Business Analysis for Investment (FNCE2003)

Model MST
Multiple Choice Questions (25 marks)
[Correct answers are highlighted]

Note: In your actual Mid-Semester-Test (MST), you need to clearly indicate your answers
on the General Answer Purpose Sheet as well as the Question Paper. Please note that
there is NO assurance that your actual exam will be similar to the model/ sample in terms
of difficulty level and coverage.

1. The resources a company controls and its obligations to lenders and other creditors at a
specific point in time are disclosed in:
A. income statement
B. statement of cash flows
C. balance sheet
D. audit report.

2. Who performs financial analysis to make operating, financing, and investment decisions of
a company?
A. Investors.
B. Managers.
C. Directors.
D. Analysts.

3. Cash flows from activities associated with the acquisition and disposal of long-term assets,
such as property and equipment would most likely be found in the:
A. Cash flows from operating activities
B. Cash flows from investing activities
C. Cash flows from financing activities
D. None of the above.

4. Ratios are an output into which step in the financial statement analysis framework?
A. Collect input data
B. Process data
C. Analyze/interpret the processed data
D. All of them.

5. The following numbers appeared in the annual report of ABC, Inc. for the fiscal year
ending May 2016 (in millions of dollars):

Fiscal 2016 Fiscal 2015

Total assets 18,691 18,875
Total stockholders’ equity 6,893 6,617
Total revenues 12,352 12,781
Common share issues 705 621
Common dividends 753 693
Common stock repurchases 796 1,548

The firm has no preferred stock. For fiscal 2016, what is the amount of net payout to common?

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A. $844.
B. $940.
C. $1,120.
D. $1,150.

6. The accounting equation is least accurately stated as:

A. Owners’ equity = liabilities — assets.
B. Ending retained earnings = assets - contributed capital - liabilities.
C. Assets = liabilities + contributed capital + beginning retained earnings + revenue —
expenses — dividends.
D. None of the above.

7. On 1 May 2016, SKB Media received $1,000 cash for a one-year subscription to the
monthly journal. This transaction would most likely result in which of the following on 1 May
2016:
A. No effect on assets.
B. decrease in assets of $1,000.
C. An increase in liabilities of $1,000.
D. An increase in owners’ equity of $1,000.

8. An analyst has compiled the following information regarding AGB, Inc.

Liabilities at year-end $1,000
Contributed capital at year-end $1,000
Beginning retained earnings $ 500
Revenue during the year $2,800
Expenses during the year $3,000
There have been no distributions to owners. The analyst’s estimate of ending retained earnings
should be closest to:
A. $1000.
B. $300.
C. $700.
D. $1,000.

9. According to the Conceptual Framework for Financial Reporting (2010), which of the
following is not an enhancing qualitative characteristic of information in financial statement?
A. Understandability
B. Reliability
C. Verifiability
D. None of them.

10. The valuation technique under which the amount of cash or cash equivalents would have
to be paid to buy the same or an equivalent asset today is:
A. Current cost.
B. Present value.
C. Realizable value.
D. All of them.

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11. Which of the following is not a characteristic of a coherent financial reporting framework?
A. Consistency.
B. Transparency.
C. Timeliness.
D. None of the above.

12. The sale of Land for cash by a real estate company would be classified as what type of
activity on the cash flow statement?
A. Operating.
B. Investing.
C. Financing.
D. None of them.

13. Which of the following is an appropriate method of computing free cash flow?
A. Add operating cash flows to after tax interest payments and deduct capital expenditures.
B. Add operating cash flows to capital expenditures and deduct after tax interest payments.
C. Deduct both after-tax interest payments from the operating cash flows and capital
expenditures from the financing cash flows.
D. All of them.

14. Port Lincoln Holiday Houses, an advertising and online company, reported revenues of
$100 million, total expenses of $50 million, cash and marketable securities $5million and net
income of $20 million in the most recent year. If accounts receivable decreased by $25 million
and accounts payable increase by 8 million, how much cash did the company receive from
customers?
A. $117 million
B. $125 million
C. $75 million
D. $50 million

15. An analyst who is interested in assessing a company’s liquidity position is most likely to
focus on which financial statement?
A. Balance sheet.
B. Income statement.
C. Statement of cash flows.
D. Statement of shareholders’ equity.

16. Which of the following elements of financial statements is most closely related to
measurement of financial position?
A. Assets.
B. Expenses.
C. Net income.
D. Gain from assets sale.

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17. Mandatory publication of audited financial statements is an imperfect solution to incentive
and information problems between managers and investors because:
A. Accounting profits are typically less informative about firms’ economic performance than
cash-flows.
B. Managers unintentionally as well as strategically introduce noise into reported accounting
performance through their accounting decisions.
C. The accounting standards governing the preparation of such financial statements are
typically too loosely defined.
D. None of the above.

18. Which of the following is least likely to cause a change in investing cash flow?
A. The sale of a division of a company.
B. The purchase of new machinery.
C. An increase in depreciation expense.
D. None of them.

19. Quantum Corporation reported sales revenue of $150,000 and total assets of $200,000 for
the current year. If accounts receivable decreased $10,000 during the year and accounts payable
increased $4,000 during the year, cash collections are:
A. $154,000
B. $160,000
C. $164,000
D. $175,000

20. Depreciation expense would be classified as:

A. operating cash flow
B. Investing cash flow
C. No cash flow impact
D. None of them.

21. An analyst has compiled the following information regarding Alex, Inc.
Liabilities at year-end $1,000
Contributed capital at year-end $1,000
Beginning retained earnings $500
Revenue during the year $4,000
Expenses during the year $3,800
There have been no distributions to owners.
The analyst’s estimate of total assets at year-end should be closest to:
A. $2,000
B. $2,300
C. $2,700
D. $3,000

22. On 30 April 2006, Pinto Products received a cash payment of $30,000 as a deposit on
production of a custom machine to be delivered in August 2006. This transaction would most
likely result in which of the following on 30 April 2006?
A. No effect on liabilities.
B. A decrease in assets of $30,000.
C. An increase in liabilities of $30,000.
D. None of the above.
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23. Which of the following is NOT an example of Standard-setting bodies?
A. IASB.
B. SEC.
C. AASB.
D. All of them.

24. Residual interest in the assets after subtracting the liabilities is known as:
A. Assets.
B. Liabilities.
C. Equity.
D. Net profit.

25. Which of the following statements about desirable attributes of accounting standards boards
is most accurate? Accounting standards boards should:
A. concede to political pressures.
B. be guided by a well-articulated framework.
C. be adequately funded by companies to which the standards apply.
D. All of the above.

26. Denali Limited, a manufacturing company, had the following income statement
information.
Revenue $4,000,000
Cash discount $50,000
Cost of goods sold $3,000,000
Return of goods sold $100,000
Cash collection $200,000
Tax expense $150,000
Under accrual basis of accounting, how much net revenue would be reported on income
statement?
A. 3850,000
B. 3500,000
C. 3650,000
D. None of the above.

27. Gama Ltd. had 2,500,000 average shares outstanding during all of 2015. During 2015,
Gama also had 150,000 options outstanding with exercise prices of $15 each. The average stock
price of Gama during 2015 was $18. For purposes of computing diluted earnings per share,
how many shares would be used in the denominator?
A. 125,0000
B. 2,500,000
C. 2,525,000
D. 2,555,000

28. During 2016, XYZ Inc. reported net income of $115,600 and had 200,000 shares of
common stock and 1,000 shares of preferred stock outstanding for the entire year. XTZ’s 10%,
$100 par value preferred shares are each convertible into 40 shares of common stock. The tax
rate is 40%. What is the basic EPS for XYZ?
A. $0.48
B. $ 0.50
C. $0.53
D. $0.55

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29. Which of the following equitation is not correct?
A. Gross profit = revenue – cost of sales.
B. Operating profit = Gross profit – operating expenses.
C. Net income = revenue - operating expenses.
D. None of the above.

30. If the purchase price is greater than the acquirer’s interest in the fair value of the identifiable
assets and liabilities acquired, the excess is described as:
A. treasury share.
B. goodwill.
C. non-operating expense.
D. minority interest.

31. An investor worried about a company’s short-term liquidity would most likely examine
its:
A. return on asset
B. debt-to-equity ratio
C. current ratio
D. Accounts receivable turnover ratio.

32. Which of the following is most likely an essential characteristic of an asset?

A. An asset is tangible.
B. An asset is obtained at a cost.
C. An asset provides future benefits.
D. None of the above.

33. TBH, a Health and Skin Product Company, reported revenues of $60 million, total
expenses of $45 million, and net income of $15 million in the most recent year. If accounts
receivable decreased by $10 million, how much cash did the company receive from
customers?
A. $25 million
B. $70 million.
C. $55 million
D. $60 million.

34. Which one of the following cash flow ratios measures a company’s ability to meet
interest obligations?
A. Dividend payment ratio.
B. Interest coverage ratio.
C. Investing and financing ratio.
D. Debt-equity ratio.

35. Below is the income statement data of Jones Inc.

Sales $1500
Increase in inventory 100
Depreciation 150
Increase in accounts receivable 50
Decrease in accounts payable 70
After tax profit margin 25%
Gain on sale of machinery $30

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Based on the above information, what is the Cash flow from operation for Jones Inc.?
A. $275
B. $250
C. $225
D. $300

36. Which of the following is most likely to appear in the operating section of the cash flow
statement under the indirect method?
A. Cash received from customers
B. Cash paid to suppliers
C. Net income
D. Purchase of equipment.

37. Following are the information gathered from a company’s 2010 financial statements (in $
millions):
Year ended 31 December 2009 2010
Net sales 265.4 277.4
Cost of goods sold 168.3 187.9
Accounts receivable 77.8 68.8
Inventory 37.4 47.8
Accounts payable 28.3 32.9
Property and equipment 185.5 195.6

Based only on the information above, what would the company’s 2010 statement of cash flows
in the direct format include amounts (in $ millions) for cash received from customers?
A. $286.4
B. $193.7
C. $187.0
D. $185.0

Use the following information in answering questions 38 – 40.

Assuming U.S. GAAP, use the following data to answer the questions:
Net Income $45
Depreciation 75
Taxes paid 25
Interest paid 5
Dividends paid 10
Cash received from sale of company building 40
Issuance of preferred stock 35
Repurchase of common stock 30
Purchase of machinery 20
Issuance of bonds 50
Debt retired through issuance of common 45
stock
Paid off long-term bank borrowing 15
Profit on sale of building 20

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38. What is the cash flow from operation?
A. $100.
B. $ 120.
C. $150.
D. $180.

39. What is the cash flow from investment activities?

A. $20.
B. $40.
C. $60.
D. $80.

40. What is the cash flow from financing activities?

A. $ 20.
B. $30.
C. $40.
D. $50.

END OF TEST PAPER