QB Introduction To FSA

Download as pdf or txt
Download as pdf or txt
You are on page 1of 7

Learning Module: Introduction to Financial Statement Analysis

1. Ratios are an input into which step in the financial statement analysis framework?
A. Process data
B. Collect input data
C. Analyze/interpret the processed data

2. Which phase in the financial statement analysis framework is most likely to involve
producing updated reports and recommendations?
A. Follow-up
B. Analyze/interpret the processed data
C. Develop and communicate conclusions and recommendations

3. Which of the following best describes the role of financial statement analysis?
A. To provide information about a company’s performance
B. To provide information about a company’s changes in financial position
C. To form expectations about a company’s future performance and financial position

4. The primary role of financial statement analysis is best described as:


A. providing information useful for making investment decisions.
B. evaluating a company for the purpose of making economic decisions.
C. using financial reports prepared by analysts to make economic decisions.

5. International Financial Reporting Standards are currently developed by which entity?


A. IFRS Foundation
B. International Accounting Standards Board
C. International Organization of Securities Commissions

6. US GAAP are currently developed by which entity?


A. Securities and Exchange Commission
B. Financial Accounting Standards Board
C. Public Company Accounting Oversight Board

7. A core objective of the International Organization of Securities Commissions is to:


A. eliminate systemic risk.
B. protect users of financial statements.
C. ensure that markets are fair, efficient, and transparent.

8. Which of the following best describes why the notes that accompany the financial
statements are required? The notes:
A. permit flexibility in statement preparation.
B. standardize financial reporting across companies.
C. provide information necessary to understand the financial statements.

9. Accounting policies, methods, and estimates used in preparing financial statements


are most likely to be found in the:
A. auditor’s report.
Introduction to Financial Statement Analysis

B. management commentary.
C. notes to the financial statements.

10. Information about management and director compensation is most likely to be found
in the:
A. auditor’s report.
B. proxy statement.
C. earnings release.

11. Information about a company’s objectives, strategies, and significant risks are most
likely to be found in the:
A. auditor’s report.
B. management commentary.
C. notes to the financial statements.

12. What type of audit opinion is preferred when analyzing financial statements?
A. Adverse
B. Qualified
C. Unqualified

13. An auditor determines that a company’s financial statements are prepared in


accordance with applicable accounting standards except with respect to inventory
reporting. This exception is most likely to result in an audit opinion that is:
A. adverse.
B. qualified.
C. unqualified.

14. An independent audit report is most likely to provide:


A. absolute assurance about the accuracy of the financial statements.
B. reasonable assurance that the financial statements are fairly presented.
C. a qualified opinion with respect to the transparency of the financial statements.

15. Interim financial reports released by a company are most likely to be:
A. monthly.
B. unaudited.
C. unqualified.

16. Which of the following sources of information used by analysts is found outside a
company’s annual report?
A. Auditor’s report
B. Peer company analysis
C. Management discussion and analysis

17. For a company issuing securities in the United States to meet its obligations under
the Sarbanes–Oxley Act, which of the following is management required to attest to?

Faculty: Vikas Vohra Page 2 of 7


Introduction to Financial Statement Analysis

A. The adequacy of internal control over financial reporting


B. The suitability of management and director compensation agreements
C. The accuracy of estimates and assumptions used in preparing the financial
statements

18. Which of the following reports is least likely to be filed with the US SEC?
A. Annual report
B. Form 10-K
C. Proxy statement

19. Interim reports most likely:


A. are audited.
B. are issued semi-annually or quarterly.
C. include a full set of financial statements and notes.

20. Which of the following statements is most accurate about the responsibilities of an
auditor for a publicly traded firm in the United States? The auditor must:
A. state that the financial statements are prepared according to generally accepted
accounting principles.
B. ensure that the financial statements are free from error, fraud, or illegal acts.
C. express an opinion about the effectiveness of the company’s internal control
systems.

21. Common-size financial statements are most likely a component of which step in the
financial analysis framework?
A. Collect data
B. Analyze/interpret data
C. Process data

22. Providing information about the performance of a company, its financial position, and
changes in financial position that is useful to a wide range of users is most accurately
described as the role of:
A. financial reporting.
B. the audit report.
C. financial statement analysis.

23. The role of the International Organization of Securities Commissions (IOSCO) is


best described as:
A. promoting cross-border cooperation and uniformity in securities regulation.
B. enforcing financial reporting requirements for entities participating in capital
markets.
C. promoting the use of International Financial Reporting Standards (IFRS) and the
convergence of national accounting standards.

Faculty: Vikas Vohra Page 3 of 7


Introduction to Financial Statement Analysis

24. Where might an analyst look for details covering the full extent of a company’s capital
resources?
A. Balance sheet
B. Notes to the financial statements
C. Management discussion and analysis (MD&A)

25. Notes to financial statements most likely include:


A. an auditor’s opinion as to the fair presentation of the financial statements.
B. supplementary information about accounting policies, methods, and estimates.
C. a discussion of significant trends, events, and uncertainties that affect the
operating results.

26. A disclaimer of opinion is issued when an auditor:


A. is unable to issue an opinion.
B. notes an exception to accounting standards.
C. finds a material departure from accounting standards.

27. Which of the following opinions is the best indication that the auditor believes that
the financial statements depart materially from accounting standards and are not
fairly presented?
A. Adverse opinion
B. Qualified opinion
C. Disclaimer of opinion

28. A qualified audit opinion is most likely issued when financial statements are prepared:
A. in compliance with accounting standards.
B. with material departures from accounting standards.
C. with some limitation or exception to accounting standards.

29. Common-size statements are most likely the output of which of the following phases
of the financial statement analysis framework?
A. Process data
B. Analyze/interpret the processed data
C. Develop and communicate conclusions and recommendations

30. The role of financial reporting is best described as:


A. making operating, investing, and financial decisions.
B. providing information about a company's performance, financial position, and
change in financial position.
C. evaluating a company's past, current, and potential performance for the purpose
of making economic decisions.

Faculty: Vikas Vohra Page 4 of 7


Introduction to Financial Statement Analysis

Solutions
1. C is correct. Ratios are an output of the process information step but are an input
into the analyze/interpret data step.

2. A is correct. The follow-up phase involves gathering information and repeating the
analysis to determine whether it is necessary to update reports and
recommendations.

3. C is correct. In general, analysts seek to examine the past and current performance
and financial position of a company to form expectations about its future
performance and financial position.

4. B is correct. The primary role of financial statement analysis is to use financial


reports prepared by companies to evaluate their past, current, and potential
performance and financial position for the purpose of making investment, credit, and
other economic decisions.

5. B is correct. The International Accounting Standards Board (IASB) is currently


charged with developing International Financial Reporting Standards.

6. B is correct. US Generally Accepted Accounting Principles are developed by the US


Financial Accounting Standards Board (FASB).

7. C is correct. A core objective of IOSCO is to ensure that markets are fair, efficient,
and transparent. The other core objectives are to reduce, not eliminate, systemic
risk and to protect investors, not all users of financial statements.

8. C is correct. The notes provide information that is essential to understanding the


information provided in the primary statements.

9. C is correct. The notes disclose choices in accounting policies, methods, and


estimates.

10. B is correct. Disclosure of management compensation is typically included in the proxy


statement. An earnings release is about corporate earnings, not what managers earn
as compensation.

11. B is correct. These are components of management commentary.

12. C is correct. An unqualified opinion is a “clean” opinion and indicates that the financial
statements present the company’s performance and financial position fairly in
accordance with applicable accounting standards.

13. B is correct. A qualified audit opinion is one in which there is some scope limitation or
exception to accounting standards. Exceptions are described in the audit report with

Faculty: Vikas Vohra Page 5 of 7


Introduction to Financial Statement Analysis

additional explanatory paragraphs so that the analyst can determine the importance
of the exception.

14. B is correct. The independent audit report provides reasonable assurance that the
financial statements are fairly presented, meaning that there is a high probability
that the audited financial statements are free from material error, fraud, or illegal
acts that have a direct effect on the financial statements.

15. B is correct. Interim reports are typically provided semiannually or quarterly and
require certain financial information, including unaudited financial statements and an
MD&A for the interim period covered by the report. Unqualified refers to a type of
audit opinion.

16. B is correct. When performing financial statement analysis, analysts should review all
company sources of information as well as information from external sources
regarding the economy, the industry, the company, and peer (comparable) companies.

17. A is correct because the [Sarbanes-Oxley] act addresses auditor independence (it
prohibits auditors from providing certain non-audit services to the companies they
audit); strengthens corporate responsibility for financial reports (it requires
executive management to certify that the company's financial reports fairly present
the company's condition); and requires management to report on the effectiveness
of the company's internal control over financial reporting (including obtaining
external auditor confirmation of the effectiveness of internal control).

18. A is correct because the annual report is not a requirement of the US SEC.

19. B is correct. Interim reports are provided semi-annually or quarterly, depending on


applicable regulatory requirements.

20. C is correct. For a publicly traded firm in the United States, the auditor must express
an opinion as to whether the company’s internal control system is in accordance with
the Public Accounting Oversight Board, under the Sarbanes–Oxley Act. The opinion
is given either in a final paragraph in the auditor’s report or as a separate opinion.

21. C is correct. Preparing common-size financial statements is part of the process data
step.

22. A is correct. The role of financial reporting is to provide information about the
performance of a company, its financial position, and changes in financial position that
is useful to a wide range of users in making economic decisions.

23. A is correct because IOSCO assists in attaining the goal of uniform regulation as well
as cross-border cooperation in combating violations of securities and derivatives laws.

Faculty: Vikas Vohra Page 6 of 7


Introduction to Financial Statement Analysis

24. C is correct because in the MD&A, management must highlight any favorable or
unfavorable trends and identify significant events and uncertainties that affect the
company’s liquidity, capital resources, and results of operations. The MD&A must also
provide information about off-balance-sheet obligations and about contractual
commitments, such as purchase obligations.

25. B is correct because the notes also disclose information about the accounting policies,
methods, and estimates used to prepare the financial statements.

26. A is correct because a disclaimer of opinion occurs when auditors are unable to issue
an opinion.

27. A is correct because an adverse audit opinion is issued when an auditor determines
that the financial statements materially depart from accounting standards and are
not fairly presented.

28. C is correct because financial statements showing “scope limitation or exception to


accounting standards” will earn a qualified opinion.

29. A is correct because common-size statements are an output of the “process data”
phase of the financial statement analysis framework.

30. B is correct because the role of financial statements issued by companies is to


provide information about a company’s performance, financial position, and changes in
financial position.

Faculty: Vikas Vohra Page 7 of 7

You might also like