Monday, March 1, 2010

FIN621- Financial Statement Analysis (Session - 1)FINALTERM EXAMINATION Fall 2009(Solved by Muhammad Bilal)

FINALTERM EXAMINATION

Fall 2009

FIN621- Financial Statement Analysis (Session - 1)

Solved by Muhammad Bilal

Question No: 1 ( Marks: 1 ) - Please choose one

Which of the following arrangement is used to maintain the accounts?

Sequentialy

Alphabaticaly

Monthly

Orderly

Question No: 2 ( Marks: 1 ) - Please choose one

Which of the following represents the main step(s) of accounting cycle?

Recording the transactions

Classifying the transactions

Ordering, summarizing, counting the transactions

Recording, classifying, summarizing transactions

Question No: 3 ( Marks: 1 ) - Please choose one

Blankenship Company pays its employees every Friday for work rendered that week. The payroll is typically Rs.10,000 per week. Which of the following journal entries would Blankenship ordinarily record on the Friday payday?

Salary expense Rs. 10,000 - Debit; Salary payable Rs. 10,000 - Credit

Salary expense Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit

Salary payable Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit

Salary payable Rs. 10,000 - Debit; Salary expense Rs. 10,000 - Credit

Question No: 4 ( Marks: 1 ) - Please choose one

Retained earnings change over time because of several factors. Which of the following factors would explain an INCREASE in retained earnings?

Net Income

Dividends payment

Investment by the stockholders

Net Loss

Question No: 5 ( Marks: 1 ) - Please choose one

Which one of the following statements is TRUE regarding distributions to stockholders?

► The payment of dividends is not directly related to the profits of a given period

► Shareholders can individually decide on their distributions

► To receive a corporate dividend, stock must be owned on the date of declaration

► Corporate dividends reduce contributed capital and therefore, stockholders’ equity

Question No: 6 ( Marks: 1 ) - Please choose one

Which of the following is the largest single expense of most merchandising firms?

Cost of goods sold

Rent Expense

Amortization Expense

Salaries Expense

Question No: 7 ( Marks: 1 ) - Please choose one

Which of the following is NOT the most common example of cash equivalents?

Savings deposits

Certificates of Deposit (CDs)

Stocks of other companies

Money market mutual funds

Question No: 8 ( Marks: 1 ) - Please choose one

The statement of cash flow does NOT assist investors, creditors and others in assessing:

► The company’s ability to generate positive cash flows in future periods

► The company’s ability to meet its obligations and to pay dividends

► The company’s needs for external financing

► The company’s ability to forecast future losses

Question No: 9 ( Marks: 1 ) - Please choose one

When using the perpetual inventory system, each time a sale is recorded the:

► Inventory account is increased

► Inventory account is decreased

► Cost of Goods Sold account is decreased

► Cost of goods available for sale decreases

Question No: 10 ( Marks: 1 ) - Please choose one

In perpetual inventory system, a return of defective merchandise is recorded by crediting __________.

► Purchases

► Purchase Returns

► Purchase Allowance

► Merchandise Inventory

Question No: 11 ( Marks: 1 ) - Please choose one

Which factor would NOT affect the gross profit rate?

An increase in the cost of heating the store

An increase in the price of inventory items

An increase in the sale of luxury items

An increase in the use of “discount pricing” to sell merchandise

Question No: 12 ( Marks: 1 ) - Please choose one

Assets which have NO market value are called:

Wasting assets

Fictitious assets

Quick assets

Tangible assets

Question No: 13 ( Marks: 1 ) - Please choose one

Audit opinions can NOT be classified as which of the following?

Adverse opinion

Unqualified opinion

Qualified opinion

Disagreement of opinion

Question No: 14 ( Marks: 1 ) - Please choose one

The audit is NOT a necessary requirement for which of the following companies?

Listed companies

Corporations

Sole proprietorship

Partnerships

Question No: 15 ( Marks: 1 ) - Please choose one

Which of the following is NOT a part of the five-year summary of a company?

Net income/Loss

Total assets

Discontinued operations

Net sales

Question No: 16 ( Marks: 1 ) - Please choose one

Which of the following is NOT a limitation of financial statements for an investor?

It provides complete basis for the analysis of a company

Past financial performance does not signify what will happen with the investor in future

The financial statements are useless without the notes to the financial statements

Unless the statements are audited their authenticity is under doubt

Question No: 17 ( Marks: 1 ) - Please choose one

Which of the following is NOT a feature of preferred shares?

Distributive

Callable

In arrears

Cumulative

Question No: 18 ( Marks: 1 ) - Please choose one

Which of the following is a type of preferred stock that entitles the holder to a fixed dividend and, in addition, to the right to get any surplus profits after payment of agreed levels of dividends to holders of common stock?

In arrears preferred shares

Call able preferred shares

Cumulative preferred shares

Participating preferred shares

Question No: 19 ( Marks: 1 ) - Please choose one

Which one of the following represents the value of shares in the market at any point of time?

Par value

Book value

Face value

Market value

Question No: 20 ( Marks: 1 ) - Please choose one

By computing component percentages for several successive balance sheets, which of the following can NOT be found?

The increasing items

The decreasing items

The unchanged items

The future profitable items

Question No: 21 ( Marks: 1 ) - Please choose one

Which of the following would NOT improve the current ratio?

Issue long-term debt to buy inventory

Sell common stock to reduce current liabilities

Sell fixed assets to reduce accounts payable

Borrow short term to finance additional fixed assets

Question No: 22 ( Marks: 1 ) - Please choose one

Krisle and Kringle's debt-to-total assets ratio is 4%. What is its debt-to-equity ratio?

2%

7%

6%

3%

Question No: 23 ( Marks: 1 ) - Please choose one

A company experiences a dramatic fall in its gross profit ratio. This could be the result of which of the following?

An increase in competition in the company's main product market

An increase in the incidence of bad debts

An increase in overhead expenses

An increase in demand for the company's products

Question No: 24 ( Marks: 1 ) - Please choose one

Which of the following is NOT an objective of fundamental analysis?

To make projection on its business performance

To predict the future stock price

To evaluate its management and make internal business decisions

To calculate its credit risk

Question No: 25 ( Marks: 1 ) - Please choose one

Which of the following is NOT a goal of analysis of financial statement?

Assess the past performance

Asses the current financial position

Predict the future performance of the company

Asses the working of management in the future

Question No: 26 ( Marks: 1 ) - Please choose one

In isolation, which of the following is TRUE about a financial ratio?

Useless piece of information

Useful piece of information

Useful only for past performance

Useful only for future predictions

Question No: 27 ( Marks: 1 ) - Please choose one

Financial statement ratio analysis may be undertaken to study liquidity, turnover, profitability, and other indicators. To which does the current ratio most relate?

Liquidity

Turnover

Profitability

Other indicator

Question No: 28 ( Marks: 1 ) - Please choose one

Which of the following would NOT result in an improved overall gross margin of a business?

A fall in raw material prices resulting in a lower cost of sales

Higher discounts offered to customers

Increased selling price of existing products

Introduction of new products with a higher gross profit margin

Question No: 29 ( Marks: 1 ) - Please choose one

Which of the following would NOT improve the return on investment ratio?

Reducing costs

Increasing gains

Accelerating gains

Issuing treasury stock

Question No: 30 ( Marks: 1 ) - Please choose one

Which one of the following statement indicates the Inventory turnover ratio?

How quickly company prepared its inventory

How quickly company converts its inventory into cash

How quickly company purchases its inventory

How quickly company sells its inventory

Question No: 31 ( Marks: 1 ) - Please choose one

Which of the following is the ideal position of debt ratio?

30%

60%

50%

45%

Question No: 32 ( Marks: 1 ) - Please choose one

If current assets are Rs. 15.6 million, current liabilities Rs. 11.2 million and stocks Rs. 1.8 million, what is the acid test ratio?

1.39

1.23

1.65

0.89

Question No: 33 ( Marks: 1 ) - Please choose one

Which of the following is essential to conduct business activity, particularly in times of adversity?

Profitability

Liquidity

Stability

Solvency

Question No: 34 ( Marks: 1 ) - Please choose one

Which of the following explains the debit and credit rules relating to recording revenues and expenses?

Realization and matching principle

The effect of revenues and expenses in the owner’s equity

Expenses appear on the left side of the income statement

Liabilities are recorded as debit on the balance sheet

Question No: 35 ( Marks: 1 ) - Please choose one

Which of the following equations properly represents a derivation of the fundamental accounting equation?

Assets + liabilities = owner's equity

Assets = owner's equity

Cash = assets

Assets - liabilities = owner's equity

Question No: 36 ( Marks: 1 ) - Please choose one

How would the purchase of merchandise on account be represented in the buyer's records?

Increase assets and increase expenses

Increase assets and increase liabilities

Increase liabilities and increase paid-in capital

Increase liabilities and decrease assets

Question No: 37 ( Marks: 1 ) - Please choose one

Which of the following is NOT an advantage of the accrual basis of accounting?

It is simple to see what payments to vendors are outstanding

It is easy to see how much revenue is due the company

It is much easier to assess the overall financial health of the company

It is much easier and cheaper to maintain

Question No: 38 ( Marks: 1 ) - Please choose one

ABC company has decided to change the inventory system from FIFO to LIFO keeping in view the raising day by day inflation threat. What different things/factors Mr Ali, the auditor of the company, will have to notify or report?

► The purpose of switching

► The existing system drawbacks

► The new system threats

► All of the above

Question No: 39 ( Marks: 1 ) - Please choose one

Which of the following elements of financial statements is MOST closely related to measurement of financial position?

Equity

Income

Expense

Disclosures

Question No: 40 ( Marks: 1 ) - Please choose one

All of the following steps are considered during the formation of a company EXCEPT:

The memorandum and articles of association of articles should be prepared

Suitable persons should be appointed for the subscription of memorandum of association

The election of the CEO of the company

Registration fees should be deposited to registrar of companies and receipt of certificate of incorporation should be collected

Question No: 41 ( Marks: 1 ) - Please choose one

The basic type of capital stock issued by every corporation is known as:

Common stock

Preferred stock

Class B

Cumulative Stock

Question No: 42 ( Marks: 1 ) - Please choose one

Which of the following ratios provide a MORE penetrating measure of liquidity than does the current ratio?

Assets Test Ratio

Defensive interval ratio

Investments ratio

Current ratio

Question No: 43 ( Marks: 1 ) - Please choose one

Average payment period is calculated as:

365 / Accounts payable turnover

► 365 X Accounts payable turnover

365/ Total purchases

Accounts payable turnover / 365

Question No: 44 ( Marks: 1 ) - Please choose one

Which of the following ratios indicates in days how quickly inventory is sold?

Inventory turnover Rate

Inventory Turnover ratio

Operating Cycle

Days sales of inventory

Question No: 45 ( Marks: 3 )

How does working capital help management in making rationale decisions?

Question No: 46 (Marks: 5 )

Consider the following information.

Cash Rs. 15,000

Beginning net receivables Rs. 55,000

Ending net receivables Rs. 57,000

Net sales Rs. 640,000

Net credit sales Rs. 480,000

Cost of goods sold Rs. 390,000

Average inventory Rs. 62,000

Requirement:

Compute the receivable turnover to the nearest tenth.

Receivables turn over ratio = Net credit sales /Average Debtors

= 640,000 / [(55,000+57,000)/2]

= 640,000 / 56,000

= 11.43

Question No: 47 (Marks: 5 )

Assume that you are a commercial loan officer at a large bank. One of your clients recently submitted an application for Rs. 300,000 five year loan. You have worked with this business before on numerous occasions and have periodically been forced to deal with late and missed payments attributed to cash flow problems. Thus you are surprised to see in the business plan accompanying the application that the management expects to reduce the company’s operating cycle from 190 days to 90 days. A footnote to the business plan indicates that the reduction in the operating cycle will result from a tighter credit policy and the implementation of a just-in-time inventory system.

Requirement:

Would the company be able to reduce the operating cycle by applying the new strategy and would you give the loan to the company on this basis?

Question No: 48 (Marks: 5 )

Assume that you are a graduate student and going to form a web page consultancy firm. You are very young and compassionate to form this company. You need a bank loan of Rs.50,000 for computer equipment , as a collateral you have a bike your father gave you after securing 80% marks in FSc. Not wanting to lose your bike and to protect yourself you decided to organize a corporation. Explain will it be beneficial idea for you or not.

Question No: 49 (Marks: 10 )

The data shown below were taken from the financial records of J Ltd at the end of the year. The financial year of the company ends on 31, December each year.

Accounts Payable

Rs 50,000

Accrued Liabilities

Rs. 33,000

Cash

32,000

Inventories Jan

42,000

Inventories Dec

38,000

Marketable Securities

10,000

Operating Expenses

120,000

Prepaid Expenses

25,000

Purchases (Net)

360,000

Accounts Receivable Jan

61,000

Accounts Receivable Dec

61,000

Long Term Loan

150,000

Plant Assets

400,000

Sales

604,000

Sales Returns

20,000

Retained Earning

133,000

Share Capital (Rs.10 Par)

92,000

Market Price

18

Interest expense

30,000

On the basis of above information, calculate the following.

a. Debt ratio (4)

b. Debt to equity ratio (2)

c. Debt to total asset ratio (4)

Question No: 50 ( Marks: 10 )

How many types of audit opinions are there? Assume that you have been appointed as an Auditor of the company, after the audit of the company, what can be your possible audit opinions. Briefly explain each of the audit opinion.

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