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Exam 12: Financial Statement Analysis

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Question 21

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Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities.

A) True
B) False

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Question 22

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Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing in the space provided.

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Practices that result in reporting higher income, higher assets, and lower liabilities.

Discontinued operation

An event that is (1) unusual in nature and (2) infrequent in occurrence.

Aggressive accounting practices

Practices that result in reporting lower income, lower assets, and higher liabilities.

Extraordinary item

The sale or disposal of a significant component of a company's operations.

Conservative accounting practices

Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings.

Quality of earnings

Premises

Practices that result in reporting higher income, higher assets, and lower liabilities.

An event that is (1) unusual in nature and (2) infrequent in occurrence.

Practices that result in reporting lower income, lower assets, and higher liabilities.

The sale or disposal of a significant component of a company's operations.

Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings.

Responses

Discontinued operation

Aggressive accounting practices

Extraordinary item

Conservative accounting practices

Quality of earnings

Show Answer

Correct Answer

Premises

Responses

Practices that result in reporting higher income, higher assets, and lower liabilities.

An event that is (1) unusual in nature and (2) infrequent in occurrence.

Practices that result in reporting lower income, lower assets, and higher liabilities.

The sale or disposal of a significant component of a company's operations.

Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings.

Premises

Practices that result in reporting higher income, higher assets, and lower liabilities.

An event that is (1) unusual in nature and (2) infrequent in occurrence.

Practices that result in reporting lower income, lower assets, and higher liabilities.

The sale or disposal of a significant component of a company's operations.

Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings.

Responses

Question 23

Multiple Choice

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Stealth Company's 2013 debt to equity ratio is:

Phillip's Fun Center has go-karts, miniature golf, bumper boats, paintball, and laser tag. Determine whether the company should report each of the following items as discontinued operations, extraordinary items, or other expenses: 1. Extraordinary items. 2. Other expenses. 3. Discontinued operations. 4. Other expenses.

We report extraordinary items separately, net of taxes, near the bottom of the income statement just below discontinued operations.

Which of the following is a conservative accounting practice?

Stealth Company's 2013 return on equity is:

United Products began the year with an Accounts Receivable balance of $250,000, and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Calculate the receivables turnover ratio for the year.

Define earnings persistence. How does earnings persistence relate to the reporting of discontinued operations and extraordinary items?

Which of the following is a conservative accounting practice?

The average days in inventory converts the inventory turnover ratio into days.

Changes in accounting estimates usually have no effect on a company's underlying cash flows.

Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio?

Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy.

Stealth Company's 2013 asset turnover is:

The following is an example of:

Comparing operating expenses as a percentage of sales is an example of:

Listed below are six profitability ratios followed by a list of phrases that describe or characterize the ratios. Match each phrase with the correct ratio placing the number designating the ratio in the space provided.

If a company's sales are $648,000 in 2012, and this represents an 8% increase over sales in 2011, what were sales in 2011?

Which of the following is an example of horizontal analysis?