Fin621 Final Term Papers

FINAL TERM EXAMINATION
FIN621- Financial Statement Analysis (Session - 1)
: 90 min
Marks: 69
Question No: 1 ( Marks: 1 ) - Please choose one
Which one of the following is NOT a type of adjusting entries?
► Entries to record accrued revenues
► Entries to record accrued expenses
► Entries to distribute un-earned revenue
► Entries to record revenues
(Handout page 29)
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
Cash flow relating to investing activities does NOT present the cash effects of
which of the following?
► Plant assets
► Intangible assets
► Investments
► Debt financing
Office supplies are purchased on account. The company uses a perpetual

inventory system. What is the correct journal entry for this purchase of office
supplies?
► Debit - Purchases; Credit - Cash
► Debit - Merchandise Inventory; Credit - Cost of Goods Sold
► Debit - Office Supplies; Credit - Accounts Payable
► Debit - Merchandise Inventory; Credit - Accounts Payable
Which of the following is NOT true about the specific identification method?
► It requires a very detailed physical count
► This method allows management to easily manipulate ending inventory cost
► This method is very hard to use on interchangeable goods

► This results in an overstated inventory account during the period of
inflation
http://en.wikipedia.org/wiki/Specific_Identification
If sales revenues are Rs. 400,000, cost of goods sold is Rs. 310,000, and
operating expenses are Rs. 60,000, what is the gross profit?
► Rs. 30,000
► Rs. 90,000
► Rs. 340,000
► Rs. 400,000
G.P= SALES – C.O.G.S
= 400,000-310,000= 90,000
Which of the following statements best describes the nature of depreciation?
► Regular reduction of asset value to correspond to the decline in market value

as the asset ages
► A process of correlating the book value of an asset with its gradual decline
in physical efficiency
► Allocation of the cost in a manner that will ensure that plant and equipment
items are not carried on the balance sheet at amounts in excess of net realizable
value
► Allocation of the cost of a plant asset to the periods in which benefits are
received
http://docs.google.com/viewer?a=v&q=cache:-
M6JW9lCKWkJ:belkcollegeofbusiness.uncc.edu/bap/2121%2520Practice%2520Exam%
25201%2520MC.doc+Which+of+the+following+statements+best+describes+the+nature
+of+depreciation?&hl=en&gl=pk&pid=bl&srcid=ADGEESgUlDfGF7ZG_rAatYOPcOo
z0FQCFbaGSpuuOD6M_o5d19iks4bQs9kr9saHXkT3OVkl6Mcjsg1TWeXbvqBRKfJ_U
4lSsN27HbuQPhA7DZgbjuwRSNoBvBPLvsr8YkyFA7yEiJ6m&sig=AHIEtbQJu2DeRE
aNvrCjyVDK2pOaLAcUvw&pli=1
http://studentoffortune.com/question/376489/ACC400-wk2/644730-
CH9%20Plant%20%26%20Intangible%20Assets.pdf
Warner Corporation reported net income in excess of its net cash flow from
operations. A possible explanation of this difference is:
► Depreciation expense
► Non operating gains
► A decrease in income tax rates
► A decrease in accounts receivable over the period
http://highered.mcgraw-
hill.com/sites/0072396881/student_view0/chapter13/multiple_choice_quiz.html
In a statement of cash flows, the acquisition of land by issuing capital stock:
► Is not shown at all, since no cash was received or disbursed
► Is shown as an investing activity
► Is shown as a financing activity
► Is shown in a supplementary schedule as a non-cash investing and

financing transaction
http://www.scribd.com/doc/22806908/Cash-Flows
hill.com/sites/0072396881/student_view0/chapter13/multiple_choice_quiz.h
tml
Which of the following opinions state that the financial statements do not
present fairly the financial position, results of operations etc, in conformity
with GAAP?
► Unqualified opinion
► Qualified opinion
► adverse opinion
► Disclaimer of opinion
(PAGE 101)
Which one of the following is NOT a limitation of financial statements?
► They always present past
► They always present the monetary terms
► They help in assessment of future profitability
► They give no information about management and employee relations
(PAGE 104)
Which of the follwing business owner is personally liable for its debts?
► Corporations
► Sole proprietorship
► General partnership
► Limited liability company
(PAGE 107)
Which of the following characteristics is NOT generally regarded as right of

common shareholders?
► Preemptive right
► Voting rights
► Preference in liquidation
► Transferability of shares
http://www.principlesofaccounting.com/questions%20-
%20%20multiple%20choice/chapter%2014%20-
%20multiple%20choice.htm
What would be the journal entry to record the issue of 1,000 shares of Rs. 1
par-value common stock, which is issued for Rs. 4 per share?
► Debit Cash 4,000; Credit Common Stock 4,000
► Debit Cash 4,000; Credit Common Stock, 1,000, Credit Paid-in-Capital

in Excess of Par 3,000
► Debit Cash 4,000; Credit Common Stock, 1,000, Credit Retained Earnings
3,000
► Debit Cash 4,000, Debit Paid-in-Capital in Excess of Par 3,000; Credit

Common Stock 4,000
%20%20multiple%20choice/chapter%2014%20-%20multiple%20choice.htm
Suppose that an investor buys shares for Rs. 15per share from a company
whose stock's par value is stated at Rs. 10 per share, then what will be the value
of paid in capital for each share sold?
► Rs. 25
► Rs. 5
► Rs. 20
► Rs. 30
http://www.scribd.com/doc/20583434/29-Stocks-and-Shares
In the vertical analysis of income statement, all the accounts are expressed as a
percentage of which of the following?
► Net sales
► Gross sales
► Net income
► Total expenses
(PAGE 128)
When using vertical analysis, the analyst calculates each item on a single
financial statement as a percentage of a total.. The total used by the analyst on
the income statement is net sales revenue,
The changes in the financial statement items from a base year to following
years are often expressed as which of the following?
► Trend percentages
► Component percentages
► Common percentages
► Both trend and component percentages
(page 128)
Trend percentages/ Horizontal Analysis/ Index Analysis: This analysis considers changes in
items of financial statement from a base year to the following years to show the direction of
change. This is also called horizontal analysis. In this, the figures of various years are placed
side by side in adjacent columns in the form of comparative financial statements.
Which of the following indicates the relative size of each item included in a
total?
► Trend percentages
► Component percentages
► Common percentages
► Both trend and component percentages
(page 128)
Component percentages/ Vertical Analysis/ Common- Size Analysis: This

type of analysis indicates the relative size of each item in the Financial
Statements as a percentage of the total of that Statement i.e. Total Assets or
total Liabilities & Shareholders equity in Balance Sheet and Sales in Income
Statement.
If a firm has Rs. 100 in inventories, a current ratio equal to 1.2, and a quick
ratio equal to 1.1, what is the firm's Net Working Capital?
► Rs. 0
► Rs. 100
► Rs. 200
► Rs. 1,000
A company can improve (lower) its debt-to-total asset ratio by doing which of
the following?
► Borrow more
► Shift short-term to long-term debt
► Shift long-term to short-term debt
► Sell common stock
REF http://web.utk.edu/~jwachowi/mcquiz/mc6.html
Krisle and Kringle's debt-to-total assets ratio is 4%. What is its debt-to-equity
ratio?
► 2%
► 7%
► 6%
► 3%
http://web.utk.edu/~jwachowi/mcquiz/mc6.html
Since the debt-to-total assets ratio is.4, then equity-to-total assets ratio is.6. The
ratio of debt to equity is then .4/.6 or .667 (66.7%).
Earnings per share, return on sales, and return on equity are all examples of
► Leverage ratios
► Liquidity ratios
► Turnover ratios
► Profitability ratios
(PAGE 138)
Which of the following could account for a company's gross profit ratio
increasing from one period to the next?
► An increase in the cost of sales which has not been accompanied by

an increase in the selling price of goods sold
► An increase in the selling price of goods sold which has not been
accompanied by an increase in the cost of sales
► A change in the mix of goods sold so that lower profit margin goods
take a greater proportion of total sales
► A change in stock valuation method at the year end which leads to

a decrease in the closing stock figure
http://wps.pearsoned.co.uk/ema_uk_he_dyson_accnas_7/64/16418/4203069.cw/index.ht
ml
Which of the following is MOST likely to offer you the highest rate of
return together with the highest risk?
► Cash in a building society deposit account
► Preference shares
► Ordinary shares
► Government bonds
http://wps.pearsoned.co.uk/ema_uk_he_dyson_accnas_8/145/3724
2/9534033.cw/content/index.html
Ordinary shares do not offer a pre-determined return - the dividend paid is variable
and depends on a number of factors including the company's cash position.
Moreover the price is determined by the laws of supply and demand and can go
down as well as up. So they carry high risk in return for which shareholders
demand a high return, in the form of income and capital growth. Preference shares
are similar except that they offer a fixed dividend which is paid before ordinary
shareholders stand to receive anything (so the term 'preferred'). Furthermore, if the
company is liquidated they normally rank above ordinary shares in any payout. So
they are less risky and offer lower but more stable returns. Building society cash
deposits and government bonds are considered almost risk free (governments rarely
go bankrupt!) and consequently offer low returns.
Assume that a company total paid in capital of Rs. 57,160,000,

Preferred shares Rs. 12,000,000 and commons tock Rs. 14,000,000.
Calculate the amount of total legal capital of the company.
► Rs. 26,000,000
► Rs. 2000,000
► Rs. 45,160,000
► Rs. 43,160,000
paid up capital – preferred shares
57,160,000 - 12,000,000
45,160,000
ABC Company has cumulative preferred stock and three years of

dividends are owed. Using the following information, calculate the
book value per share of the preferred stock.
9% preferred stock, Rs. 100 par, 300 shares Rs. 3,000
authorized and issued
Call price Rs. 109
Retained Earnings Rs. 28,000
► Rs. 109
► Rs. 202
► Rs. 211
► Rs. 118
Book value/share: preferred stock
= call price/redemption value / Number of preferred share
300*109 = 32700
32700/300=109
A company has a cost of goods sold of Rs. 530,000; the beginning

inventory is Rs. 120,000, and ending inventory is Rs. 180,000.
Calculate the number of days to sell the inventory. (Round the figures
to the nearest whole)
► 83 days
► 125 days
► 104 days
► 100 days
Average inventory = opening inv +ending inv / 2
= 120000+180000/ 2
= 150000
Inventory turnover = CGS / average inventory
= 530,000 / 150000
= 3.53
Number of day sell the inventory = 365 / 3.53
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
Operating cycle belongs to which group of ratios?
► Leverage ratios
► Activity ratios
(PAGE 145)
Which of the following is the ideal position of debt ratio?
► 30%
► 60%
► 50%
► 45%
What will be effect of purchase of inventory on open account on quick

ratio of the company?
► Increase
► Decrease
► No effect
► Can not be found from the given information
What will be the effect on the inventory turnover ratio of the

company, if it changed from FIFO to LIFO during the period of
inflation?
► Increase
► Decrease
► No effect
What will be the effect on the EPS of the company, if it paid stock
dividend on common stock?
► Increase
► Decrease
► No effect
Which of the following is essential to conduct business activity,

particularly in times of adversity?
► Profitability
► Liquidity
► Stability
► Solvency

Failure to record the receipt of a utility bill for services already
received will result in which of the following?
► An overstatement of assets
► An overstatement of liabilities
► An overstatement of equity
► An understatement of assets
Which of the following would be the proper journal entry to record Rs.
1,000 of Dividends paid by ABC Corporation?
► Debit Dividends 1,000; Credit Cash 1,000
► Debit Accounts Payable 1,000; Credit Cash 1,000
► Debit Dividends Expense 1,000; Credit Cash 1,000
► Debit Dividends Expense 1,000; Credit Service Revenue 1,000
How does the acid test ratio differ from the current ratio?
► It is concerned with future cash flows rather than historical cash

flows
► It does not differ from the current ratio
► It excludes the value of stocks
► It excludes the trade debtors
Which of the following provides the basis for the trial balance?
► Income statement
► Statement of cash flow
► Ledger
► Adjusting entries
Which of the following is NOT normally required for revenue to be

recognized according to the revenue principle for accrual basis
accounting?
► The price is fixed or determinable
► Services have been performed
► Cash that has already been collected
► Evidence of an arrangement for customer payment exists

http://books.google.com.pk/books?id=WH95z-
MY5LEC&pg=PA159&dq=is+NOT+normally++required++for++r
evenue++to++be++recognized+according+to+the+revenue+principl
e+for+accrual+basis+accounting?&hl=en&ei=-
6LxTNWDCYuPcd3lmLoK&sa=X&oi=book_result&ct=result&res
num=3&ved=0CDAQ6AEwAg#v=onepage&q&f=false
http://books.google.com.pk/books?id=fOAKexV5AtUC&pg=PA108
&lpg=PA108&dq=is+NOT+normally++required++for++revenue++
to++be++recognized+according+to+the+revenue+principle+for+acc
rual+basis+accounting%3F+The+price+is+fixed+or+determinable
+Services+have+been+performed+Cash+that+has+already++been+
collected+Evidence+of+an+arrangement+for+customer+payment+e
xists&source=bl&ots=uqShdAyc2K&sig=fy6Rh8BhBIPSrUGHYl
WSDlgLF98&hl=en&ei=bqj8TJm3F4blrAehyZT_Bw&sa=X&oi=b
ook_result&ct=result&resnum=4&ved=0CCoQ6AEwAw#v=onepa
ge&q&f=false
If monthly financial statements are desired by management then:
► Journalizing and posting adjusting entries must be done each month
► Journalizing and posting closing entries must be done each

month
► Monthly financial statements can be prepared from worksheets;

adjustments and closing entries need not be entered in the accounting
records
► Adjusting and closing entries must be entered in the accounting

records before preparation of interim financial statements
ABC Company sold a plant asset that originally cost Rs. 50,000 for Rs.
22,000 cash. If the company correctly reports a Rs. 5,000 gain on this
sale, the accumulated depreciation on the asset at the date of sale
must be:
► Rs. 33,000
► Rs. 28,000
► Rs. 27,000
► Rs. 23,000
Book value = cash -gain
= 22000-5000
= 17000
Depreciation = 50000-17000
= 33000
Which of the following statements is CORRECT regarding depreciation

methods?
► Accumulated depreciation represents a fund being accumulated fro
the replacement of assets
► The cost of a machine includes the cost of repairing damage to the

machine during the installation process
► A company may use different depreciation methods in its financial

statements and its income tax returns
► The use of an accelerated depreciation method causes an asset

to wear out more quickly than does the straight line method
The actions taken by the management to make company appear as

strong as possible in its financial statements is termed as which of the
following?
► Window dressing
► Understanding
► Comprehensiveness
► Materiality
Firms can employ “window dressing” techniques to make their financial statements look
stronger.
ABC Company selected ‘Abdullah and Ahmad Charted Accountants’ as

its auditors / accountancy firm. After audit the auditors stated
company’s audit report as:
We have examined the accounts of ABC Company up to the year ended

30th June, 2009, and other record based on these accounts and we got
all the information required by us. In our opinion the financial
statements and the accounts on which they are based have been
prepared in conformity with GAAP and present a true and fair position
of the affairs of ABC Company.
What do you think the above case is which type of following audit
reports?
► Qualified Audit Opinion
► Un-qualified Audit Opinion
► Adverse Audit Opinion
► Disclaimer Audit Opinion
All of the following users are very much concerned with the ratio
analysis EXCEPT?
► Credit analyst, including banks who want to know the credibility of

company
► Bond rating companies, who analyze ratios to help ascertain a

company’s ability to pay its debts
► Customers, who want to know the designs and quality of the

products offered
► Managers, to analyze, control, and thus improve their working

operations
Ratio analysis is used by three main groups: (1) managers, who employ ratios to help
analyze, control, and thus improve their firms’ operations; (2) credit analyst, including
bank loan officers and bond rating analysts, who analyze ratios to help ascertain a
company’s ability to pay its debts; and (3) stock analyst, who are interested in a company’s
efficiency, risk, and growth prospects.
In order to know the percentage of assets financed by creditors, which

of the following ratio is calculated?
► Debt Ratio
► Equity Ratio
► Operating credit Ratio
► Quick Ratio
The creditors' equity ratio equals total liabilities divided by total

assets. This reflects the percentage of assets financed by creditors. In
the event of corporate liquidation, creditors are paid before
Which of the following statement is the LEAST LIKELY to be correct?
► A firm that has a high degree of business risk is less likely to want
to incur financial risk
► There exists little or no negotiation with suppliers of capital

regarding the financing needs of the firm
► Financial ratios are relevant for making internal comparisons
► It is important to make external comparisons or financial ratios
A firm that has a high degree of business risk is much more likely to
use equity financing because there is no contractual responsibility to
make interest payments.
Which of the following is LEAST likely to be presented in Notes to

financial statements of a firm?
► Significant pending lawsuits
► Methods of Cost flow assumptions
► A firm’s capital resource needs and liquidity
► Sales by region or business segment

FINALTERM EXAMINATION
Spring 2009

The process of recording the economic effects of business transactions in a book
of original entry is knows as which of the following?
Double entry system
Debit
Journalizing
Posting

An entry that affects more than one accounts is knows as _____________.
Journal entry
Compound entry
Adjusting entry
Reversing entry

In which of the following form of Income Statement, the total of all expenses is
deducted from the total of all revenues?
Multiple-step form
Account form
Report form
Single-step form
A single-step income statement for a merchandising company lists net sales under
revenues and the cost of goods sold under expenses.(PAGE 73)

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

All of the following are true regarding the financing activity section of the cash
flow statement EXCEPT:
Financing activities require analysis of long-term liability and shareholders' equity
accounts
The ability to issue large quantities of common shares usually signals investor
confidence in the future of the company
Excessive borrowing has been the downfall of many companies
The declaration and payment of a large cash dividend may signal an
emergency
http://wps.prenhall.com/ca_ph_horngren_accounting_7/60/15481/3963284.cw/content/in
dex.html

The indirect method shows the reconciliation from net income to operating cash
flows. Select the adjustment that is subtracted during the reconciliation.
Revenues earned and received in cash.

Non-cash expenses (expenses incurred but not paid) reported on the
income statement one example is amortization expense.
Non-cash revenues (revenues earned but payment not yet received)
reported on the income statement
A decrease in Accounts Receivable or another non-cash current asset
http://wps.prenhall.com/ca_ph_horngren_accounting_7/60/15481/3963284.cw/c
ontent/index.html

Which of the following would NOT be the cash inflow for the business?
Sale of land for cash
Issuance of long term bonds
The sale of common stock
Retirement of long term debt

Under which cost flow assumption, the ending inventory is composed of the
earliest purchased merchandise?
FIFO
LIFO
Average cost
Specific identification
hill.com/sites/0072396881/student_view0/chapter8/online_tutorial_quiz.html

Which of the following would affect the gross profit rate if sales remain constant?
An increase in advertising expense
A decrease in depreciation expense
An increase in cost of goods sold
A decrease in insurance expense

Nishat Mills Ltd. is a rapidly growing company that acquires more equipment
every year. The company uses straight line depreciation in its financial
statements and MACRS in its tax returns.
Which of the following statements is NOT correct?
Using straight line depreciation in the financial statements instead of accelerated

method increases the company s reported net income
Using straight line depreciation in the financial statements instead of accelerated

method increases the company s annual net cash flow
Using MACRS instead of straight line in income tax returns increases company s
net cash flow
As long as the company keeps growing, it will report more depreciation in

its income tax returns each year than it does in its financial statements

A statement of cash flows would be least useful in answering which of the
following questions?
What was the average balance in the Cash account during the period?
Did operating activities result in a positive or negative net cash flow?
How much cash was provided or used by financing activities during the period?
Were cash dividends paid by the company more or less than the net cash
flow from operations?
hill.com/sites/0072396881/student_view0/chapter13/multiple_choice_quiz.html

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
http://www.scribd.com/doc/15937179/Finanacial-Accounting
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,
which are complex.
•Unless the statements are audited their authenticity is under doubt and they may
be misleading and fraudulent.
•Financial statements reflect the recorded facts and figures. Hence these are not
useful for control purpose.

Which of the following is NOT an advantage of a Sole proprietorship?
Easy to form and wind up
Direct motivation
Better control
Limited liability

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
http://www.qfinance.com/dictionary/participating-preferred-stock

The current ratio will be excessively very high in which of the following inventory
costing methods?
FIFO
LIFO
Average cost
Specific identification

If a firm has Rs. 100 in inventories, a current ratio equal to 1.2, and a quick ratio
equal to 1.1, what is the firm's Net Working Capital?
Rs. 0
Rs. 100
Rs. 200
Rs. 1,000

To financial analysts, "working capital" means the same thing as which of the
following?
Total assets
Fixed assets
Current assets
Current assets minus current liabilities

Which of the following could account for a company's gross profit ratio increasing
from one period to the next?
An increase in the cost of sales which has not been accompanied by an increase
in the selling price of goods sold
An increase in the selling price of goods sold which has not been
accompanied by an increase in the cost of sales
A change in the mix of goods sold so that lower profit margin goods take a
greater proportion of total sales
A change in stock valuation method at the year end which leads to a decrease in
the closing stock figure
http://wps.pearsoned.co.uk/ema_uk_he_dyson_accnas_7/64/16418/4203069.cw/index.ht
ml

Nestle Pakistan Limited is an example of which of the following types of
businesses?
Manufacturing
Service
Merchandise
Whole seller

Which of the following represents the long term debt paying ability of the
company as they become due?
Liquidity
Solvency
Profitability
Stability
(page 136)
Which group of ratios relates the financial charges of a firm to its ability to service
them?
Debt ratios
Coverage ratios
Profitability ratios
Activity ratios
(page 137)
Coverage Ratio
Coverage ratios are designed to relate the financial charges of a firm to its
ability to service, or cover, them. One of the most traditional coverage
ratios is the interest coverage ratio, or times interest earned

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
http://www.finpipe.com/equity/finratan.htm
In isolation, a financial ratio is a useless piece of information. In context, however, a
financial ratio can give a financial analyst an excellent picture of a company's
situation and the trends that are developing.
Ames Corporation's net accounts receivable were Rs. 750,000 on December 31,
20X1, and Rs.1,250,000 on December 31, 20X2. Net cash sales for 20X2
were Rs. 3,300,000. The accounts receivable turnover ratio for 20X2 was 16.
What were the total net sales for 20X2?
Rs. 12,800,000
Rs. 16,000,000
Rs. 16,100,000
Rs. 19,300,000
Calculation:
Receivable turnover = net credit sales/Avg.receivable
16 = net credit sales/1000,000
16*1000,000=net credit sales

16,000,000= net credit sales

How is the accounts receivable turnover ratio calculated?
Net credit sales / Average total assets
Net credit sales /Operating income
Net credit sales /Average accounts receivables
Net credit sales /Cost of goods sold

Company A makes an operating profit margin of 5 % on sales of Rs. 2.5 million.
Company B has sales that are 20% higher than Company A and achieves an
operating profit margin of 3.5%.Which company makes the highest operating
profit?
Company B
Company A
Both make the same operating profit
Not possible to calculate
Calculation
Company A operating profit margin = 2500,000*5/100
= 125000
company B = 3,000,000 *3.5/ 100
= 105000
The DuPont Approach breaks down the earning power on shareholders' equity
(ROE) as which of the following?
Net profit margin × Total asset turnover × Equity multiplier
Total asset turnover × Gross profit margin × Debt ratio
Total asset turnover × Net profit margin
Total asset turnover × Gross profit margin × Equity multiplier
http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/6679/17
09848.cw/content/index.html

Which of the following statement best describes the operating profit margin?
It shows what portion of profits are being distributed to shareholders
It shows what return is being made on assets employed in the business
It shows how well a company is controlling its costs, including overheads
It shows how efficiently a company is turning profits into cash
http://books.google.com.pk/books?id=PJYDfJ9o93UC&pg=PA48&dq=Which+of
+the+following+statement+best+describes+the+operating+profit+margin%3F+It+
shows+what+portion+of+profits+are+being+distributed+to+shareholders+It+show
s+what+return+is+being+made+on+assets+employed+in+the+business+It+show
s+how+well+a+company+is+controlling+its+costs,+including+overheads+It+sho
ws+how+efficiently+a+company+is+turning+profits+into+cash&hl=en&ei=ZgEuT
d2OK4PKswaH24zeBw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCQ
Q6AEwAA#v=onepage&q&f=false

Return on Sales is also known as which of the following?
Gross profit margin
Operating profit margin
Return on total assets
Return on investment
ROS is also known as a firm's"operating profit margin". PAGE#144

Which of the following is NOT a profitability measure?
Accounts receivable turnover ratio
Return on sales
Dividend yield
(page 138 and 142)

Which of the following is formula to measure the return on total assets?
Average total assets by operating income
Average total assets by net income
Operating income by average total assets
Net income by average total assets
(page 142)
Return on total assets = Operating income / Average assets

Which of the following is NOT part of additional paid-in-capital of the company?
Preferred stocks
Common stocks
Retained earnings
Dividends distributed
(page 148)
Which of the following options indicate how quickly accounts receivables are
converted into cash?
Accounts receivable turnover
Days to collect accounts receivable
Working capital
Total assets turnover
Liquidity of Receivables: It shows have quickly Accounts Receivables are

collected i.e. converted into cash. It is determined by Receivable Turnover
Ratio (RTO). It is number of times “Receivables” are converted into cash
during the year.

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
Inventory Turnover Ratio
(ITO). It is the number of times the company sells (turns over) it inventory
during the year. PAGE#132

Assume that a company has current assets of Rs. 60,000, current liabilities
of Rs. 35,000 and prepaid expenses of Rs. 5,000. Calculate the quick ratio of the
company?
1.57
1.71
1.86
0.58
Quick ratio = CA – inv – prepaid exp / CL

= 60000-5000 / 35000
= 55000/ 35000
= 1.57
What will be the effect on the EPS of the company, if it paid stock dividend on
common stock?
Increase
Decrease
No effect
Can not be found from the given information

What will be the effect of appropriated retained earnings on the rate of return on
stockholder's equity?
Increase
Decrease
No effect

Which of the following is the basic purpose of an accounting system?
Develop financial statements in conformity GAAP
Provide as much useful information to decision makers as possible
Record changes in the financial position of an entity
Meet an organization's need for accounting information as efficiently as possible
http://www.quickmba.com/accounting/fin/

A complete set of financial statements for Hartman Company, at December 31,
1999, would include each of the following, EXCEPT:
Balance sheet as of December 31, 1999
Income statement for the year ended December 31, 1999
Statement of projected cash flows for 2000
Notes containing additional information that is useful in interpreting the financial
Statements

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

Which of the following is TRUE regarding Retained Earnings?
Increased by net income
Increased by revenues
Decreased by dividends declared
Decreased by gains and losses

What are the effects of an adjusting entry on the financial statements?
Match revenues and expenditures
Increase net income
Increase the accuracy of balance sheet and income statement
Match revenues and assets

The supplies account has a balance of Rs. 1,500 at year end. The actual amount
of supplies in hand at the end of period is Rs. 400. The necessary adjusting entry
is:
Debit Supplies on Hand Rs. 1100; Credit Supplies Expense Rs. 1100
Debit Supplies Expense Rs. 400; Credit Supplies on Hand Rs. 400
Debit Supplies Expense Rs. 1100; Credit Supplies on Hand Rs. 1100
Debit Supplies on Hand Rs. 400; Credit Supplies Expense Rs. 400
Spring 2009
Marks: 81
Question No: 1 __ ( Marks: 1 ) - Please choose one
As transactions and events related to financial resources occur, they are
analyzed with respect to their effect on which of the following?
Financial position of the company
Accounting cycle
Trial balance
Liquidity position of the company Question
No: 2 ( Marks: 1 ) - Please choose one

If monthly financial statements are desired by management then:
Journalizing and posting adjusting entries must be done each month

Journalizing and posting closing entries must be done each month
Monthly financial statements can be prepared from worksheets; adjustments and
closing entries need not be entered in the accounting records
Adjusting and closing entries must be entered in the accounting records before
preparation of interim financial statements

Which of the following items are NOT added back to the net income figure (which
is found on the Income Statement) to arrive at cash flows from operations?
Depreciation
Deferred tax
Amortization
Investments

Which of the following would be considered as cash flow from investing
activities?
Expenditure for sale of plant and equipment
Payments to suppliers
Receipts from sale of goods or services
Proceeds from issuance of long-term debt
ABC Company has a cost of goods sold of Rs. 500,000. During the year the
inventory increased by Rs. 10,000 and accounts payable increased by Rs.
15,000. The interest expense was Rs. 15,000 for the year and dividend of Rs.
11,000 were paid during the year. What would be the cash payments for the
purchase of the merchandise?
Rs. 505,000
Rs. 516,000
Rs. 490,000
Rs. 495,000
Which of the following items does not result in an adjustment in the merchandise
inventory account under a perpetual system?
A purchase of merchandise
A return of merchandise inventory to the supplier
Payment of freight costs for goods shipped to a customer
Payment of freight costs for goods received from a supplier
http://www.google.com.pk/#sclient=psy&hl=en&q=does+NOT+result+in+an+adjust
ment+in+the+merchandise+inventory+account+under+a+perpetual+system%3F+
%E2%96%BA+A+return+of+merchandise+inventory+to+the+supplier+%E2%96
%BA+Payment+of+freight+costs+for+goods+shipped+to+a+customer+%E2%96%
BA+Payment+of+freight+costs+for+goods+received+from+a+supplier+%E2%96%
BA+A+purchase+of+merchandise&aq=f&aqi=&aql=&oq=&gs_rfai=&pbx=1&fp=9
77d28a4874662a8
http://webcache.googleusercontent.com/search?q=cache:qBtmRjcH2MoJ:higheredb
cs.wiley.com/legacy/college/kimmel/0470087447/self_study/ch05.rtf+Which+of+the+
following+items+does+NOT+result+in+an+adjustment+in+the+merchandise+invent
ory+account+under+a+perpetual+system%3F&cd=2&hl=en&ct=clnk&gl=pk

In a perpetual inventory system, which of the following is NOT part of the series of
journal entries made when merchandise is sold on credit?
Credit the Cost of Goods Sold account
Credit the Sales account
Credit the Merchandise Inventory account
Debit the Accounts Receivable account
hill.com/sites/0072996536/student_view0/chapter5/interactive_quiz_a.html

Assuming that net purchases cost Rs 250,000 during the year and that closing
inventory was Rs 4,000 less than the opening inventory of Rs 30,000, how much
was the cost of goods sold?
Rs. 276, 000
Rs. 280,000
Rs. 254,000
Rs. 246,000
Opening inv + purchases – closing inv

30000 + 250000 – 4000
276000
The sale of a depreciable asset resulting in a loss indicates that the proceeds
from the sale were:
Less than current market value
Greater than cost
Greater than book value
Less than book value

ABC Company sold a plant asset that originally cost Rs. 50,000 for Rs. 22,000
cash. If the company correctly reports a Rs. 5,000 gain on this sale, the
accumulated depreciation on the asset at the date of sale must be:
Rs. 33,000
Rs. 28,000
Rs. 27,000
Rs. 23,000
Book value = cash -gain
= 22000-5000
= 17000
Depreciation = 50000-17000
= 33000
Question No: 11 __( Marks: 1 ) - Please choose one

Which of the following is NOT the part of annual report?
Financial statements
Auditor's report
Five year summary
Future investments report
Annual Report is part of Financial Reporting Process which contains Financial

Statements, Notes to financial statements, Auditors’ Report, Five-year summary of key
financial and non-financial data, and Management’s discussion and analysis of operations
(MD&A).
As stated in the audit report, or Report of Independent Accountants, the primary
responsibility for a company's financial statements lies with which of the
following?
The owners of the company
Independent financial analysts
The auditors
The company's management
Audit of financial statements is independent of the business issuing these. Financial

Statements preparation is Management’s responsibility

An auditor would most likely issue an inability to form an opinion because which
of the following?
Inadequate disclosure of material information in the financial statements
The omission of the statement of cash flow
Management's refusal to furnish written representations
A material departure from accounting standards

Which of the following is a technique in accounting that can be used to present
the financial position of the company in a favorable light?
Good will
Relevance
Consistency
Window dressing

Which of the following valuation methods can distort the comparison between
companies?
Inventory valuation methods
Assets valuation methods
Sales valuation methods
Expenses valuation methods
Different accounting practices can distort comparisons. As noted earlier, inventory

valuation and depreciation methods can affect financial statements and thus distort
comparisons among firms
Which of the following is NOT a disadvantage of a Sole proprietorship?
Limited capital
Unlimited liability
Strong managerial expertise
Lack of continuity
Which of the following types of preferred stocks carry the provision that the issuer
has the right to purchase back the stock at a certain price, and retire it whenever
he wants?
In arrears preferred shares
Call able preferred shares
Cumulative preferred shares
Participating preferred shares
http://www.investopedia.com/terms/c/callablepreferredstock.asp

Which of the following remains intact and unaffected by the continuous changes
in business?
Capital Stock
Assets
Liabilities
Retained Earnings

What will be the effect of purchases of its own shares by the business on the
book value of the business?
Increase the total book value
Decrease total book value
No effect on the total book value
May or may not change
http://en.wikipedia.org/wiki/Book_value

When dividends are paid to the shareholders they must be approved by which of
the following authority?
Board of directors
Management
Common Stockholders
Preferred Stockholders
_ Question No: 21 ( 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

Which of the following statements (in general) is CORRECT?
A low receivables turnover is desirable
The lower the total debt-to-equity ratio, the lower the financial risk for a
firm
An increase in net profit margin with no change in sales or assets means a
weaker ROI
The higher the tax rate for a firm, the lower the interest coverage ratio

Which group of ratios shows the extent to which the firm is financed with debt?
Liquidity ratios
Debt ratios
Coverage ratios
(page 136)
Debt –To-Total-Assets: The debt-to-total assets ratio is derived by dividing a firm’s
total debt by its total assets: It indicates percentage of total assets financed by debt
Earnings per share, return on sales, and return on equity are all examples of
Leverage ratios
Liquidity ratios
Turnover ratios

If a gross profit stays high, but net profit falls this implies which of the following?
Competitive pressures are increasing
The expenses of the business may be growing too rapidly
The market is becoming saturated
The expenses of the business are firmly under control

Using the following information, calculate the book value per share of common
stock.
Common stock, 0.10 par, 10,000 shares authorized
2000 share issued and outstanding Rs. 200
Paid-in capital in excess of par - common Rs. 49,800
Retained Earnings Rs. 28,000
Rs. 25
Rs. 39
Rs. 5
Rs. 7.8
Book value per share common stock = common stockholders equity / Number of common
share
200+49800+28000 /10000
7.8
Which of the following is the percentage change if a negative amount appears in
the base year?
Misleading
Positive
Can not be computed
Negative
http://books.google.com/books?id=PFemtNzz0JAC&pg=PA670&lpg=PA670&dq=
percentage+change+if+a+negative+amount+appears+in+the+base+year%3F&so
urce=bl&ots=A6omdZrtEV&sig=kLeEA4jBeWIN3oh-obbuWK7kj1o&hl=en&ei=k-
wyTdufK8yTjAfNyuW4Cg&sa=X&oi=book_result&ct=result&resnum=4&ved=0CC
0Q6AEwAw#v=onepage&q=percentage%20change%20if%20a%20negative%20
amount%20appears%20in%20the%20base%20year%3F&f=false

Which group of ratios relates the financial charges of a firm to its ability to service
them?
Debt ratios
Coverage ratios
Activity ratios
http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/6679/170
9848.cw/content/index.html

Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2.
The company has Rs. 2 million in sales and its current liabilities are Rs. 1 million.
what is the value of company's current assets?
1,600,000
1,200,000
3,200,000
2,400,000
current ratio = current assets / current liabilities

current assets = current ratio * current liabilities
= 1.6*1,000,000
= 1,600,000
A firm has beginning accounts receivables of Rs. 375,000, and ending accounts
receivables of Rs. 400,000. The sales were Rs. 2,500,000 including cash sales
of Rs. 600,000.
Calculate the accounts receivable turnover ratio of the company.
0.76
6.45
4.75
4.90
Account receivable turnover = net credit sales / average account receivable

= 1,900,000 / 387,500
= 4.90
Which of the following performance measures would be of most direct interest to
shareholders?
Return on net assets
Gross profit margin
Debt ratio
Dividend yield

How is the company's debt ratio calculated?
Total liabilities by total assets
Total assets by total liabilities
Total liabilities by net income
Total assets by operating income

Sales for 1991 (base year) were Rs. 800,000 and the year-end total asset
turnover ratio was 1.6. With which of the following statements would you agree?
The total assets index analysis value, assuming Rs. 1.05 million of assets
at the end of 2000, would be 210
The gross profit margin and the net profit margin are examples of balance sheet
ratios
If total debt in 2000 was Rs. 420,000, the debt-to-equity ratio in 2000 would be
84%
Index analysis supplements the common-size analysis by comparing key
industry ratios

Which of the following is NOT a profitability measure?
Accounts receivable turnover ratio
Return on sales
Dividend yield
http://www.netmba.com/finance/financial/ratios/

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

Leverage ratios
Liquidity ratios
Activity ratios
(PAGE 145)
what will be effect of payment of previously declared dividends on the debt ratio
of the company?
Increase
Decrease
No effect

All of the following statements are TRUE regarding ratios that measure a
company's ability to pay current liabilities EXCEPT:
A higher current ratio is always preferred to a lower current ratio
In most industries, a current ratio of 2.0 is considered adequate
Working capital = current assets - current liabilities
Inventory and prepaid expense are included in the numerator of the current ratio
http://wps.prenhall.com/ca_ph_horngren_accounting_7/60/15481/3963328.cw/co
ntent/index.html

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

The statement of cash flows is designed to assist users in assessing each of the
following EXCEPT:
The ability of the company to remain solvent
In assessing the company's profitability
Major source of cash receipt during the period
The reasons for difference between cash from operating activities and net
income
Failure to record the receipt of a utility bill for services already received will result
in which of the following?
An overstatement of assets
An overstatement of liabilities
An overstatement of equity
An understatement of assets

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
Spring 2010
FIN621 - Financial Statement Analysis
Time: 90 min
Marks: 69
Student Info
StudentID:
Center:
ExamDate: Tue, Aug 10, 2010
After recording the transactions in journal, posting is made to which of the following?
► Trial Balance
► Financial Statements
► Ledger
► After-closing Trial Balance

PAGE#9
Posting in ledger which mean transferring debits and credits from journal to ledger
account. This is
also called ledgerising or classification
Which of the following is TRUE about the preparation of Trial Balance?
► It is prepared at the beginning of the year
► It is prepared at the end of the fiscal year
► It is prepared at the beginning of the accounting period
► It is prepared at the end of the accounting period
PAGE#16
• At the end of accounting period, a list of all ledger balances is prepared. This list is
called trial
Balance.
Prepaid Expense is a(n) _________ account and has a _________ normal balance.
► Revenue, credit
► Liability, credit
► Asset, debit
► Expense, debit

One purpose of closing entries is to give zero balances to which of the following accounts?
► Asset and liability accounts
► Liability and capital accounts
► Revenue and expense accounts
► Expense and capital accounts
PAGE#35
PURPOSE OF CLOSING ENTRIES
1. Updates the owner’s capital account in the ledger by transferring net income (loss) and
owner’s drawings to owner’s capital.
2. Prepares the temporary accounts (revenue, expense, drawings) for the next period’s
postings by reducing their balances to zero.
Which of the following would be considered as cash flow from investing activities?
► Proceeds from issuance of long-term debt

► Expenditure for sale of plant and equipment
► Payments to suppliers
► Receipts from sale of goods or services
PAGE#48
Cash flow from investing activities includes cash receipts and payments that arise from
Fixed and Long
Term assets of the organization.
• Cash inflows:
– From sale of property, plant, and equipment
– From sale of debt or equity securities of other entities
– From collection of principal on loans to other entities
• Cash outflows:
– To purchase property, plant, and equipment
– To purchase debt or equity securities of other entities
– To make loans to other entities
The cash flow from investing activities shows the cash effects of which of the following?
► Income statement items
► Long term assets items
► Long term liability & stockholder’s equity
► Long term liability and long term assets

PAGE#47
Cash Flow From Investing Activities
Cash flow from investing activities includes cash receipts and payments that arise from
Fixed and Long
Term assets of the organization.
In a perpetual inventory system, which of the following is NOT part of the series of journal entries
made when merchandise is sold on credit?
► Credit the Cost of Goods Sold account

► Credit the Sales account
► Credit the Merchandise Inventory account
► Debit the Accounts Receivable account
hill.com/sites/0072996536/student_view0/chapter5/interactive_quiz_a.html
Which of the following is NOT an example of accelerated depreciation method?
► Straight-line method
► Sum-of-the-years digit method
► Double-declining balance method
► Modified Accelerated Cost Recovery System
Accelerated-Depreciation method: In this method higher depreciation rate is charged
in early years and lower rate in later years.
Straight Line Method
Under this method, a fixed amount is calculated by a formula. That fixed amount is
charged every year
irrespective of the written down value of the asset
As stated in the audit report, or Report of Independent Accountants, the primary responsibility for a
company’s financial statements lies with which of the following?
► The owners of the company
► Independent financial analysts
► The auditors
► The company’s management
PAGE#98
Audit of financial statements is independent of the business issuing these. Financial

Statements preparation is Management’s responsibility
Which of the following is NOT a typical classification of partnerships?
► General partnerships
► Limited partnerships
► Limited liability partnerships
► Limited capital partnerships

http://smallbusiness.findlaw.com/business-structures/partnership/partnerships-types.html
Capital stock is normally listed on which of the following financial statements of a business
enterprise?
► Cash flow Statement
► Income Statement
► Statement of Retained Earnings
► Balance Sheet
PAGE#150
http://www.scribd.com/doc/24954370/ch05
The money that a company gets from potential investors in addition to the stated value of the stock
is referred to which of the following?
► Paid in capital
► Additional paid in capital
► Capital stock
► Contributed capital
PAGE#113
Additional paid-in-capital: shows excess amount received, when stock is sold for more
than par value.
http://en.wikipedia.org/wiki/Paid_in_capital
Generally , investors want to buy shares at which of the following prices?

► At face value
► Below face value
► Above face value
► At market value
page#123
Investors who buy stock are primarily interested in a company's profitability and their
prospects for earning a return on their investment by receiving dividends and/or
increasing the market value of their stock holdings.
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

PAGE#128
Component percentages/ Vertical Analysis/ Common- Size Analysis: This type of

analysis
indicates the relative size of each item in the Financial Statements as a percentage of the
total of that
Statement i.e. Total Assets or total Liabilities & Shareholders equity in Balance Sheet
and Sales in
Income Statement. Such a statement is then called common-size Financial Statement.
This type of
analysis technique is also called Vertical Analysis.
Which of the following are the ratios that are used to determine an entity’s short-term debt paying
ability?
► Times interest earned, inventory turnover, current ratio, and receivables turnover
► Times interest earned, acid-test ratio, current ratio, and inventory turnover
► Current ratio, acid-test ratio, receivables turnover, and inventory turnover
► Asset turnover, times interest earned, current ratio, and receivables turnover
page#130
If a company had a current ratio of 0.5, then which of the following statements regarding that
company's working capital would be true?
► The company's working capital would be positive

► The company's working capital would be zero
► The company's working capital would be negative
► The company's working capital would be 2:1

page#130
%20%20multiple%20choice/chapter%204%20-%20multiple%20choice.htm#10.
A company has an inventory turnover ratio of 1.05 times, and cost of goods sold of Rs. 50,000.
Calculate the average inventory of the company.
► Rs. 47, 500
► Rs. 47, 619
► Rs. 47, 500
► Rs. 47, 650

Inventory turnover ratio = CGS/ average inventory
1.05 = 50000 / A inv
Average inv = 50000/ 1.05
= 47619
1.06
Which of the following is a possible reason for company's average debtor’s collection period falling
from one year to the next?
► An improvement in the state of the economy
► A large credit customer facing severe cash shortages
► Economic recession
► A shortening of the credit period offered by suppliers

http://wps.pearsoned.co.uk/ema_uk_he_dyson_accnas_7/64/16418/4203069.cw/index.html
Which of the following ratio is calculated in order to know the liquidity of the accounts receivables?
► Accounts receivables turnover

► Accounts receivables turnover in days
► Operating cycle
► Activity ratios
page#133

collected i.e. converted into cash. It is determined by Receivable Turnover Ratio
(RTO). It is number of times “Receivables” are converted into cash during the year.
A company can improve (lower) its debt-to-total asset ratio by doing which of the following?
► Borrow more
► Shift short-term to long-term debt
► Shift long-term to short-term debt
► Sell common stock

Nishat Corporation had net income of Rs. 100,000, paid income taxes of Rs. 30,000, and had
interest expense of Rs. 8,000. What was Nishat's times interest earned ratio?
► 12.5
► 16.25
► 17.25
► 17.85
operating income available for interest payment /annual interest expenses.
1,30,000/8000=16.25 (for more detail see handouts page#137)
Most consumer-oriented stores and catalogue companies are an example of which of the following
type of business?
► Manufacturing
► Service
► Merchandise
► Both merchandise and manufacturing
All of the following statements are true regarding ratios that measure a company's ability to pay
short-term and long-term debt EXCEPT:
► The average debt ratio is between 0.57 and 0.67
► High times-interest-earned ratio indicates a company can pay interest expense easily
► Debt ratio of 60% indicates 60% of assets are financed with debt
► Debt ratio of 90% indicates lower financial risk than a debt ratio of 60%
A Debt Ratio Of 90% Indicates Lower Financial Risk Than A Debt Ratio Of 60%; In General, Lower
Financial Risk Results In Lower Interest Rates
http://wps.prenhall.com/ca_ph_horngren_accounting_7/60/15481/3963328.cw/content/index.html
Which of the following performance measures would be of most direct interest to shareholders?
► Return on net assets
► Gross profit margin
► Debt ratio
► Dividend yield
The total legal capital of the company consists of which of the following?
► Only common stocks issued
► Only preferred stocks issued
► Common stocks and preferred stocks
► Common stocks and retained earnings
page#149
Total legal capital = 12,000,000 (preferred) +14,000,000 (common) = Rs.26, 000,000
What will be the dividend requirement on outstanding preferred stocks, if the number of preferred
shares is 50,000, number of common shares is 40,000 and the dividend per share is Rs. 10.
► Rs. 500,000
► Rs. 400,000
► Rs. 5,000
► Rs. 4,000
50000*10 = 500000
Which of the following options indicate how quickly accounts receivables are converted into cash?
► Accounts receivable turnover
► Days to collect accounts receivable
► Working capital
► Total assets turnover
page#133
collected i.e. converted into cash. It is determined by Receivable Turnover Ratio
(RTO). It is number of times “Receivables” are converted into cash during the year.

► Leverage ratios
► Activity ratios
page#145
Efficiency of operating cycle/process: It is determined by activity ratios
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
Acid Test Ratio = Current assets- Inventories/ Current Liabilities
= 15.6 – 1.8 /11.2
= 1.23
What will be effect of purchase of inventory on open account on quick ratio of the company?
► Increase
► Decrease
► No effect
What will be the effect of conversion of a portion of bonds payable into common stock on the
interest coverage ratio of the company?
► Increase
► Decrease
► No effect
page#137
Interest coverage ratio = operating income available for interest payment = 25 = 5
annual interest expenses. 5
(Normal ratio 3:5)
This ratio serves as one measure of the firm’s ability to meet its interest payments and
thus avoid
bankruptcy. In general, the higher the ratio, the greater the likelihood that the company
could cover its
interest payments without difficulty. It also sheds some light on the firm’s capacity to
take on new debt
What will be the effect on the inventory turnover ratio of the company, if it changed from FIFO to
LIFO during the period of inflation?
► Increase
► Decrease
► No effect
Assume that a company has current assets of Rs. 60,000, current liabilities of Rs. 35,000 and
prepaid expenses of Rs. 5,000. Calculate the quick ratio of the company?
► 1.57
► 1.71
► 1.86
► 0.58
Quick ratio = current assets – inventory – prepaid expenses / current liabilities
= 60000 – 5000 / 35000
= 55000 / 35000
= 1.57
A complete set of financial statements for Hartman Company, at December 31, 1999, would
include each of the following, EXCEPT:
► Balance sheet as of December 31, 1999
► Income statement for the year ended December 31, 1999
► Statement of projected cash flows for 2000
► Notes containing additional information that is useful in interpreting the financial statements
Failure to record the receipt of a utility bill for services already received will result in which of the
following?
The journal entry would involve a debit to expense and a credit to a liability. Failure to record this
entry causes expenses and liabilities to be understated. As a result of understating expenses,
income and owner's equity are overstated. Notice that assets are correct.
Which of the following is the proper journal entry to record Ransom Company's billing of clients for
Rs. 500 of services rendered?
► Debit Cash 500; Credit Accounts Receivable 500
► Debit Accounts Receivable 500; Service Revenue 500
► Debit Accounts Receivable 500; Credit Capital Stock 500
► Cash 500; Credit Service Revenue 500
Both Accounts Receivable (an asset which is increased with a debit) and Service Revenue
(increased with a credit) increase by the rendering of services on account. Cash is not impacted
and should not be debited or credited. The increase in revenue will ultimately cause an increase
in owner's equity -- but this occurs through financial statement preparation, not a direct credit to
Capital Stock.
Which of the following transaction have an effect on expense account?

► Purchase of office equipment on credit
► Payment on accounts payable
► Repayment of principle of bank loan
► Payment of wages
Failure to record the receipt of a utility bill, which have already been received for services, will
result in which of the following?
The journal entry would involve a debit to expense and a credit to a liability. Failure to record this
entry causes expenses and liabilities to be understated. As a result of understating expenses,
income and owner's equity are overstated. Notice that assets are correct.
A business has purchased machinery on credit, what will be its journal entry?
► Cash - (Debit); Machinery - (Credit)

► Machinery - (Debit) ; Accounts payable - (Credit)
► Accounts payable - (Debit) ; Machinery - (Credit)
► Machinery - (Debit) ;Cash - (Credit)
Which of the following is NOT normally required for revenue to be recognized according to the
revenue principle for accrual basis accounting?
► The price is fixed or determinable

► Services have been performed
► Cash that has already been collected
► Evidence of an arrangement for customer payment exists
Using the following information calculate Net Income: Sales Revenue Rs.200, 000, Loss on Sale of
Equipment Rs.10, 000, Amortization Expense Rs.20, 000 and Cost of Goods Sold Rs.50, 000.
► Rs. 170,000
► Rs. 120,000
► Rs. 130,000
► Rs. 180,000
Sales 200,000
Less cost of goods sold 50,000
Gross profit 1, 50,000
Less
Loss on sale of equipment 10,000
Less amortization expense 20,000
Net income 1, 20,000
Which of the following statements is CORRECT regarding depreciation methods?

► Accumulated depreciation represents a fund being accumulated fro the replacement of
assets
► The cost of a machine includes the cost of repairing damage to the machine during the
installation process
► A company may use different depreciation methods in its financial statements and its
income tax returns
► The use of an accelerated depreciation method causes an asset to wear out more
quickly than does the straight line method
The actions taken by the management to make company appear as strong as possible in its
financial statements is termed as which of the following?
► Window dressing
► Understanding
► Comprehensiveness
► Materiality
page#124
Firms can employ “window dressing” techniques to make their financial statements
look stronger.
Persons, who sign articles/memorandum of the company, contribute in the initial share capital of
the company. They are called as:
► Subscribers
► Undertakers
► Investors
► Shareholders
(page 114)
Subscribers / Sponsors Of The Company
Subscribers / Sponsors are the persons who sign articles and memorandum of the
company and
contribute in the initial share capital of the company.
ABC Company now wants to further raise its capital; it is going to offer its shares first to current
shareholders. The issuance of further capital to Present Shareholders is called:
► Paid-in capital
► Preferred-stock Issue
► Right Issue
► Additional capital
page#114
Where a company wants to issue further capital (called raising the capital), shares are
first offered to
current shareholders. The issuance of further capital to Present Shareholders is called
Right Issue
Which one of the following ratios measures general liquidity of a company?

► Quick ratio
► Current ratio
► Investments ratio
► Defensive interval ratio
page#130
It should be noted that current ratio measures “general liquidity”,
Which of the following is MORE concerned with the short-term solvency?

► Short term Creditors
► Long term Creditors
► Short term Debtors
► Long term Debtors
PAGE#130
Analysis by short-term creditors: Interest of short-term creditors is to watch the
ability of business to meet its debts as these become due; i.e. Short-term solvency.
The increasing Return on Sales (ROS) shows:

► Company is facing financial troubles
► Company is retaining more than 65% of its profit for operational efficiency
► Company is paying dividends consistently over the past years
► Company is growing by leaps and bounds
page#144
A ratio widely used to evaluate a company's operational efficiency. ROS is also known as
a firm's
"operating profit margin". An increasing ROS indicates the company is growing
more efficient, while a decreasing ROS could signal looming financial troubles
Fall 2009
Which of the following arrangement is used to maintain the accounts?

► Sequentialy
► Alphabaticaly
► Monthly
► Orderly
(page 8)
Orderly arrangement of Accounts is to be maintained. Numbering of Accounts is also done
to facilitate proper record-keeping and cross references.
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

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
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

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
Which of the following is the largest single expense of most merchandising firms?
► Cost of goods sold
► Rent Expense
► Amortization Expense
► Salaries Expense
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
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
Cash Flow Prediction is Better than Earning Prediction -

Cash flow ...
Developing ratios for effective cash flow statement analysis

...
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
Perpetual System
1. Purchases increase Merchandise Inventory.

2. Freight costs, Purchase Returns and Allowances and Purchase Discounts are
included in Merchandise Inventory.
3. Cost of goods sold is increased and Merchandise Inventory is decreased for
each sale.
4. Physical count done to verify Inventory balance.
In perpetual inventory system, a return of defective merchandise is recorded by

crediting __________.
► Purchases
► Purchase Returns
► Purchase Allowance
► Merchandise Inventory
Financial Accounting and Accounting Standards
hill.com/sites/0072996536/student_view0/chapter5/interactiv
e_quiz_a.html
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
SELF-STUDY QUESTIONS
Assets which have NO market value are called:
► Wasting assets
► Fictitious assets
► Quick assets
► Tangible assets
Audit opinions can NOT be classified as which of the following?
► Adverse opinion
► Unqualified opinion
► Qualified opinion
► Disagreement of opinion
Auditor’s Report, Opinion/Certificate: There are four types of Audit certificates.

i) Unqualified: It states that Financial Statements present information in conformity with
GAAP.
ii) Qualified: It qualifies the Report with certain observations.
iii) Adverse: It states that financial statements have not been presented fairly in accordance
with GAAP.
iv) Disclaimer: Auditor expresses his inability to report on Financial Statements for various
reasons.
The audit is NOT a necessary requirement for which of the following companies?
► Listed companies
► Corporations
► Sole proprietorship
► Partnerships
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
(page 103)
This is also a very important part of Annual Report prepared by the management of a
corporation. It offers quick look at some overall trends, and it includes net sales or
operating revenues, income/loss from continuing operations, total assets, long-term
obligations and cash dividend per common share.
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
Which of the following is NOT a feature of preferred shares?
► Distributive
► Callable
► In arrears
► Cumulative
http://en.wikipedia.org/wiki/Preferred_stock
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
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
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
hill.com/sites/0072396881/student_view0/chapter14/chapter_summary.html
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
Krisle and Kringle's debt-to-total assets ratio is 4%. What is its debt-to-equity ratio?
► 2%
► 7%
► 6%
► 3%
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
http://wps.pearsoned.co.uk/ema_uk_he_dyson_accnas_8/145/37242/9534033.cw/
content/index.html

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
http://en.wikipedia.org/wiki/Fundamental_analysis
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
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
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
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
http://tutor2u.net/business/quizzes/as/analysing_financial_performance/quizmake
r.htm
Which of the following would NOT improve the return on investment ratio?
► Reducing costs
► Increasing gains
► Accelerating gains
► Issuing treasury stock
Page#143
Decision makers will also look for ways to improve ROI by reducing costs,
increasing gains, or accelerating gains.
► 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
Which of the following is the ideal position of debt ratio?
► 30%
► 60%
► 50%
► 45%
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
15.6 -1.8 / 11.2 = 1.23
Which of the following is essential to conduct business activity, particularly in times

of adversity?
► Profitability
► Liquidity
► Stability
► Solvency
http://books.google.com/books?id=-
DSdeU2kheoC&pg=PA22&lpg=PA22&dq=Which+of+the+following+is+essential+to+
conduct+business+activity,+particularly+in+times+of+adversity&source=bl&ots=l7
TeBBgxG_&sig=TY2Oklq2GlDwCdktIP17R3F8UG8&hl=en&ei=x6IxTd2NPMqWhQfM9u
C_Cw&sa=X&oi=book_result&ct=result&resnum=5&ved=0CCYQ6AEwBA#v=onepag
e&q&f=false
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
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
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
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
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
Which of the following elements of financial statements is MOST closely related to

measurement of financial position?
► Equity
► Income
► Expense
► Disclosures
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
The basic type of capital stock issued by every corporation is known as:
► Common stock
► Preferred stock
► Class B
► Cumulative Stock
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
Acid Test Ratio = Current assets- Inventories/ Current Liabilities This ratio serves as a
supplement to the current ratio in analyzing liquidity. This ratio is the same as the current
ratio except that it excludes inventories. Presumably the least liquid portion of current-
assets-from the numerator. The ratio concentrates primarily on the more liquid current
assets, cash, marketable securities, and receivables, in relation to current obligations. Thus,
this ratio provides a more penetrating measure of liquidity than does the current ratio.
Average payment period is calculated as:
► 365 / Accounts payable turnover
► 365 X Accounts payable turnover
► 365/ Total purchases
► Accounts payable turnover / 365
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
The trial balance shows Supplies of Rs.1,350 and Supplies Expense of Rs.0. If Rs.600 of supplies are on
hand at the end of the period, the adjusting entry would be:
 Supplies, Rs. 600 - Debit; Supplies Expense, Rs. 600 - Credit
 Supplies, Rs. 750 - Debit; Supplies Expense, Rs. 750 - Credit
 Supplies Expense, Rs. 750 - Debit; Supplies, Rs. 750 - Credit
 Supplies Expense, Rs. 600 Debit; Supplies, Rs. 600 - Credit
Which of the following items are NOT added back to the net income figure (which is found on the Income
Statement) to arrive at cash flows from operations?
 Depreciation
 Deferred tax
 Amortization
 Investments
Which of the following accounts will be debited, when increased?
 Liabilities and expenses
 Assets and equity
 Assets and expenses
 Equity and revenues
The users of a statement of cash flows are mostly interested in:
 Net cash flow from operating activities
 Net cash flow from investing activities
 Net cash flow from financing activities
 Net cash flow from non-cash transactions
A business has purchased a building on cash, how it would be recorded in the journal?
Select correct option:
 Building - Debit; Cash - Credit
 Cash - Debit; Building - Credit
 Building - Debit; Owner’s equity - Credit
 Building - Debit; Accounts Payable - Credit
The current ratio will be excessively very high in which of the following inventory costing
Methods?
 FIFO
 LIFO
 Average cost
 Specific identification
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
There are five main kinds of current assets. Which of the following is NOT among them?
Select correct option:
 Cash and equivalents

 Deferred income
 Accounts receivable
 Prepaid expenses
What will be the effect on the EPS of the company, if it paid stock dividend on common stock?
 Increase
 Decrease
 No effect
 Can not be found from the given information
What will be the effect of appropriated retained earnings on the rate of return on stockholder's equity?
 Increase
 Decrease
 No effect
 Can not be found from the given information
 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
Which of the following options indicate how quickly accounts receivables are converted into cash?
a) Accounts receivable turnover
b) Days to collect accounts receivable
c) Working capital
d) Total assets turnover
Ames Corporation's net accounts receivable were Rs. 750,000 on December 31, 20X1, and Rs. 1,250,000
on December 31, 20X2. Net cash sales for 20X2 were Rs. 3,300,000. The accounts receivable
turnover ratio for 20X2 was 16. What were the total net sales for 20X2?
a) Rs. 12,800,000
b) Rs. 16,000,000
c) Rs. 16,100,000
d) Rs. 19,300,000
Calculation:
Receivable turnover = net credit sales/Avg.receivable
16 = net credit sales/1000,000
16*1000,000=net credit sales
16,000,000= net credit sales
Nestle Pakistan Limited is an example of which of the following types of businesses?

a) Manufacturing
b) Service
c) Merchandise
Whole seller

Fin621 Final Term Papers

Uploaded by

Copyright:

Available Formats

Fin621 Final Term Papers

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Fin621 Final Term Papers

Uploaded by

Copyright:

Available Formats

FINAL TERM EXAMINATION

FIN621- Financial Statement Analysis (Session - 1)

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

Which one of the following is NOT a type of adjusting entries?

► Entries to record accrued revenues

► Entries to record accrued expenses

► Entries to distribute un-earned revenue

► Entries to record revenues

(Handout page 29)

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

Which one of the following statements is TRUE regarding distributions to

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

► Shareholders can individually decide on their distributions

► Corporate dividends reduce contributed capital and therefore, stockholders’

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

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

Office supplies are purchased on account. The company uses a perpetual

► Debit - Purchases; Credit - Cash

► Debit - Merchandise Inventory; Credit - Cost of Goods Sold

► Debit - Office Supplies; Credit - Accounts Payable

► Debit - Merchandise Inventory; Credit - Accounts Payable

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

► It requires a very detailed physical count

► This method allows management to easily manipulate ending inventory cost

► This method is very hard to use on interchangeable goods

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

G.P= SALES – C.O.G.S

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

Which of the following statements best describes the nature of depreciation?

► Regular reduction of asset value to correspond to the decline in market value

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

► Non operating gains

► A decrease in income tax rates

► A decrease in accounts receivable over the period

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

In a statement of cash flows, the acquisition of land by issuing capital stock:

► Is not shown at all, since no cash was received or disbursed

► Is shown as an investing activity

► Is shown as a financing activity

► Is shown in a supplementary schedule as a non-cash investing and

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

Which one of the following is NOT a limitation of financial statements?

► They always present past

► They always present the monetary terms

► They help in assessment of future profitability

► They give no information about management and employee relations

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

► Limited liability company

Which of the following characteristics is NOT generally regarded as right of

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

► Debit Cash 4,000; Credit Common Stock 4,000

► Debit Cash 4,000; Credit Common Stock, 1,000, Credit Paid-in-Capital

► Debit Cash 4,000, Debit Paid-in-Capital in Excess of Par 3,000; Credit

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

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

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

► Both trend and component percentages

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

► Both trend and component percentages

Component percentages/ Vertical Analysis/ Common- Size Analysis: This