Financial Statement Analysis Midterm
Exam with Verified Detailed Answers
What are the four steps to financial statement analysis and
valuation? -
correct answer ✅(1) Understanding the business environment
and accounting information
(2) Adjusting and assessing financial information - care about the
FUTURE not the PAST (ex. profitability analysis, credit analysis,
operation, investing, financing)
(3) Forecasting financial information
(4) Using information for valuation
Who demands financial accounting information? -
correct answer ✅- managers and employees
- investment analysts and information intermediaries
- Shareholders and directors
- Customer and strategic partners
- Regulators and tax agencies
- Voters and representatives
,Financial Statement Analysis Midterm
Exam with Verified Detailed Answers
What are the two primary SEC filing requirements -
correct answer ✅- 10-K - audited anual report, includes 4
financial statements and notes with MD&A
- 10-Q - unaudited quarterly report including summary versions of
four financial statements
What are the benefits and costs of disclosure? -
correct answer ✅Benefits:
(1) lower costs of funds and labor
(2) Economic benefits from reliable disclosures
Costs:
(1) preparation and dissemination, competitive disadvantages,
litigation potential, potential costs
What are the two governing boards for financial statements? -
correct answer ✅(1) International Accounting Standards Board
(IASB)
(2) FASB (U.S.)
,Financial Statement Analysis Midterm
Exam with Verified Detailed Answers
Is there a big difference between financial statements prepared
using GAAP and IFRS -
correct answer ✅No, differences mostly technical. Both require
four financial statements and use accrual accounting
Explain how the accounting equation relates to investing and
financing? -
correct answer ✅Assets (Investing) = Liabilities (Non-owner
financing) + SE (Owner financing)
--> Idea that a corporation can only raise $ through borrowing or
money from firm's investors
What are 5 initial questions to ask about the B/S? -
correct answer ✅(1) Is there a cost to holding too much cash?
(2) What is the proportion of long-term to short-term assets? What
does this have to do with the industry/business models
(3) What are trade-offs in financing company by owner vs. non-
owner financing?
(4) How do SE's influence strategic direction of company?
, Financial Statement Analysis Midterm
Exam with Verified Detailed Answers
(5) Most assets and liabilities reported at acquisition/historical
costs - would FMV be more representative?
What is the difference between IFRS and GAAP balance sheet
preparation? -
correct answer ✅- IFRS lists accounts in order of reverse liquidity
(Cash at end)
- IFRS lists SE before liabilities
What activities does an income statement report? how? -
correct answer ✅- Reports on operating activiies
- Lists amounts for sales (revenues) minus expenses (costs) to yield
--> "Bottom line" net income
Explain the relationship between non-controlling and controlling
interest? -
correct answer ✅- Companies calculate net income using ALL
revenues and expenses THEN split net income by their controlling
interest
- Controlling interest is precent outstanding common stock that
company owns
- Focus on net income attributable to company shareholders
Exam with Verified Detailed Answers
What are the four steps to financial statement analysis and
valuation? -
correct answer ✅(1) Understanding the business environment
and accounting information
(2) Adjusting and assessing financial information - care about the
FUTURE not the PAST (ex. profitability analysis, credit analysis,
operation, investing, financing)
(3) Forecasting financial information
(4) Using information for valuation
Who demands financial accounting information? -
correct answer ✅- managers and employees
- investment analysts and information intermediaries
- Shareholders and directors
- Customer and strategic partners
- Regulators and tax agencies
- Voters and representatives
,Financial Statement Analysis Midterm
Exam with Verified Detailed Answers
What are the two primary SEC filing requirements -
correct answer ✅- 10-K - audited anual report, includes 4
financial statements and notes with MD&A
- 10-Q - unaudited quarterly report including summary versions of
four financial statements
What are the benefits and costs of disclosure? -
correct answer ✅Benefits:
(1) lower costs of funds and labor
(2) Economic benefits from reliable disclosures
Costs:
(1) preparation and dissemination, competitive disadvantages,
litigation potential, potential costs
What are the two governing boards for financial statements? -
correct answer ✅(1) International Accounting Standards Board
(IASB)
(2) FASB (U.S.)
,Financial Statement Analysis Midterm
Exam with Verified Detailed Answers
Is there a big difference between financial statements prepared
using GAAP and IFRS -
correct answer ✅No, differences mostly technical. Both require
four financial statements and use accrual accounting
Explain how the accounting equation relates to investing and
financing? -
correct answer ✅Assets (Investing) = Liabilities (Non-owner
financing) + SE (Owner financing)
--> Idea that a corporation can only raise $ through borrowing or
money from firm's investors
What are 5 initial questions to ask about the B/S? -
correct answer ✅(1) Is there a cost to holding too much cash?
(2) What is the proportion of long-term to short-term assets? What
does this have to do with the industry/business models
(3) What are trade-offs in financing company by owner vs. non-
owner financing?
(4) How do SE's influence strategic direction of company?
, Financial Statement Analysis Midterm
Exam with Verified Detailed Answers
(5) Most assets and liabilities reported at acquisition/historical
costs - would FMV be more representative?
What is the difference between IFRS and GAAP balance sheet
preparation? -
correct answer ✅- IFRS lists accounts in order of reverse liquidity
(Cash at end)
- IFRS lists SE before liabilities
What activities does an income statement report? how? -
correct answer ✅- Reports on operating activiies
- Lists amounts for sales (revenues) minus expenses (costs) to yield
--> "Bottom line" net income
Explain the relationship between non-controlling and controlling
interest? -
correct answer ✅- Companies calculate net income using ALL
revenues and expenses THEN split net income by their controlling
interest
- Controlling interest is precent outstanding common stock that
company owns
- Focus on net income attributable to company shareholders
