Financial Statement Analysis Exam 1
Question and answers rated A+
2025/2026
An industry having a high degree of competition and low profit margins would be characterized by:
A. Many rivals, high legal barriers to entry, low product differentiation
B. Few barriers to entry, high first mover advantage, high product differentiation
C. Few rivals, low distribution access, high switching costs
D. Many rivals, few barriers to entry, low switching costs
E. Supply < demand, low supplier switching costs, steep industry learning curves - correct answer
✔Answer D
Acquirer Company buys Target Company. Target's pre-acquisition balance sheet at historical cost
showed Total Assets at $900,000 and Total Liabilities at $300,000. Upon acquisition, Acquirer revalued
Target's identifiable assets at $1,600,000 and liabilities at $360,000. Acquirer paid $2,000,000 in cash for
Target. Determine the amount of Goodwill Acquirer must recognize in the purchase of Target.
A. $1,460,000 B. $1,400,000 C. $760,000 D. $780,000 E. $820,000 - correct answer ✔C. $760,000
1600000-360000= 1240000
2000000-1240000= 760000
3. The last possible line item reported on the income statement is:
A. Net Revenue B. Operating Income C. Gross Profit D. Income from Continuing Operations E. Net
Income - correct answer ✔Answer E Net Income
The ability of diamond miners to dictate price and quantity to jewelry makers and sellers is an example
of:
,A. Customer bargaining power B. Supplier bargaining power C. Product differentiation D. Barriers to
entry E. Fixed-variable cost ratios - correct answer ✔B. supplier bargaining power
The figure below is a simple income statement. Use the figure to answer questions 5 and 6:
PERIOD ENDING 31-Dec-14 31-Dec-15 Total Revenue 129,184,000 161,480,000 Cost of Revenue
90,428,800 96,888,000 Gross Profit 38,755,200 64,592,000 Operating Expenses Research &
Development 498,000 610,000 Selling General and Administrative 5,948,000 7,538,000 Total Operating
Expenses 6,446,000 8,148,000 Operating Income or Loss 32,309,200 56,444,000 5. What was the cost of
goods sold for the year ending December 31, 2015. - correct answer ✔Cost of revenue
Assuming investors only care about intrinsic value, managers should attempt to maximize shareholder
wealth by increasing the stock price.
True or False - correct answer ✔False
An entrepreneur is attempting to sell you a 20% stake in his company in exchange for $1 million dollars.
They plan to invest all of their retained earnings and your $1 million back into the company to help it
grow. The company is only one year old and their revenue last year was $4 million dollars. Because it is a
new company, fixed costs are practically zero; so, the only cost is the cost of goods sold. Their cost of
goods sold is $2,000 and their current gross profit margin is 50%. You estimate that only 1,200 people
will want the product (including those that already purchased it). Should you invest? - correct answer
✔No
Which of the following is true regarding accrual accounting?
A. Accrual accounting is the basis for inputs into most financial models.
B. Accrual accounting attempts to measure the period in which cash flows occur.
C. Accrual accounting attempts to measure economic activities in the period transactions take place,
regardless of when cash flows transpire.
D. Accrual accounting forces land acquisitions to be recorded at historical cost. E. Accrual accounting
mostly affects the statement of cash flows. - correct answer ✔Answer C
Which of the following shows a proper sequence on an income statement:
, A. Net Revenue, Gross Profit, Depreciation Expense, Net Income, Operating Income
B. Sales, Operating Income, Gross Profit, Depreciation Expense, Net Income
C. Net Revenue, Gross Profit, Depreciation Expense, Operating Income, Net Income
D. Sales, Operating Income, Depreciation Expense, Net Income, Gross Profit
E. Net Revenue, Depreciation Expense, Gross Profit, Operating Income, Net Income - correct answer
✔C. Net Revenue, Gross Profit, Depreciation Expense, Operating Income, Net Income
Which of the following, if absolutely true in the real world, would make financial statement analysis
useless?
A. Technical analysis and momentum trading B. the Capital Asset Pricing Model (CAPM)
C. Strong Form Efficiency Market Hypothesis
D. Modigliani and Miller Theorem
E. Stagflation or negative interest rates - correct answer ✔C. Strong Form Efficiency Market Hypothesis
Which of the following investment strategies is most consistent with financial statement analysis?
A. Fundamental analysis
B. Technical analysis
C. Passive investing
D. All of the above
E. None of the above - correct answer ✔A Fundamental Analysis
Where should you go to find a company's financial statements?
A. EDGAR
B. FRED
C. Company's retail webpage
D. Google
Question and answers rated A+
2025/2026
An industry having a high degree of competition and low profit margins would be characterized by:
A. Many rivals, high legal barriers to entry, low product differentiation
B. Few barriers to entry, high first mover advantage, high product differentiation
C. Few rivals, low distribution access, high switching costs
D. Many rivals, few barriers to entry, low switching costs
E. Supply < demand, low supplier switching costs, steep industry learning curves - correct answer
✔Answer D
Acquirer Company buys Target Company. Target's pre-acquisition balance sheet at historical cost
showed Total Assets at $900,000 and Total Liabilities at $300,000. Upon acquisition, Acquirer revalued
Target's identifiable assets at $1,600,000 and liabilities at $360,000. Acquirer paid $2,000,000 in cash for
Target. Determine the amount of Goodwill Acquirer must recognize in the purchase of Target.
A. $1,460,000 B. $1,400,000 C. $760,000 D. $780,000 E. $820,000 - correct answer ✔C. $760,000
1600000-360000= 1240000
2000000-1240000= 760000
3. The last possible line item reported on the income statement is:
A. Net Revenue B. Operating Income C. Gross Profit D. Income from Continuing Operations E. Net
Income - correct answer ✔Answer E Net Income
The ability of diamond miners to dictate price and quantity to jewelry makers and sellers is an example
of:
,A. Customer bargaining power B. Supplier bargaining power C. Product differentiation D. Barriers to
entry E. Fixed-variable cost ratios - correct answer ✔B. supplier bargaining power
The figure below is a simple income statement. Use the figure to answer questions 5 and 6:
PERIOD ENDING 31-Dec-14 31-Dec-15 Total Revenue 129,184,000 161,480,000 Cost of Revenue
90,428,800 96,888,000 Gross Profit 38,755,200 64,592,000 Operating Expenses Research &
Development 498,000 610,000 Selling General and Administrative 5,948,000 7,538,000 Total Operating
Expenses 6,446,000 8,148,000 Operating Income or Loss 32,309,200 56,444,000 5. What was the cost of
goods sold for the year ending December 31, 2015. - correct answer ✔Cost of revenue
Assuming investors only care about intrinsic value, managers should attempt to maximize shareholder
wealth by increasing the stock price.
True or False - correct answer ✔False
An entrepreneur is attempting to sell you a 20% stake in his company in exchange for $1 million dollars.
They plan to invest all of their retained earnings and your $1 million back into the company to help it
grow. The company is only one year old and their revenue last year was $4 million dollars. Because it is a
new company, fixed costs are practically zero; so, the only cost is the cost of goods sold. Their cost of
goods sold is $2,000 and their current gross profit margin is 50%. You estimate that only 1,200 people
will want the product (including those that already purchased it). Should you invest? - correct answer
✔No
Which of the following is true regarding accrual accounting?
A. Accrual accounting is the basis for inputs into most financial models.
B. Accrual accounting attempts to measure the period in which cash flows occur.
C. Accrual accounting attempts to measure economic activities in the period transactions take place,
regardless of when cash flows transpire.
D. Accrual accounting forces land acquisitions to be recorded at historical cost. E. Accrual accounting
mostly affects the statement of cash flows. - correct answer ✔Answer C
Which of the following shows a proper sequence on an income statement:
, A. Net Revenue, Gross Profit, Depreciation Expense, Net Income, Operating Income
B. Sales, Operating Income, Gross Profit, Depreciation Expense, Net Income
C. Net Revenue, Gross Profit, Depreciation Expense, Operating Income, Net Income
D. Sales, Operating Income, Depreciation Expense, Net Income, Gross Profit
E. Net Revenue, Depreciation Expense, Gross Profit, Operating Income, Net Income - correct answer
✔C. Net Revenue, Gross Profit, Depreciation Expense, Operating Income, Net Income
Which of the following, if absolutely true in the real world, would make financial statement analysis
useless?
A. Technical analysis and momentum trading B. the Capital Asset Pricing Model (CAPM)
C. Strong Form Efficiency Market Hypothesis
D. Modigliani and Miller Theorem
E. Stagflation or negative interest rates - correct answer ✔C. Strong Form Efficiency Market Hypothesis
Which of the following investment strategies is most consistent with financial statement analysis?
A. Fundamental analysis
B. Technical analysis
C. Passive investing
D. All of the above
E. None of the above - correct answer ✔A Fundamental Analysis
Where should you go to find a company's financial statements?
A. EDGAR
B. FRED
C. Company's retail webpage
D. Google
