Chapter 01
Overview of Financial Statement Analysis
Multiple Choice Questions
1. Which of the following is likely to be the most informative source if you were interested
in a company's business plan or strategy?
A. Auditor's letter
B. Management discussion and analysis
C. Proxy statement
D. Footnotes
2. Which of the following would not be considered a source of financing?
A. Notes receivable
B. Common stockholders' equity
C. Retained earnings
D. Debentures
,3. Wilco Company reports the following:
Dividend payout ratio for 2005 was:
A. 27%
B. 12%
C. 22.2%
D. Not determinable
4. If a company receives an unqualified audit opinion it means the auditors:
A. did not complete a full audit and therefore do not feel qualified to give an opinion on
financial statements.
B. are providing assurance that the company will remain financially viable for at least the
next year.
C. are providing assurance that the company's financial statements fairly present company's
financial performance and position.
D. are providing assurance that the company's financial statements are free from
misstatement, fraudulent accounting and fairly indicate future performance.
,5. The Management Discussion and Analysis Section of the annual report:
A. is required by the SEC.
B. is optional but normally included in the annual report.
C. is required by the SEC only if the company has suffered from unfavorable trends or there
are significant uncertainty concerning liquidity of the company.
D. is required by the SEC only if they have a qualified audit opinion.
You are analyzing a large stable company. For the year ending 12/31/05 the company
reported earnings of $58,900K and book value at the end of 2005 was $371,700K. You
expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to
continue. The company borrows at 8%, and has a cost of equity of 12%. The company has
25,000K shares outstanding.
6. What is your estimate of price per share using the dividend discount model at 12/31/05?
A. $20.62
B. $21.65
C. $23.56
D. $24.74
7. What is your estimate of price using the residual income valuation model at 12/31/05?
A. $20.62
B. $21.65
C. $23.56
D. $24.72
, 8. Which of the following is not a common tool used in financial statement analysis?
A. Random walk analysis
B. Ratio analysis
C. Common size statement analysis
D. Trend series analysis
9. A common size income statement would typically be prepared by dividing:
A. all items on income statement in Year t by their corresponding value in Year t-1.
B. all items on income statement in Year t by their corresponding balance sheet accounts in
Year t.
C. all items on income statement in Year t by net income in Year t-1.
D. all items on income statement in Year t by sales in Year t.
10. When conducting comparative analysis by reviewing consecutive balance sheets,
A. all items on the balance sheet in Year t must be divided by their corresponding value in
Year t-1 and subtract 1.
B. all items on the balance sheet in Year t-1 must be subtracted from their corresponding
value in Year t.
C. all items on the balance sheet in Year t must be divided by net income in Year t-1.
D. Both A and B are correct.
You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive,
using 2004 as the base year. Below are selected data.
Overview of Financial Statement Analysis
Multiple Choice Questions
1. Which of the following is likely to be the most informative source if you were interested
in a company's business plan or strategy?
A. Auditor's letter
B. Management discussion and analysis
C. Proxy statement
D. Footnotes
2. Which of the following would not be considered a source of financing?
A. Notes receivable
B. Common stockholders' equity
C. Retained earnings
D. Debentures
,3. Wilco Company reports the following:
Dividend payout ratio for 2005 was:
A. 27%
B. 12%
C. 22.2%
D. Not determinable
4. If a company receives an unqualified audit opinion it means the auditors:
A. did not complete a full audit and therefore do not feel qualified to give an opinion on
financial statements.
B. are providing assurance that the company will remain financially viable for at least the
next year.
C. are providing assurance that the company's financial statements fairly present company's
financial performance and position.
D. are providing assurance that the company's financial statements are free from
misstatement, fraudulent accounting and fairly indicate future performance.
,5. The Management Discussion and Analysis Section of the annual report:
A. is required by the SEC.
B. is optional but normally included in the annual report.
C. is required by the SEC only if the company has suffered from unfavorable trends or there
are significant uncertainty concerning liquidity of the company.
D. is required by the SEC only if they have a qualified audit opinion.
You are analyzing a large stable company. For the year ending 12/31/05 the company
reported earnings of $58,900K and book value at the end of 2005 was $371,700K. You
expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to
continue. The company borrows at 8%, and has a cost of equity of 12%. The company has
25,000K shares outstanding.
6. What is your estimate of price per share using the dividend discount model at 12/31/05?
A. $20.62
B. $21.65
C. $23.56
D. $24.74
7. What is your estimate of price using the residual income valuation model at 12/31/05?
A. $20.62
B. $21.65
C. $23.56
D. $24.72
, 8. Which of the following is not a common tool used in financial statement analysis?
A. Random walk analysis
B. Ratio analysis
C. Common size statement analysis
D. Trend series analysis
9. A common size income statement would typically be prepared by dividing:
A. all items on income statement in Year t by their corresponding value in Year t-1.
B. all items on income statement in Year t by their corresponding balance sheet accounts in
Year t.
C. all items on income statement in Year t by net income in Year t-1.
D. all items on income statement in Year t by sales in Year t.
10. When conducting comparative analysis by reviewing consecutive balance sheets,
A. all items on the balance sheet in Year t must be divided by their corresponding value in
Year t-1 and subtract 1.
B. all items on the balance sheet in Year t-1 must be subtracted from their corresponding
value in Year t.
C. all items on the balance sheet in Year t must be divided by net income in Year t-1.
D. Both A and B are correct.
You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive,
using 2004 as the base year. Below are selected data.
