Question 1

Which of the following best describes the Accounts Receivable Turnover ratio?

Accepted Answer

It measures how many times on average accounts receivable are collected in cash during the year.

Question 2

A company has net credit sales of $$500,000 and average accounts receivable of 50$$,000. What is its Accounts Receivable Turnover ratio?

Accepted Answer

$$ \frac{500,000}{50,000} = 10 $$

Question 3

Which of the following is a red flag for premature revenue recognition?

Accepted Answer

A significant spike in fourth-quarter revenue.

Question 4

During periods of inflation, which inventory cost flow assumption typically results in lower reported earnings?

Accepted Answer

LIFO

Question 5

Which of the following is most likely to indicate low earnings quality?

Accepted Answer

Earnings boosted by nonrecurring items and aggressive accounting.

Question 6

A company reduces its research and development expenses significantly in the current year to boost reported earnings. What is a potential long-term consequence?

Accepted Answer

Detrimental impact on long-run operating profit.

Question 7

Which of the following is an example of 'cookie-jar accounting'?

Accepted Answer

Over-reserving for expenses in good years and reversing them in poor years.

Question 8

If a company’s Total Asset Turnover increases, what does this generally indicate?

Accepted Answer

The company is more efficient in using its assets to generate sales.

Question 9

Which of the following is NOT a typical sign of financial statement manipulation?

Accepted Answer

Consistent application of conservative accounting standards.

Question 10

A company’s Management Discussion and Analysis (MD&A) section reports that sales increased due to higher prices, not higher volume. What should an analyst do to verify this claim?

Accepted Answer

Compare sales data with changes in inventory and accounts receivable.

Question 11

Which of the following best describes 'marked to market' accounting as used in the Enron case?

Accepted Answer

Recognizing profits based on estimated future values rather than actual transactions.

Question 12

Which of the following is a formula for Fixed Asset Turnover?

Accepted Answer

$$ 	ext{Fixed Asset Turnover} = \frac{	ext{Net Sales}}{	ext{Net Fixed Assets}} $$

Question 13

Which of the following would most likely improve the comparability of profit margins between periods?

Accepted Answer

Excluding the effects of significant inventory write-downs.

Question 14

Which of the following is a characteristic of high-quality earnings?

Accepted Answer

Earnings are supported by strong cash flows and conservative accounting.

Question 15

If a company underestimates its allowance for doubtful accounts, what is the immediate effect on net income?

Accepted Answer

Net income increases.

Question 16

Which of the following is NOT considered a discretionary expense?

Accepted Answer

Product warranty

Question 17

A company’s Accounts Payable Turnover ratio decreases significantly. What might this indicate?

Accepted Answer

The company is taking longer to pay its suppliers.

Question 18

Which of the following is a potential sign of earnings manipulation related to reserves?

Accepted Answer

Large, unexplained changes in reserve accounts.

Question 19

Which of the following best describes the purpose of analyzing efficiency ratios?

Accepted Answer

To assess how effectively a company manages its assets to generate sales.

Efficiency Ratios and Earnings Quality: Advanced Financial Statement Analysis

Study Guide - Practice Questions

Study Guide - Flashcards