Q: Which equation represents the balance sheet identity?

$$ \text{Assets} = \text{Liabilities} + \text{Shareholders' Equity} $$

Q: A company has a share price of $$20, 2 million shares outstanding, total debt of 15 $$million, and cash of $5 million. What is its enterprise value?

$$ (2,000,000 \times 20) + 15,000,000 - 5,000,000 = 50,000,000 $$

Q: Which of the following is the correct formula for the quick ratio?

$$ \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} $$

Q: Which ratio would an analyst use to assess how efficiently a company turns its inventory into sales?

Inventory Turnover = \frac{\text{Cost of Goods Sold}}{\text{Inventory}} $

Q: Which formula correctly expresses the DuPont Identity for Return on Equity (ROE)?

$$ \frac{\text{Net Income}}{\text{Sales}} \times \frac{\text{Sales}}{\text{Total Assets}} \times \frac{\text{Total Assets}}{\text{Equity}} $$

Question 1

Which of the following best describes the primary purpose of financial statements for investors?

Accepted Answer

To present past performance information and a snapshot of the firm's assets and financing

Question 2

A Canadian public company must prepare its financial statements according to which set of standards for fiscal years beginning January 1, 2011 or later?

Accepted Answer

International Financial Reporting Standards (IFRS)

Question 3

Which equation represents the balance sheet identity?

Accepted Answer

$$ 	ext{Assets} = 	ext{Liabilities} + 	ext{Shareholders' Equity} $$

Question 4

A company has current assets of $$500,000 and current liabilities of 350$$,000. What is its net working capital?

Accepted Answer

$$ \150$$,000 $

Question 5

Which of the following is NOT typically considered a current asset?

Accepted Answer

Goodwill

Question 6

If a firm’s market capitalization is $$40 million and its book value of equity is 10 $$million, what is its market-to-book ratio?

Accepted Answer

$$ 4.0 $$

Question 7

Which of the following best explains why the book value of equity is often not a good estimate of a firm’s true value?

Accepted Answer

It is based on historical costs and may not reflect current market values or intangible assets

Question 8

A company has a share price of $$20, 2 million shares outstanding, total debt of 15 $$million, and cash of $5 million. What is its enterprise value?

Accepted Answer

$$ (2,000,000 	imes 20) + 15,000,000 - 5,000,000 = 50,000,000 $$

Question 9

Which of the following is the correct formula for the quick ratio?

Accepted Answer

$$ \frac{	ext{Current Assets} - 	ext{Inventory}}{	ext{Current Liabilities}} $$

Question 10

A firm reports net income of $12 million and has 4 million shares outstanding. What is its earnings per share (EPS)?

Accepted Answer

$$ 3.00 $$

Question 11

Which of the following best describes the impact of an increase in depreciation expense on a firm’s cash flow, assuming a 30% tax rate?

Accepted Answer

Net income decreases, but cash flow increases by the tax shield amount

Question 12

Which ratio would an analyst use to assess how efficiently a company turns its inventory into sales?

Accepted Answer

Inventory Turnover = \frac{	ext{Cost of Goods Sold}}{	ext{Inventory}} $

Question 13

A firm has EBIT of $$5 million and interest expense of 1 $$million. What is its interest coverage ratio?

Accepted Answer

$$ 5.0 $$

Question 14

Which of the following is a key requirement of the Sarbanes-Oxley Act (SOX)?

Accepted Answer

CEOs and CFOs must certify the accuracy of financial statements

Question 15

Which formula correctly expresses the DuPont Identity for Return on Equity (ROE)?

Accepted Answer

$$ \frac{	ext{Net Income}}{	ext{Sales}} 	imes \frac{	ext{Sales}}{	ext{Total Assets}} 	imes \frac{	ext{Total Assets}}{	ext{Equity}} $$

Question 16

If a company has a price-earnings (P/E) ratio of 10 and earnings per share of $2, what is its share price?

Accepted Answer

$$ 20 $$

Question 17

Which section of the statement of cash flows would include cash paid for new equipment?

Accepted Answer

Investing activities

Question 18

A firm’s payout ratio is calculated as:

Accepted Answer

$$ \frac{	ext{Dividends}}{	ext{Net Income}} $$

Question 19

Which of the following would NOT be found in the notes to the financial statements?

Accepted Answer

Management’s discussion of future strategy

Chapter 2Introduction to Financial Statement Analysis – Study Notes

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