Interpretation of Financial Statements Course Instructions and Final Examination Interpretation of Financial Statements Steven M. Bragg CPE Edition Distributed by The CPE Store www.cpestore.com 1-800-910-2755 The CPE Store 819 Village Square Drive Tomball, TX 77375 1-800-910-2755
Interpretation of Financial Statements Table of Contents Page Course Objectives... 3 Course Instructions... 4 Final Examination... 7
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Course Objectives After completing this course, you will be able to: Recognize the accrual basis of accounting concept and its functions Determine which accounting method to use in order to have revenues and all related expenses recorded within the same reporting period. Identify an account with which a contra account is commonly paired Ascertain which financial statement the accounting equation applies to Discern the purpose of the natural cash balance concept Recognize what an exactly zero cash balance can indicate Determine when a restricted cash designation is most important Identify the key expense excluded from the calculation of the contribution margin Spot an identifying attribute of a business that can afford to extend generous payment terms to its customers Determine the manner in which the days sales outstanding is most useful Ascertain when the days sales outstanding measurement can be misleading Recognize an industry in which inventory is less likely to be a consideration Identify a competitive strategy that requires very little inventory investment Pinpoint what can cause a decline in inventory turnover Identify the only situation in which you are allowed to depreciate land Calculate the amount of depreciation for a five-year calculation period under the double declining balance method Determine the effect of the capitalization of software development costs Spot examples of prepaid expenses Discern when the prepaid expenses account would be more likely to increase along with sales in a business Ascertain when goodwill impairment occurs Pinpoint a failing of the days payables outstanding measurement Determine what can cause a spike in the sales tax payables line item Ascertain how a spike in the year-end wages payable line item might be triggered Determine when the use of financial leverage is most beneficial Recognize when the amount of debt held by a business can be considered minor Discern what can trigger a shift in debt classification to the short-term classification Identify a ratio that improves as a result of a debt-to-equity conversion Determine how book value is calculated Recognize asset types included in the tangible book value concept Pinpoint circumstances that can cause a negative retained earnings balance Recognize how net sales is calculated Pinpoint the type of investor attracted to rapid sales growth Identify a likely characteristic of a business experiencing highly reliable sales Recognize a cost commonly found in factory overhead Spot methods for improving the gross margin percentage Identify industries in which companies routinely engage in an inventory build Pinpoint costs included in the operating expenses area Ascertain what a large spike in the bank fees expense may indicate Determine which business model tends to experience high operating expenses Discern when a high cost of debt is a particular problem Spot the type of business that commonly has net operating loss carryforwards Identify the type of expenses that can improve the net profit margin if delayed Recognize a key method for improving the earnings per share figure Pinpoint a transaction which is considered to be an investing activity Determine what the statement of cash flows adjusts the net income figure for, under the indirect method Identify what cash paid to buy back shares from investors can indicate Discern the most comprehensive type of financial review conducted by an outside auditor Recognize what the margin of safety is used to determine Spot the formula for the dividend payout ratio Identify the section of the Form 10-K in which the description of a company s dependence on certain customers falls Ascertain what advice is offered by the SEC regarding the disclosure of risks Determine when the change in independent accountant must be disclosed - 3 -
Course Instructions To fully benefit from this course, please follow all of the steps below. 1. Read each chapter in the text to get a good understanding of the material. 2. Answer the study guide problems which appear at the end of each chapter. After answering the problems, compare your answers with the correct answers to ensure that you understand the material. 3. When you feel that you have a good understanding of the material contained in the chapter, answer the questions on the final examination. 4. When you have completed the final examination, record your answers on the answer sheet provided and submit it for grading. A score of 70% or better is required to pass. Please also complete the course evaluation and submit it to us along with your answer sheet. Upon passing you will receive a Certificate of Completion stating that you have successfully completed the course and earned the continuing education credit. Prerequisites and Advance Preparation No prerequisites or advance preparation are required for this course. CPE Credit This course is recommended for 11 CPE credits. Final Exam Grading Online: By Mail: By Fax: Our fastest option, with instant results. Simply go to www.cpestore.com and click the link for online grading. Just follow the instructions from there. When you finish entering your answers, you ll receive instant test results and a Certificate of Completion to print. Mail your test and course evaluation to us. We grade the tests the day we receive them and mail the results and Certificate of Completion to you the following business day. Just fax your answer sheet to 1-281-255-4337. If you need us to fax the Certificate of Completion back to you, please provide us with your fax number and write please fax back on your answer sheet. If you don t need the Certificate faxed back, please write no fax needed on your answer sheet. Refunds The CPE Store guarantees your satisfaction. If, for any reason, you are not completely satisfied with your purchase, return it to us unused within 30 days for a prompt refund, no questions asked. (Sorry, but shipping fees are not refundable.) Customer Service The CPE Store holds itself to the highest standards. If we have not met your expectations, something is missing, or you just have a question please contact us at 1-800-910-2755 or customerservice@cpestore.com. - 4 -
About Our Courses The CPE Store s courses are developed to satisfy the continuing education requirements of the American Institute of Certified Public Accountants, each state s Board of Accountancy and the National Association of State Boards of Accountancy (NASBA). If your state requires registration of sponsors, our sponsor number will appear on your Certificate of Completion. Our courses are designed to meet the continuing education requirements of accounting professionals. A great deal of care has been taken to ensure that the course material is both interesting and relevant to the practice of accounting. The information presented is, to the best of our knowledge, current and accurate. However, The CPE Store is not in the business of rendering legal, accounting or other professional advice and as such, the material presented in our courses is intended as an overview. If legal advice or other expert assistance is required, the services of a competent professional should be sought. - 5 -
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Interpretation of Financial Statements 11-Credit Course Final Examination A score of 70% or higher is required to pass the exam. If you score less than 70% on your first attempt, we will allow you to take the test a second time. Chapter 1 Overview of the Financial Statements 1. Under the accrual basis of accounting, expenses are recorded: A. After revenue is recognized B. When cash is paid C. As incurred D. Following depreciation 2. The corporate controller wants revenues and all related expenses to be recorded within the same reporting period. She should use the method. A. Cash basis B. Accrual C. Direct D. Hybrid 3. A common contra account pairing is with the account. A. Cash B. Accrued expenses C. Notes payable D. Accounts receivable 4. The accounting equation applies to the report. A. Balance sheet B. Income statement C. Statement of cash flows D. Receivables aging Chapter 2 Interpretation of Cash and Investments 5. The natural cash balance concept can be used to: A. Determine when a business might be in financial difficulty B. Set investment strategies C. Decide whether a petty cash system is needed D. Centralize cash 6. An exactly zero cash balance can be an indication that: A. A business is a heavy user of wire transfers B. A company has seasonal sales C. Checks were cut in advance of having enough cash D. A company only pays with credit cards 7. A restricted cash designation is most important when: A. It is mandated by the board of directors B. There is a large balance in the investments account C. It must be reported in the footnotes to the financial statements D. It is imposed by an outside party 8. A company that is continually using up its cash is considered to have a high: A. Rate of product development B. Return on investment C. Burn rate D. Cost of goods sold - 7 -
Final Exam Chapter 3 Interpretation of Receivables 9. The key expense excluded from the calculation of the contribution margin is: A. Factory overhead B. Direct materials C. Direct labor D. Variable commission costs 10. A business that can afford to extend generous payment terms to its customers is one: A. With a large number of small customers B. Located in the consumer electronics industry C. With a low gross margin D. With a high contribution margin 11. The days sales outstanding calculation is most useful: A. In a retail environment B. For a business that requires cash payments in advance C. When compared to the standard number of payment days allowed to customers D. When services have been sold 12. The days sales outstanding measurement can be misleading when: A. A business has seasonal sales B. A business has several subsidiaries C. There is a mix of customer sizes D. A number of different product lines are being sold Chapter 4 Interpretation of Inventory 13. An industry in which inventory is less likely to be a consideration is: A. Fashion goods B. Repair parts C. Services D. Retail 14. A competitive strategy that requires very little inventory investment is the: A. Retail model B. Internet store pass-through model C. Full product range model D. High service model 15. A decline in inventory turnover can be caused by: A. Products being reformulated to allow for common parts usage B. The production system only producing to specific customer orders C. Inventory not being written off D. Production being outsourced Chapter 5 Interpretation of Fixed Assets 16. The only situation in which you are allowed to depreciate land is when: A. The land is part of a government grant B. The land is used for farming C. The land is classified as a natural resource and you are depleting the resource D. The land was purchased with a building on it 17. In the first year of depreciation for a five-year calculation period under the double declining balance method, the amount of depreciation would be % of the depreciable asset balance. A. 40 B. 20 C. 50 D. 25-8 -
Final Exam 18. A business may only depreciate its assets at year-end. This is most common: A. When fixed assets comprise a large part of the balance sheet B. When there is a large amount of fixed asset turnover C. For a rate-regulated utility D. For a smaller entity 19. The capitalization of software development costs tends to: A. Increase salaries expense B. Increase profitability C. Increase cash flows D. Increase payroll taxes liability Chapter 6 Interpretation of Other Assets 20. Which of the following is not an example of prepaid expenses? A. Rent B. Insurance C. Advertising D. Wages 21. The prepaid expenses account would be more likely to increase along with sales in a business that uses: A. Large amounts of computer hardware B. Short credit terms C. A large number of employees D. Significant amounts of bandwidth 22. Goodwill impairment occurs when: A. The fair value of the acquired entity drops below the recognized assets and liabilities derived from the acquisition B. An acquired legal entity is eliminated C. The amortization of all acquired intangible assets has been completed D. No more than ten years have passed since the acquisition date Chapter 7 Interpretation of Current Liabilities 23. A failing of the days payables outstanding measurement is that: A. It does not include the cost of goods sold B. It includes taxes C. It includes wage payments D. It does not include interest payments 24. A spike in the sales tax payable line item can be caused by: A. A reversion by customers to cash payments B. An unpaid tax assessment resulting from a sales tax audit C. Splitting a single sales taxes payable account into multiple accounts, one for each state D. An acceleration from quarterly to monthly sales tax remittances to the government 25. A spike in the year-end wages payable line item might be triggered by: A. The inclusion of year-end payroll taxes B. The acquisition of another entity C. The awarding of bonuses to employees D. Shifting the wage expense among subsidiaries Chapter 8 Interpretation of Debt 26. The use of financial leverage is more beneficial: A. Due to the tax deductibility of interest expense B. For companies that do not expect to earn a profit C. For non-profit organizations D. When warrants are attached to the debt offered to investors - 9 -
Final Exam 27. The amount of debt held by a business can be considered minor when: A. Its debt-equity ratio is no worse than 1:1 B. There is a large amount of offsetting depreciation expense C. The amount of cash and investments held exceeds the amount of debt D. Borrowings are only seasonal 28. A shift in debt classification to the short-term classification can be triggered by: A. A covenant breach B. Extension of the loan terms C. Conversion by bondholders of their bonds into common stock D. A change in the interest rate, from a fixed to a variable rate 29. A ratio that improves as a result of a debt-to-equity conversion is the: A. Sales to working capital ratio B. Days sales outstanding C. Debt-equity ratio D. Fixed assets to sales ratio Chapter 9 Interpretation of Equity 30. Book value is calculated as: A. Sales minus expenses B. Assets minus liabilities C. Fair value minus selling costs D. Net realizable value 31. The tangible book value concept does not include which asset type? A. Short-term B. Intangible C. Long-term D. Computer-related 32. A negative retained earnings balance would not be caused by which of the following? A. Landing a new government contract B. Tax planning by the owners C. A startup environment where a business is still expanding its customer base D. A large one-time loss Chapter 10 Interpretation of Sales 33. Net sales is the reduction of gross sales by: A. The cost of goods sold B. Affiliate fees C. Commissions D. Sales discounts 34. Rapid sales growth attracts the attention of investors. A. Income-oriented B. Bottom feeder C. Growth-oriented D. Value-oriented 35. A business experiencing highly reliable sales is more likely to be: A. In an industry with low entry costs B. In a field not governed by any laws C. Locked into a small proportion of the total market D. In a monopoly position - 10 -
Final Exam Chapter 11 Interpretation of the Cost of Sales and Gross Margin 36. Which cost is commonly found in factory overhead? A. Direct materials B. Direct labor C. Insurance on production facilities D. Corporate overhead 37. Which of the following is not a method for improving the gross margin percentage? A. Cutting audit fees B. Outsourcing production C. Stripping away excess production capacity D. Layoffs of production staff 38. Companies in which industry would not routinely engage in an inventory build? A. Ski equipment B. Health care C. Garden supplies D. Patio furniture Chapter 12 Interpretation of Operating Expenses 39. The operating expenses area does not include which of the following costs? A. Research and development B. Risk management C. Manufacturing D. Corporate 40. A large spike in the bank fees expense category may indicate: A. A fee for a periodic bank audit B. A monthly lock box charge C. That more check stock was ordered D. Not sufficient funds fees for customer checks that bounced 41. A business that incurs unusually large legal and audit fees is: A. A manufacturing business B. A public company C. A government entity D. A utility 42. A business model that tends to experience high operating expenses is: A. High market share B. Research-oriented C. Full service orientation D. Internet store Chapter 13 Interpretation of Other Income, Taxes, and Profits 43. A high cost of debt is a particular problem when: A. There is a tight credit policy B. Inventory turnover levels are high C. There is a significant base of assets D. The pre-tax profit margin is already low 44. Which type of business commonly has net operating loss carryforwards? A. Startup company B. Agricultural supply business C. Oil and gas exploration firm D. Defense contractor - 11 -
Final Exam 45. The net profit margin can be improved by delaying expenses. A. Variable B. Discretionary C. Period D. Direct labor 46. A key method for improving the earnings per share figure is: A. Increasing the use of stock options to reward employees B. Offering more bonds with a conversion feature C. Buying back shares from investors D. Offering a dividend reinvestment plan to investors Chapter 14 Interpretation of Cash Flows 47. Which transaction is considered to be an investing activity? A. The repayment of loans made to other entities B. Cash receipts from royalty agreements C. Cash payments to buy back shares D. Cash receipts from the sale of company stock 48. Under the indirect method, the statement of cash flows adjusts the net income figure for: A. Factory overhead B. Corporate overhead allocations C. Change in trade payables D. Depreciation and amortization 49. Cash paid to buy back shares from investors can indicate that: A. A minimum stock price threshold has been reached B. A business is getting ready to issue a new class of stock C. Management is attempting to improve a company s debt-equity ratio D. A company is under pressure from a lender to increase its financial stability Chapter 15 Other Analysis Topics 50. The type of financial review conducted by an outside auditor that is the most comprehensive is the: A. Compilation B. Examination C. Review D. Audit 51. The margin of safety is used to determine: A. When cash will run out B. The decline in sales that can occur before the breakeven point is reached C. Whether the mix of products offered for sale should be changed D. The time period that will pass before a company s line of credit is fully used 52. The formula for the dividend payout ratio is: A. (Total dividends paid + Appreciation in share price) Operating income B. Total dividends paid Net income C. (Total dividends paid + Appreciation in share price) Net income D. Total dividends paid Operating income Chapter 16 Additional Public Company Information 53. A description of a company s dependence on certain customers falls within the section of the Form 10-K. A. Business B. Selected Financial Data C. Certain Relationships D. Exhibits - 12 -
Final Exam 54. The SEC offers what advice regarding the disclosure of risks? A. Present risks that could apply to any company B. Include risks related to general economic conditions C. Explain how the risk affects the company D. Note insignificant risk factors, if they could make the company s shares speculative 55. Which change in independent accountant need not be disclosed? A. Merger of the accountant with another accounting firm B. The accountant resigned C. The accountant was dismissed D. The accountant declined to stand for re-election Thank you for taking our course. We hope you enjoyed it. - 13 -
Interpretation of Financial Statements Course Number: AA153501 Qualifies for 11 hours of CPE credit Name as it should appear on your Certificate: License State(s): License Number: Date Course Completed: If you are mailing or faxing your test to us for grading, please fill in Member ID and Validation number. Where should we send your results? * Answer each question A, B, C, or D as appropriate. * Be sure you are answering questions from the Final Examination, not from the Study Guide * For instant online grading, go to www.cpestore.com and click the link for Online Services 1. 12. 23. 34. 45. 2. 13. 24. 35. 46. 3. 14. 25. 36. 47. 4. 15. 26. 37. 48. 5. 16. 27. 38. 49. 6. 17. 28. 39. 50. 7. 18. 29. 40. 51. 8. 19. 30. 41. 52. 9. 20. 31. 42. 53. 10. 21. 32. 43. 54. 11. 22. 33. 44. 55. Page 1 of 1
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