Question 1 - CIA 1192 P4 Q30 - Basic Financial Statement Analysis
The management of ABC Corporation is analyzing the financial statements of XYZ Corporation because ABC is strongly considering purchasing a block of XYZ common stock that would give ABC significant influence over XYZ. Which financial statement should ABC primarily use to assess the amounts, timing, and uncertainty of future cash flows of XYZ Company?
A. Income statement.
B. Balance sheet.
C. Statement of changes in stockholders' equity.
D. Statement of cash flows.
A. The income statement is prepared using accruals accounting and therefore does not provide information about cash flows. See the correct answer for a complete explanation.
B. The balance sheet simply provides information about the amount of cash at the beginning and end of the year. It does not provide any information about the cash flows during the period. See the correct answer for a complete explanation.
C. The statement of changes in stockholders' equity does not provide information about cash flows. See the correct answer for a complete explanation.
D. The statement of cash flows is used to assess the amounts, timing, and uncertainty of future cash flows of a company.
Question 2 - CIA 1192 P4 Q32 - Basic Financial Statement Analysis
A reader of a statement of cash flows wishes to analyze the major classes of cash receipts and cash payments from operating activities. Which methods of reporting cash flows from operating activities will supply that information?
A. Only the indirect method.
B. Both the direct and indirect methods.
C. Neither method.
D. Only the direct method.
A. The indirect method does not provide specific information about cash inflows and outflows from specific operating activities.
B. The indirect method does not provide specific information about cash inflows and outflows from specific operating activities.
C. One of the methods of reporting cash flows from operating activities does provide specific information about cash inflows and outflows from specific operating activities.
D. Only the direct method provides specific information about the cash inflows or outflows from different operating activities (such as cash received from customers and cash paid to suppliers).
Question 3 - CIA 1195 P4 Q34 - Basic Financial Statement Analysis
In the statement of cash flows, the payment of common share dividends appears in the _____ activities section as a
_____ of cash.
A. Investing, Source
B. Operating, Source
C. Investing, Use
D. Financing, Use
A. The payment of dividends is a financing activity and since it is the payment of dividends, it is a use of cash. See the correct answer for a complete explanation.
B. The payment of dividends is a financing activity and since it is the payment of dividends, it is a use of cash. See the correct answer for a complete explanation.
C. The payment of dividends is classified as a financing activity. See the correct answer for a complete explanation.
D.The payment of dividends is classified as a financing activity and because it is the payment of dividends, it is a use of cash.
Question 4 - CIA 590 IV.32 - Basic Financial Statement Analysis
The major distinction between the multiple-step and single-step income statement formats is the separation of
A. The effect on income taxes of extraordinary items and the effect on income taxes of profit or loss from ordinary activities.
B. Cost of goods sold expense and administrative expenses.
C. Operating and non-operating data.
D. Income tax expense and administrative expenses.
A. The effect of income taxes on profit from ordinary activities will be the same for both formats. Extraordinary items will be reported separately.
B. There is a separation of cost of goods sold expense and administrative expenses under both formats.
C. The major distinction between the multiple-step and single-step income statement formats is how operating and non-operating data is separated. In the single-step format all revenues and gains are put together and all expenses and losses are reported together. In the multiple-step format, individual classes of operating revenues and expenses are reported and after this, all other gains and losses are reported.
D. There is a separation of income tax expenses and administrative expenses under both formats.
Question 5 - CMA 0693 P2 Q13 - Basic Financial Statement Analysis
With respect to the content and form of the statement of cash flows,
A. The reconciliation of the net income to net operating cash flow need not be presented when using the direct method.
B. The indirect method adjusts ending retained earnings to reconcile it to net cash flows from operations.
C. The direct method of reporting cash flows from operating activities includes disclosing the major classes of gross cash receipts and gross cash payments.
D. The pronouncements covering the cash flow statement encourage the use of the indirect method.
A. This reconciliation is required no matter which method is used.
B. The indirect method adjusts net income to calculate the cash flows from operations.
C. Under the direct method, the statement of cash flows discloses each type of transaction separately. There
are individual lines for cash received from customers, cash paid to suppliers, cash paid for rent, cash paid for salaries, and so forth. Under the indirect method, this breakdown by activity is not provided.
D. The FASB does not encourage the use of the indirect method.
Question 6 - CMA 0695 P2 Q21 - Basic Financial Statement Analysis
With respect to the statement of cash flows, the FASB Accounting Standards Codification classifies business transactions into operating, investing, and financing activities. Which one of the following transactions should not be classified as a financing activity?
A. Payment of dividends.
B. Purchase of treasury stock.
C. Issuance of common stock.
D. Income tax refund.
A. The payment of dividends is classified as a financing activity.
B. The purchase of treasury stock is classified as a financing activity.
C. The issuance of common stock is classified as a financing activity.
D. Income tax refunds are classified as an operating activity.
Question 7 - CMA 0697 P2 Q2 - Basic Financial Statement Analysis
When preparing the statement of cash flows, companies are required to report separately as operating cash flows all of the following except
A. Interest paid on the company's bonds.
B. Cash dividends paid on the company's stock.
C. Interest received on investments in bonds.
D. Cash collected from customers.
A. This is an operating activity.
B. Dividends paid is classified as a financing activity in the statement of cash flows.
C. This is an operating activity.
D. This is an operating activity.
Question 8 - CMA 1288 P4 Q19 - Basic Financial Statement Analysis
Which of the following items is specifically included in the of a statement of cash flows?
A. Acquiring an asset through a capital lease.
B. Operating and nonoperating cash flow information.
C. Purchasing a building by giving a mortgage to the seller.
D. Conversion of debt to equity.
A. This is a noncash transaction and noncash transactions are recorded in s supplemental schedule at the bottom of the statement of cash flows; they are not reported in the of the statement of cash flows.
B. Only cash transactions are disclosed in the of the statement of cash flows. This is the only choice that is a cash transaction so this is the correct answer.
C. This is a noncash transaction and noncash transactions are recorded in s supplemental schedule at the bottom of the statement of cash flows; they are not reported in the of the statement of cash flows.
D. This is a noncash transaction and noncash transactions are recorded in s supplemental schedule at the bottom of the statement of cash flows; they are not reported in the of the statement of cash flows.
Question 9 - CMA 1293 P2 Q29 - Basic Financial Statement Analysis
With respect to the statement of cash flows, the FASB Accounting Standards Codification classifies cash receipts and cash payments as arising from operating, investing, and financing activities. All of the following should be classified as investing activities except
A. Cash inflows from the sale of a manufacturing plant.
B. Cash inflows from the sale of bonds of other entities.
C. Cash outflows to lenders for interest.
D. Cash outflows to purchase manufacturing equipment.
A. Inflows from the sale of a manufacturing plant are classified as an investing activity on the statement of cash flows.
B. Inflows from the sale of bonds of other entities are classified as an investing activity on the statement of cash flows.
C. Cash paid to lenders for interest is classified as an operating activity on the statement of cash flows.
D. Outflows to purchase manufacturing equipment are classified as an investing activity on the statement of cash flows.
Question 10 - CMA 1295 2.21 - Basic Financial Statement Analysis
In assessing the financial prospects for a firm, financial analysts use various techniques. An example of vertical, common-size analysis is
A. Advertising expense is 4% of sales.
B. A comparison in financial ratio form between two or more firms in the same industry.
C. An assessment of the relative stability of a firm's level of vertical integration.
D. Advertising expense increased by 3% over the previous year.
A. Vertical, common-size analysis creates financial statements in which each component is measured as a percentage of another element of the financial statements for that same period. For example, all items on the balance sheet are measured as a percentage of total assets and all income statement items are measured as a percentage of total sales. Advertising expense being 2% of sales is such an example of vertical, common-size analysis.
B. Vertical, common-size analysis creates financial statements in which each component is measured as a percentage of another element of the financial statements for that same period. A comparison between companies within the same
industry is not vertical, common-size analysis.
C. Vertical, common-size analysis creates financial statements in which each component is measured as a percentage of another element of the financial statements for that same period. Vertical integration occurs when a company owns other companies that are suppliers or customers. Vertical integration is not related to vertical, common-size analysis.
D. Vertical, common-size analysis creates financial statements in which each component is measured as a percentage of another element of the financial statements for that same period. A comparison between periods for the same company is not vertical, common-size analysis. This is horizontal, common-size analysis.
Question 11 - CMA 1295 P2 Q2 - Basic Financial Statement Analysis
Royce Company had the following transactions during the fiscal year ended December 31, 2005:
Accounts receivable decreased from $115,000 on December 31, 2004 to $100,000 on December 31, 2005.
Royce's board of directors declared dividends on December 31, 2005 of $.05 per share on the 2.8 million shares outstanding, payable to shareholders of record on January 31, 2006. The company did not declare or pay dividends for fiscal 2004.
Sold a truck with a net book value of $7,000 for $5,000 cash, reporting a loss of $2,000.
Paid interest to bondholders of $780,000.
The cash balance was $106,000 on December 31, 2004 and $284,000 on December 31, 2005.
Royce Company uses the direct method to prepare its statement of cash flows at December 31, 2005. The interest paid to bondholders is reported in the
A. Debt section, as a use or outflow of cash.
B. Operating section, as a use or outflow of cash.
C. Financing section, as a use or outflow of cash.
D. Investing section, as a use or outflow of cash.
A. The payment of interest is classified as an operating activity and is a use or outflow of cash. There is no debt classification on the statement of cash flows.
B. The payment of interest is classified as an operating activity and is a use or outflow of cash.
C. The payment of interest is classified as an operating activity and is a use or outflow of cash.
D. The payment of interest is classified as an operating activity and is a use or outflow of cash.
Question 12 - CMA 1295 P2 Q4 - Basic Financial Statement Analysis
Royce Company had the following transactions during the fiscal year ended December 31, 2005:
Accounts receivable decreased from $115,000 on December 31, 2004 to $100,000 on December 31, 2005.
Royce's board of directors declared dividends on December 31, 2005 of $.05 per share on the 2.8 million shares outstanding, payable to shareholders of record on January 31, 2006. The company did not declare or pay dividends for fiscal 2004.
Sold a truck with a net book value of $7,000 for $5,000 cash, reporting a loss of $2,000.
Paid interest to bondholders of $780,000.
The cash balance was $106,000 on December 31, 2004 and $284,000 on December 31, 2005.
The total of cash provided/used by operating activities plus cash provided/used by investing activities plus cash provided/used by financing activities is
A. Cash provided of $178,000.
B. Equal to net income reported for fiscal year ended December 31, year 2005.
C. Cash used of $582,000.
D. Cash provided of $284,000.
A. This question is made simple by the fact that the beginning and ending cash balances are given. Since the beginning cash was $106,000 and the ending balance was $284,000, we know that the cash increased by $178,000 during the year. All transactions that involved cash will be classified as either on operating, investing or financing activity so this question is actually just asking what the change in the cash balance was during the year, which is given to us.
B. Net income must be adjusted for noncash items in order to determine the net change in the cash position for the period.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This is simply the ending cash balance.
Question 13 - CMA 1295 P2 Q5 - Basic Financial Statement Analysis
A statement of cash flows is intended to help users of financial statements
A. Determine whether insiders have sold or purchased the firm's stock.
B. Evaluate a firm's liquidity, solvency, and financial flexibility.
C. Determine a firm's components of income from operations.
D. Evaluate a firm's economic resources and obligations.
A. The notes to the financial statements will provide information as to whether or not insiders have sold or purchased the firm's stock.
B. The statement of cash flows provides information about the sources and uses of cash. This statement, when used with other financial statements will assist users in evaluating a firm's liquidity, solvency and financial flexibility. This choice is not the best definition of the uses of the statement of cash flows, but it is a better answer than the other choices.
C. The income statement helps users determine a firm's components of income from operations.
D. The balance sheet provides information about a firm's economic resources and obligations.
Question 14 - CMA 1296 P2 Q21 - Basic Financial Statement Analysis
All of the following should be classified under the operating section in a statement of cash flows except a
A. Depreciation expense.
B. Purchase of land and building in exchange for a long-term note.
C. Decrease in inventory.
D. Decrease in prepaid insurance.
A. Depreciation expense is an adjustment included in operating activities.
B.The purchase of land and building in exchange for a long-term note is reported in the supplemental schedule of noncash investing and financing activities at the end of the statement of cash flows.
C. The decrease in the inventory account is an adjustment included in operating activities.
D. The decrease in the prepaid insurance account is an adjustment included in operating activities.
Question 15 - CMA 1296 P2 Q22 - Basic Financial Statement Analysis
Which one of the following transactions should be classified as a financing activity in a statement of cash flows?
A. Purchase of treasury stock.
B. Sale of trademarks.
C. Payment of interest on a mortgage note.
D. Purchase of equipment.
A. The purchase of treasury shares is classified as a financing activity.
B. The sale of trademarks would be classified as an investing activity. This is because the trademark is considered to be a long-lived asset.
C. The payment of interest is classified as an operating activity.
D. This is an investing activity.
Question 16 - CMA 1296 P2 Q23 - Basic Financial Statement Analysis
All of the following should be classified as investing activities in the statement of cash flows except
A. Cash outflows to creditors for interest.
B. Cash inflows from the sale of a manufacturing plant.
C. Cash outflows to purchase manufacturing equipment.
D. Cash inflows from the sale of bonds of other entities.
A. Cash paid for interest is classified as an operating activity.
B. The sale of a manufacturing plant is classified as an investing activity.
C. The purchase of equipment is classified as an investing activity.
D. The sale of bonds of other entities is classified as an investing activity.
Question 17 - CMA 688 4.17 - Basic Financial Statement Analysis
In financial statement analysis, expressing all financial statement items as a percentage of base-year figures is called
A. Market growth analysis.
B. Vertical common size analysis.
C. Ratio analysis.
D. Horizontal common size analysis.
A. Market growth analysis is the process of looking at the whole market in which the company does business to analyze its growth.
B. Vertical, common-size analysis creates financial statements in which each component is measured as a percentage of another element of the financial statements for that same period. For example, all items on the balance sheet are measured as a percentage of total assets and all income statement items are measured as a percentage of total sales.
C. Ratio analysis is the term that is used to encompass many different elements of financial analysis. It is looking at the relationships between numbers.
D. Horizontal common-size analysis occurs when the financial information is presented as a percentage of the company's financial information from a previous period. The current year amounts are stated in comparison to the base period for that company, which is given a value of 100%.
Question 18 - CPA 0595 FARE Q25 - Basic Financial Statement Analysis
Jessica, a consultant, keeps her accounting records on a cash basis. During 2005, Jessica collected $200,000 in fees from clients. At December 31, 2004, Jessica had accounts receivable of $40,000. At December 31, 2005, Jessica had accounts receivable of $60,000, and unearned fees of $5,000. On an accrual basis, what was Jessica's service revenue for 2005?
A. $215,000
B. $180,000
C. $225,000
D. $175,000
A. This question is essentially a statement of cash flows question working backwards from cash collected from customers to revenue. The cash collected was $200,000. However, the beginning receivables of $40,000 were collected in 2005, but the revenue was from 2004 so this is not included in the revenue for 2005. The ending receivables of $60,000 were not collected in 2005, but were earned in 2005, so this needs to be added to the cash collected. This gives Jessica $220,000 of revenue before adjusting for unearned fees. This unearned revenue was collected in 2005, but was not earned in 2005 so it needs to be subtracted. This gives a revenue for 2005 of $215,000.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This answer treats the unearned revenue incorrectly. See the correct answer for a complete explanation.
D. This answer results from reversing the signs on the beginning and ending accounts receivable balances. See the correct answer for a complete explanation.
Question 19 - IMA 08.P2.332 - Basic Financial Statement Analysis
Barber Company has recorded the following payments for the current period.
| Interest paid on bank loan | $300,000 |
| Dividends paid to Barber shareholders | 200,000 |
| Repurchase of Barber Company stock | 400,000 |
The amount to be shown in the Financing Activities section of Barber's Cash Flow Statement should be
A. $600,000
B. $300,000
C. $500,000
D. $900,000
A.
Dividends paid ($200,000) and repurchase of the company's stock as treasury stock ($400,000) are transactions that should be classified as cash flows from financing activities on the company's cash flow statement.
Interest on debt is classified as a cash flow from operating activities, not financing activities.
B. This answer results from classifying interest paid on debt as the only cash flow from financing activities. However, interest on debt is classified as a cash flow from operating activities, not as a cash flow from financing activities.
C. This answer results from including interest paid on debt and dividends paid to shareholders in the calculation of cash flows from financing activities. However, interest on debt is classified as a cash flow from operating activities, not as a cash flow from financing activities. And although it is correct to classify dividends paid to shareholders as a financing activity, that is not the only financing activity among those given.
D. This answer results from including all of the cash flows given in the calculation of cash flows from financing activities. However, interest on debt is classified as a cash flow from operating activities, not as a cash flow from financing activities.
