Financial Statement Analysis and Security
Valuations UPDATED Exam Questions
and CORRECT Answers
The text presents a six-step analysis and valuation framework. Place these steps in the most
appropriate chronological order:
A. Identify the strategies the firm pursues to gain and sustain a competitive advantage.
B. Analyze the current profitability and risk of the firm.
C. Value the firm.
D. Identify the economic characteristics and competitive dynamics of the industry in which
the firm participates.
E. Assess the quality of the firm's financial statements and, if necessary, adjust them to more
faithfully represent the underlying economics of the firm.
F. Prepare forecasted financial statements.
A. D, A, E, B, F, C
B. A, B, C, D, E, F
C. A, D, B, E, F, C
D. A, D, B, E, C, F - CORRECT ANSWER- A. D, A, E, B, F, C
Porter's five forces framework suggests analyzing competition within an industry by focusing
on the following five forces:
a. demand, supply, manufacturing, marketing, investing, and financing.
b. rivalry, threat of entrants, threat of substitutes, supplier power, and buyer power.
c. demand, supply, government regulations, barriers to entry, and switching costs.
d. demand, supply, cyclicality, seasonality, and growth. - CORRECT ANSWER- b. rivalry,
threat of entrants, threat of substitutes, supplier power, and buyer power.
To be considered high quality, accounting information should
a. be a fair and complete representation of the firm's economic performance, financial
position, and risk.
,b. provide relevant information to forecast the firm's expected future earnings and cash flows.
c. both be a fair and complete representation of the firm's economic performance, financial
position, and risk; and provide relevant information to forecast the firm's expected future
earnings and cash flows.
d. None of these answer choices are correct. - CORRECT ANSWER- c. both be a fair and
complete representation of the firm's economic performance, financial position, and risk; and
provide relevant information to forecast the firm's expected future earnings and cash flows.
Which of the following asset and liability measurement methods is not acceptable under U.S.
GAAP or IFRS?
a. Present value of future cash flows
b. Historical cost
c. Fair value based on current market value
d. Whatever feels right - CORRECT ANSWER- d. Whatever feels right
GAAP and IFRS allow various treatments for revenue recognition. Which of the following
correctly describes acceptable revenue recognition principles?
a. Whenever cash is realized in a transaction with a customer (such as when a firm sells an
asset to a customer)
b. When value changes occur over time but are realized in a market transaction
c. When the firm has completed all or substantially all of the revenue-generating processes by
delivering goods or services to customers, and it is reasonable that it has generated an asset or
satisfied a liability
d. All of these answer choices are correct, depending on the circumstance. - CORRECT
ANSWER- c. When the firm has completed all or substantially all of the revenue-generating
processes by delivering goods or services to customers, and it is reasonable that it has
generated an asset or satisfied a liability
Complete the following statement correctly. Cash flow
a. always follows income.
b. can arise from operating, investing, and financing activities.
c. always precedes income.
d. always equals income. - CORRECT ANSWER- b. can arise from operating, investing, and
financing activities
, The accrual method of accounting can be best described as
a. the method that aligns revenues and expenses with the appropriate period in which
resources are generated and consumed.
b. the recording of transactions and events so that debits equal credits.
c. the method that recognizes revenue when money is received.
d. the method that equates assets with liabilities and owners' equity. - CORRECT ANSWER-
a. the method that aligns revenues and expenses with the appropriate period in which
resources are generated and consumed.
Common-size financial statements are useful tools for
a. analyzing profit margins.
b. revealing relations between amounts for specific items in a financial statement and the
relevant total for that statement.
c. showing the proportion of debt and equity financing used to finance the total assets of the
firm.
d. All of these answer choices are correct - CORRECT ANSWER- d. All of these answer
choices are correct
Percentage change financial statements are useful tools for
a. left-handed analysts.
b. highlighting relative growth rates in financial statement amounts from one period to the
next.
c. measuring profit margins.
d. All of these answer choices are correct. - CORRECT ANSWER- b. highlighting relative
growth rates in financial statement amounts from one period to the next.
Empirical results in Nichols and Wahlen's 2004 study showed that
a. an investor could earn excess returns if the investor could predict accurately the sign of the
change in working capital one year ahead.
b. analysts' forecasts of future earnings are optimistically biased.
c. unexpected changes in earnings have a strong positive association with abnormal stock
returns.
d. the capital markets are inefficient with respect to earnings information because investors
overreact to earnings surprises. - CORRECT ANSWER- c. unexpected changes in earnings
have a strong positive association with abnormal stock returns.
