SD4- Accounting Analysis and Financial Statements

SD4- Accounting Analysis and Financial Statements - CHAPTER...

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CHAPTER 4 ACCOUNTING ANALYSIS AND THE FINANCIAL STATEMENTS LEARNING OBJECTIVES 1. Why analysts must know how financial statements are prepared. 2. The balance sheet, income, and cash flow statements, and the relationship among them. 3. The recognition criteria and valuation methods used for common balance sheet and income statement items. 4. How management choices, estimates, and judgment affect the quality of the three primary financial statements. TRUE/FALSE QUESTIONS 1. As a part of the second phase of security analysis, the analyst may make adjustments to the financial statements. (easy, L.O. 1, Introduction, true) 2. The security analyst is like an accountant searching for clues in the financial statements by using ratios as the “magnifying glass” to solve the case. (moderate, L.O. 1, Introduction, false) 3. The accounting equation is different from the balance sheet equation. (moderate, L.O.2, Section 1, false) 4. The first tier of the GAAP Hierarchy consists of major pronouncements which are so straightforward they receive very little due process. (moderate, L.O. 2, Section 1, false) 5. The income statement is considered to be more important to investors and creditors than the balance sheet. (easy, L.O. 2, Section 2, true) 6. GAAP defines a firm’s income to be the change in its net assets, excluding stock issuances and dividends. (moderate, L.O. 2, Section 2, true) 7. Extraordinary items are gains and losses that are deemed to be both unusual and nonrecurring. (easy, L.O. 2, Section 2, true) 8. Conservative accounting methods are those that tend to accelerate recognition of assets and delay recognition of liabilities. (moderate, L.O. 2, Section 2, false) 9. Regarding the statement of cash flows, cash flow from financing includes the items that relate to the determination of net income (moderate, L.O. 2, Section 3, false) 10. Quality issues are less problematic for the cash flow statement than for the income statement or balance sheet. (moderate, L.O. 2, Section 3, true) 11. Current assets are not expected to be converted to cash or used to satisfy a liability within one year. (easy, L.O. 2, Section 4, false) 21
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12. Minority interest represents the portion of the book value of net assets of a firm’s subsidiary that is owned by shareholders other than the firm. (moderate, L.O. 2, Section 4, true) 13. A joint venture may be accounted for under the equity method when the company is deemed to have substantial influence over the operations of another company. (moderate, L.O. 3, Section 4, true) 14. Preferred stockholders have preference over common stockholders in a bankruptcy and always have voting rights. (moderate, L.O. 3, Section 4, false) 15. Warrants and options give the holder the right to purchase stock from the company at a fixed price, depending on the stock’s market price at the time.
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This note was uploaded on 11/22/2010 for the course CAC BSA taught by Professor Kairus during the Spring '10 term at Korea University.

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SD4- Accounting Analysis and Financial Statements - CHAPTER...

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