Financial Reporting & Analysis Flashcards

Which of the following would increase a company's current ratio but NOT its quick ratio?

Answer: Purchasing inventory on credit

Purchasing inventory on credit increases current assets (inventory) and current liabilities equally, but inventory is excluded from the quick ratio numerator.

A finance lease on the lessee's books results in which of the following compared to an operating lease?

Answer: Higher debt-to-equity ratio

Finance leases require recognizing a liability on the balance sheet, increasing the debt-to-equity ratio compared to an operating lease.

Under the percentage-of-completion method for long-term contracts, revenue recognized in a period is based on:

Answer: Costs incurred to date as a proportion of total estimated costs

Revenue is recognized proportionally based on costs incurred to date divided by total estimated costs, reflecting the stage of completion.

Common-size income statements express each line item as a percentage of:

Answer: Revenue

Common-size income statements divide each line item by revenue, enabling comparison across companies of different sizes.

A write-down of inventory to net realizable value under IFRS will immediately affect:

Answer: Both the balance sheet and income statement

An inventory write-down reduces the inventory asset on the balance sheet and is recognized as an expense on the income statement in the same period.

Which ratio measures the proportion of a company's assets financed by debt?

Answer: Debt-to-assets ratio

The debt-to-assets ratio = Total Debt / Total Assets, directly measuring what fraction of assets are debt-financed.

The effective tax rate differs from the statutory tax rate primarily due to:

Answer: Permanent differences between book and taxable income

Permanent differences (e.g., tax-exempt income, non-deductible expenses) cause the effective rate to diverge from the statutory rate permanently.