FAC Finance and Accounting Reporting & Analysis 3 — Questions and Answers
Question 1: When a company issues bonds at a discount, how is the carrying value of the bonds affected over time?
- It increases toward face value as the discount is amortized (Correct answer)
- It decreases toward zero as payments are made
- It remains constant at the issue price
- It decreases below the issue price each period
Correct answer: It increases toward face value as the discount is amortized
The unamortized discount is gradually amortized to interest expense each period, increasing the bond's carrying value toward its face value at maturity.
Question 2: Which segment of the DuPont analysis measures how effectively a company uses assets to generate sales?
- Asset turnover (Correct answer)
- Net profit margin
- Equity multiplier
- Return on equity
Correct answer: Asset turnover
Asset turnover (Net Sales ÷ Total Assets) in the DuPont framework measures operational efficiency in using assets to generate revenue.
Question 3: Under the indirect method of preparing the statement of cash flows, which adjustment is made to net income for depreciation?
- Added back because it is a non-cash expense (Correct answer)
- Subtracted because it reduces asset values
- Ignored because it is a capital expenditure
- Subtracted because it reduces taxable income
Correct answer: Added back because it is a non-cash expense
Depreciation is added back to net income under the indirect method because it reduced net income but did not require a cash outflow.
Question 4: Which financial ratio directly measures the proportion of a company's assets financed by debt?
- Debt-to-assets ratio (Correct answer)
- Times interest earned
- Quick ratio
- Return on assets
Correct answer: Debt-to-assets ratio
The debt-to-assets ratio (Total Debt ÷ Total Assets) shows what percentage of a company's resources are funded by creditors.
Question 5: A firm recognizes revenue at a point in time rather than over time when:
- Control of the good or service transfers to the customer at a specific moment (Correct answer)
- A long-term contract spans multiple reporting periods
- The customer simultaneously receives and consumes the benefit
- The seller is not primarily responsible for fulfillment
Correct answer: Control of the good or service transfers to the customer at a specific moment
Under ASC 606, revenue is recognized at a point in time when control of the asset transfers to the customer in a single transaction moment.
Question 6: Which of the following would cause a company's earnings per share (EPS) to decrease, holding all else constant?
- Issuing additional common shares (Correct answer)
- Repurchasing treasury stock
- Declaring a stock dividend with no change in total shares outstanding
- Reducing preferred dividends declared
Correct answer: Issuing additional common shares
Issuing additional common shares increases the denominator in the EPS calculation, which reduces EPS when net income is unchanged.
Question 7: In vertical (common-size) analysis of the income statement, each line item is expressed as a percentage of:
- Net revenue or net sales (Correct answer)
- Total assets
- Gross profit
- Operating income
Correct answer: Net revenue or net sales
In a common-size income statement, every line item is divided by net revenue to allow comparison across companies of different sizes.
FAC Finance and Accounting Reporting & Analysis 3
When a company issues bonds at a discount, how is the carrying value of the bonds affected over time?