FREE Financial Statement Analysis Questions and Answers

Question 1

The payment of cash dividends is an illustration of:

Accepted Answer

Cash flows from financing activities

Answer

In a statement of cash flows, the payment of cash dividends is classified under financing activities. Financing activities involve transactions that affect the size and composition of a company's debt and equity capital. Paying dividends represents a distribution of profits to shareholders, which is a key aspect of managing the company's equity structure.

Question 2

Basic earnings per share are computed as follows:

Accepted Answer

[Net Income-Preferred Dividends]/Weighted Avg # of common shares outstanding

Answer

Basic Earnings Per Share (EPS) is a financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock. It is calculated by subtracting preferred dividends from net income (as preferred shareholders have a prior claim on earnings) and then dividing the result by the weighted average number of common shares outstanding during the period. This formula provides a fundamental measure of a company's profitability on a per-share basis.

Question 3

The opinion section of an independent auditor's report begins, "In our opinion, the aforementioned financial statements fairly present the financial position in all material respects..." This language specifies .

Accepted Answer

An unqualified opinion

Answer

An unqualified opinion, also known as a clean opinion, is issued when an auditor concludes that the financial statements are presented fairly, in all material respects, and in accordance with generally accepted accounting principles (GAAP). The phrase "fairly present the financial position in all material respects" is the standard language used to convey this highest level of assurance. It signifies that the financial statements are free from material misstatements and can be relied upon by users.

Question 4

A company's net income is 200, accounts receivables increased by 30, depreciation increased by 55, and accounts payable decreased by 25. It has a ________ operating cash flow.

Accepted Answer

200

Answer

To calculate operating cash flow using the indirect method, start with net income ($200). Add back non-cash expenses like depreciation ($55). Then, adjust for changes in current operating assets and liabilities: an increase in accounts receivable ($30) reduces cash, and a decrease in accounts payable ($25) also reduces cash. Therefore, the calculation is $200 (Net Income) + $55 (Depreciation) - $30 (Increase in A/R) - $25 (Decrease in A/P) = $200.

Question 5

Stock dividends and stock splits are dissimilar because

Accepted Answer

In a stock split a larger number of new shares replaces the outstanding shares

Answer

A stock split fundamentally changes the par value per share by replacing existing shares with a larger number of new shares, proportionally reducing the par value per share. In contrast, a stock dividend issues additional shares without typically changing the par value per share, and it involves a transfer from retained earnings to paid-in capital. The key difference lies in the adjustment of the par value and the magnitude of the share increase.

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Practice Test

FREE Financial Statement Analysis Questions and Answers