FINANCIAL REPORTING &

FINANCIAL STATEMENT ANALYSIS

Final Revision 2021 / 2022
Prepared by: TA. Ahmed Adel

Faculty of Commerce – English Section - 4th year - Accounting Major

Cairo University
 Questions on Part 1

1. Information intermediaries attempt to add value to financial statements by:

A) Enhancing credibility of B) Providing C) Analyzing the D) Both (A) and (C)
financial statements as information to information in financial are correct choices.
auditors do. assess future cash statements as analysts
flows. do.
2. Which one of the following accounting principles requires that circumstances and events
that make a difference to financial statement users be disclosed?
A) Cost principle B) Matching principle C) Full disclosure D) Revenue
principle recognition principle
3. The gross increases in stockholders’ equity resulting from business activities entered into
for the purpose of earning income are known as:
A) Assets B) gains C) Retained earnings D) revenues
4. Cost and fair value of an asset are the same at:
A) Subsequent periods of B) time of acquisition C) time of D) None of the
acquisition. and subsequent periods acquisition choices is correct.
5. Which one of the following represents an area for providing additional disclosure by
footnotes?
A) Inventories and B) Pension and postemployment C) Fixed assets & D) All of the
income taxes benefits plans debts choices are correct
6. Which one of the following accounting assumptions if it is not used, the plant assets should
be stated at their liquidation value?
A) Going concern B) Time period C) Monetary unit D) The economic
assumption. assumption. assumption. entity assumption.
7. The decreases in stockholders’ equity that result from operating the business are known
as:
A) Liabilities B) losses C) revenues D) Expenses
8. Security analysts collect and analyze a wide array of information from financial statements
and other sources to:
A) Evaluate a B) Evaluate a C) Evaluate a firm’s D) Evaluate a firm’s current
firm’s current, and firm’s past and current, past, and and past performance to
future performance. future performance. future performance. predict its future performance.
9. Which one of the following provides information about the accounting methods,
assumptions, and estimates used by management to develop the data reported in the
financial statements?
A) Balance sheet B) Footnotes C) Supplementary disclosures D) Income statement
10. Which one of the following accounting assumptions is vital to applying the cost principle?
A) Going concern B) Time period C) Monetary unit D) Economic entity
assumption assumption assumption assumption
11. Expenses are not recognized when:
A) cash is paid B) the work is performed C) the product is produced D) All of these
choices are correct

1|Page
12. In which one of the following accounting principles the percentage-of-completion and the
installment methods are the exceptions to the sales basis for revenue recognition.
A) Cost principle B) Matching C) Full disclosure D) None of the
principle principle choices is correct

Questions on Part 3
True or False:
1. Ratio analysis such as profitability analysis is an analytical technique that typically
involves a comparison between two financial items. True
2. Liquidity depends to a large extent on prospective cash flows and to a lesser extent on the
level of cash and cash equivalents. True
3. Receivables turnover shows how long it takes the firm to pay its bills to suppliers. False
4. The quick ratio measures how quickly the company generates profit. False

Problem No. (1) Use the following information to answer the questions:
Note that all receivables are net of allowance & all sales are credit sales.

Account 2020 2019

Cash and cash
equivalents $ 2,450 $ 2,094
Receivables 1,813 1,611
Inventory 1,324 1,060
Prepaid expenses 1,709 2,120
Total current assets $ 7,296 $ 6,885
Other assets 18,500 15,737
Total assets $ 25,796 $ 22,622
Total current liabilities $ 7,230 $ 8,467
Long-term liabilities 4,798 3,792
Common stock 6,568 4,363
Retained earnings 7,200 6,000
Total liabilities and
equity $ 25,796 $ 22,622
Net Sales $ 20,941
Cost of goods sold 7,055
Operating expenses 7,065
Operating income $ 6,821
Interest expense 210
Income tax expense 2,563
Net income $ 4,048

2|Page
1. Which statement best describes Liberty’s acid-test ratio of 2020?
A) Greater than 1 B) Equal to 1 C) Less than 1 D) None of the above
2. In 2020, the Accounts Receivable turnover ratio for Liberty was:
A) 10.54 times B) 11.65 times C) 12.23 times D) 13.29 times
3.During 2020, Liberty’s days to collect receivables ratio was (amounts rounded):
A) 34 days B) 30 days C) 32 days D) 27 days
4. The company has 2,500 shares of common stock outstanding. What is Liberty’s earnings
per share?
A) $1.62 B) $1.75 C) $2.73 D) 2.63 times
5. The current ratio for 2020 equals:
A) 0.98:1 B) 1.009:1 C) 1.213:1 D) 1.534:1
6. Liberty’s gross profit for 2020 equals:
A) 56.5% B) 58.9% C) 61.2% D) 66.3%
7. Liberty’s return on total assets for 2020 equals:
A) 12.6% B) 14.9% C) 16.1% D) 17.6%

Problem No. (2) Use the following information to answer the questions:
Net income $31,200
Market price of common stock $12.00/share
Dividends paid $0.80/share
Common stock outstanding at January 1, 2014 110,000 shares
Common stock outstanding at December 31, 2014 150,000 shares
(No preferred stock issued)

1. How much was the price/earnings ratio for one share of common stock?
A) 3.05 B) 0.50 C) 1.50 D) 50.0
Explanation: D) Calculations: $31,200 / ((110,000 + 150,000) / 2) = $0.24
$12.00 / $0.24 = 50.0

2. How much was the dividend yield for one share of common stock?
A) $0.067 B) $0.167 C) $0.071 D) D) $0.385
Explanation: A) Calculations: $0.80 / $12.00 = $0.067

3. How much was the dividend payout for one share of common stock?
A) 1.67 B) 3.33 C) 0.30 D) 3.95
Explanation: B) Calculations: $31,200 / ((110,000 + 150,000) / 2) = $0.24
$0.80 / $0.24 = 3.33

3|Page
 Problem No. (3) Use the following information to answer the questions:
Note that all receivables are net of allowance & all sales are credit sales.

Account 2020 2019

Cash and cash
equivalents $ 2,450 $ 2,094
Receivables 1,813 1,611
Inventory 1,324 1,060
Prepaid expenses 1,709 2,120
Total current assets $ 7,296 $ 6,885
Other assets 18,500 15,737
Total assets $ 25,796 $ 22,622
Total current liabilities $ 7,230 $ 8,467
Long-term liabilities 4,798 3,792
Common stock 6,568 4,363
Retained earnings 7,200 6,000
Total liabilities and
equity $ 25,796 $ 22,622
Net Sales $ 20,941
Cost of goods sold 7,055
Operating expenses 7,065
Operating income $ 6,821
Interest expense 210
Income tax expense 2,563
Net income $ 4,048

1. Liberty’s inventory turnover during 2020 was:

A) 5.92 times B) 6.53 times C) 7.35 times D) Not determinable from the data
given
2. Liberty’s days to sell inventory ratio during 2020 was (amounts rounded):
A) 57 days B) 62 days C) 71 days D) 80 days
3. Liberty’s rate of return on common stockholders’ equity equals:
A) 25.43% B) 30.55% C) 33.55% D) 40.31%
4. Liberty’s stock has traded recently around $48 per share. The company has 2,500 shares
of common stock outstanding. Find the company’s price/earnings ratio. (Round to the
nearest whole number.)
A) 20 times B) 30 times C) 48 times D) 78 times
5. Liberty’s profit margin for 2020 equals:
A) 19.3% B) 20.5% C) 21.6% D) 22.1%
6. Liberty’s asset turnover ratio for 2020 equals:
A) 0.342 times B) 0.468 times C) 0.671 times D) 0.865 times
7. The company has 2,500 shares of common stock outstanding. Liberty’s book value per share
of common stock for 2020 equals:
A) 4.65 B) 5.51 C) 6.48 D) 8.96

4|Page
 Problem No. (4) Use the following information to answer the questions:
Net income $62,400
Market price of common stock $24.00/share
Dividends paid $1.60/share
Common stock outstanding at January 1, 2014 220,000 shares
Common stock outstanding at December 31, 2014 300,000 shares
(No preferred stock issued)

1. How much was the price/earnings ratio for one share of common stock?
A) 12.1 B) 2.0 C) 100.0 D) 6.0
Explanation: C) Calculations: $62,400 / ((220,000 + 300,000) / 2) = $0.24
$24.00 / $0.24 = 100.0

2. How much was the dividend yield for one share of common stock?
A) $0.167 B) $0.067 C) $0.071 D) $0.385
Explanation: B) Calculations: $1.60 / $24.00 = $0.067

3. How much was the dividend payout for one share of common stock?
A) 6.67 B) 3.34 C) 1.2 D) 15.8
Explanation: A) Calculations: $62,400 / ((220,000 + 300,000) / 2) = $0.24
$1.60 / $0.24 = 6.67

Problem No. (5) Use the following comparative balance sheet and income statement for the
(ABC) Co. to answer the following questions:
Company (ABC)
Balance sheet ($ thousands)
At December 31st
Total assets ($) 2012 ($) 2013
Cash and cash equivalents .............................. 110.0 120.0
Receivables .................................................. 12.3 14.5
Inventories ............................................ 18.7 19.5
Repaid rent.......................................................... 2.0 0.0
Total current assets ............................................ 143 154
Property, plant and equipment, net ................ . 34.0 34.0
Total assets 177 188
Liabilities and Owners' equity
Notes and loans payable ................................... 22.2 21.3
Accounts payable ................................................ 11.0 12.0
Accrued income taxes ..................................... . 5.8 3.7
Long-term debt .................................................. 4.0 10.0
Total liabilities ................................................ 43.0 47.0
Preference shares (at par value) .................. 0.0 20.0
Additional paid-in capital ............................ 20.0 4.0
Retained earnings .......................................... 14.0 17.0
Common shareholders' Capital (at par value) .... 100.0 100.0

5|Page
 Shareholders' Equity 134.0 141.0
Total liabilities and shareholders' equity 177 188

Company (ABC)
Income statement (5 thousands)
For the year ending December 31st
Total assets ($) 2012 ($) 2013
Gross sales (all on credit) ......................... 42.5 55.4
Sales returns and allowance........................... 2.5 1.4
Cost of goods sold ........................................................ 3.0 4.0
Marketing and administrative expenses .................... 2.8 3.4
Interest expense ............................................................. 1.2 2.6
Net income...................................................................... 3.0 4.0
Income tax (40%) ........................................................... 1.2 1.6
Net income....................................................................... 28.8 38.4

The following information are also provided:

2012 2013 2014

Common stock par value per share ($) ......................... 5.0 5.0 5.0
Preference shares dividends ......................................... . 0% 8% 8%

1. How long is the accounts receivables collection period in year 2013 (round your
answer)?
A) 60 days B) 89 days C) 21 days D) 18 days

2. Inventory turnover for year 2013 equals .................. times.

A) 0.2% B) 2% C) 3% D) None of them
3. The debt to equity ratio for year 2013 is
A) 33.33% B) 37.3% C) 10.5% D) 12.33%

4. Which of the following strategies the company may use to increase its earnings per
share (EPS)?

A) issue more B) increase its C) increase the D) reasonably

common shares inventory operating expenses increase debts

5. The assets turnover ratio is a good indicator of ..............

A) Assets utilization B) liquidity of the C) the financial risk of D) the market value
efficiency business firm the business firm of the business firm

6|Page
6. The gross profit for year 2013 equals ...........................
A) 93% B) 37% C) 47% D) 55%
7. The number of outstanding commons shares in year 2013 are.............
A) 10,000 B) 20,000 C) 35,000 D) 23,000
8. Which of the following factors affects ratio analysis?
A) Industry factors B) Economic C) Management D) All of them
conditions policies

Questions on Part 4

True or False Questions:

1. Companies report the results of operations of a component of a business that will be

disposed of, separately from continuing operations. True
2. Discontinued operations, and other gains & losses are both reported net of tax in the income
statement. False
3. Analysts look for red flags in financial statements that may signal financial trouble. True
4. Increased sales will lead to higher receivables and may require less inventory (or lower
inventory turnover) to meet demand. False
5. Most companies can survive consecutive losses year after year. False
6. If cash flow from investments consistently lower than net income, the company is in
trouble. False
7. If the company’s debt is too high, this is an indicator of liquidity problem. False
8. If the company’s days to collect the receivables are growing faster than for competitors,
the company may have cash surplus. False
9. If the company’s inventory turnover too slow, the company may be unable to sell goods,
or it may be understating inventory. False
10. Financial estimates include the allowance for receivables, depreciation, the costs of
warranties and the contingent losses. True
11. There is no relationship between the accuracy of the accounting estimates and the accuracy
of the financial ratios and percentage. False

7|Page
 12. Traditional financial statements are based on cost. They are not adjusted for price-level
changes. True
13. The growth trend in company’s sales would be informative even if the general price level
had increased significantly during the same period. False
14. The variation in the generally accepted accounting principles that companies’ use may
hamper or impede comparability. True
15. Adjusting the financial data to compensate for the different methods is quite easy. False
16. Fiscal year-end data is always typical or reflective of the financial condition during the
year. False
17. Certain accounting balances (cash, receivables, payables, and inventories) may not be
representative of the balances in the accounts during the year. True
18. Diversification in industry increases the usefulness of financial analysis. False

Multiple Choice Questions

1. A change in accounting policy, requires what kind of adjustment to the financial
statements?

a. Current period adjustment

b. Prospective adjustment
c. Retrospective adjustment
d. Current and prospective adjustment

2. Use the following information (in thousands):

Revenues ¥1,600,000
Income from continuing operations 200,000
Net Income 180,000
Income from operations 440,000
Selling & administrative expenses 1,000,000
Income before income tax 400,000

Determine the amount of discontinued operations.

a. ¥(40,000)
b. ¥160,000
c. ¥200,000
d. ¥(20,000)

8|Page
 3. Majors Corporation had income from continuing operations of $1,800,000 in 2015. During
2015, it disposed of its repair division at a pre-tax gain of $27,000. Prior to disposal, the
division operated at a pre-tax loss of $45,000. The tax rate was 30%. What is the net income
for 2015?
a. $1,782,000
b. $1,728,000
c. $1,749,600
d. $1,787,400

4. During 2015, Lopez Corporation disposed of Pine Division, a major component of its
business. Lopez realized a gain of $1,500,000, net of taxes, on the sale of Pine's assets.
Pine's operating losses, net of taxes, were $1,800,000 in 2015. How should these facts be
reported in Lopez's income statement for 2015?
Total Amount to be included in
Income from Results of
Continuing Operations Discontinued Operations
a. $1,800,000 loss $1,500,000 gain
b. 300,000 loss 0
c. 0 300,000 loss
d. 1,500,000 gain 1,800,000 loss

5. Use the following information:

Gross profit ₤3,900,000
Loss on sale of investments 10,000
Interest expense 7,500
Gain on sale of discontinued operations 30,000
Income tax rate 20%

Compute the amount of discontinued operations to be combined with income from

continuing operations on the income statement.

a. ₤30,000
b. ₤24,000
c. ₤6,000
d. None of the above.

6. Use the following information:

Gross profit ₤3,900,000
Loss on sale of investments 10,000
Interest expense 7,500
Gain on sale of discontinued operations 30,000
Income tax rate 20%

9|Page
 Compute the total amount of income tax expense experienced by the company.
a. ₤765,000
b. ₤800,000
c. ₤782,500
d. ₤1,005,000

7. Sandstorm Corporation has a discontinued operations loss of $100,000, an unusual gain of

$70,000, and a tax rate of 40%. At what amount should Sandstorm report each item?
Discontinued loss unusual gain
a. $(100,000) $70,000
b. (100,000) 42,000
c. (60,000) 70,000
d. (60,000) 42,000

8. XYZ Corporation has a discontinued operations loss of $300,000, an unusual gain of

$210,000, and a tax rate of 40%. At what amount should Prophet report each item?
Discontinued loss unusual gain
a. $(300,000) $210,000
b. (300,000) 126,000
c. (180,000) 210,000
d. (180,000) 126,000

9. Moorman Corporation reports the following information:

Correction of understatement of depreciation expense
in prior years, net of tax $ 430,000
Dividends declared, 2015 320,000
Net income for 2015 1,000,000
Retained earnings, 1/1/15, as reported 2,500,000

Moorman should report retained earnings, December 31, 2015, of

a. $2,070,000
b. $2,750,000
c. $3,180,000
d. $3,610,000

10. Leonard Corporation reports the following information:

Correction of overstatement of depreciation expense
in prior years, net of tax $ 215,000
Dividends declared, 2015 160,000
Net income for 2015 500,000
Retained earnings, 1/1/15, as reported 1,200,000

10 | P a g e
 Leonard should report retained earnings, December 31, 2015, at
a. $985,000
b. $1,325,000
c. $1,540,000
d. $1,755,000

11. Logan Corp.'s trial balance of income statement accounts for the year ended December 31,
2015 included the following:
Debit Credit
Sales revenue $140,000
Cost of sales $ 60,000
Administrative expenses 25,000
Loss on sale of equipment 9,000
Commissions to salespersons 8,000
Interest revenue 5,000
Freight-out 3,000
Loss on disposition of wholesale division 17,000
Bad debt expense 3,000
Totals $125,000 $145,000

Other information:
Logan's income tax rate is 30%. Merchandise inventory:
January 1, 2015 $80,000
December 31, 2015 70,000

On Logan's income statement for 2015, discontinued operations loss is

a. $11,900
b. $17,000
c. $18,200
d. $26,000

Best of luck 
11 | P a g e