Question :
Multiple Choice Questions
1.The following chart presents the cash flow profiles : 1253462
Multiple Choice Questions
1.The following chart presents the cash flow profiles of four companies. All four companies are in the same industry and are comparable in size. Based on this limited information, which company likely has the weakest quality of earnings?
Company 1
Company 2
Company 3
Company 4
Net cash from investing activities
Negative
Positive
Negative
Positive
Net cash from operating activities
Positive
Negative
Positive
Positive
Net cash from financing activities
Positive
Negative
Negative
Positive
a.Company 1
b.Company 2
c.Company 3
d.Company 4
2.The following information is available on four different companies. Assume that there is no salvage value on the equipment. All companies operate in the same industry and use similar processes and equipment.
Morton
Starburst
Ames
Summers
Equipment
$2,000,000
$500,000
$1,500,000
$1,000,000
Depreciation per year
$250,000
$62,500
$30,000
$100,000
Based on this limited information, which company likely has the weakest quality of earnings?
a.Morton
b.Starburst
c.Ames
d.Summers
3.The following information is presented from the financial statement of four companies that operate in the same industry, use similar processes, and are comparable in size.
Sales 2009
Sales 2010
Accounts Receivable 2009
Accounts Receivable 2010
Company 1
$4,000,000
$4,500,000
$400,000
$450,000
Company 2
$3,800,000
$4,200,000
$400,000
$390,000
Company 3
$4,200,000
$3,900,000
$420,000
$350,000
Company 4
$4,300,000
$4,000,000
$410,000
$530,000
Based on this limited information, which company likely has the weakest quality of earnings?
a.Company 1
b.Company 2
c.Company 3
d.Company 4
4.The following information is presented from the financial statement of four companies that operate in the same industry, use similar processes, and are competitors in the same market.
Sales 2009
Sales 2010
Inventory 2009
Inventory 2010
Company 1
$4,000,000
$4,500,000
$8,000,000
$9,000,000
Company 2
$3,800,000
$4,300,000
$7,500,000
$9,990,000
Company 3
$4,200,000
$3,900,000
$8,400,000
$7,350,000
Company 4
$4,300,000
$4,000,000
$8,500,000
$7,440,000
Based on this limited information, which company likely has the weakest quality of earnings?
a.Company 1
b.Company 2
c.Company 3
d.Company 4
5.The following information is presented from the financial statement of four companies that operate in the same industry, use similar processes, are similar in size, and are competitors in the same market. The data cover Years 2009 to 2012.
(in millions)
Advertising Expenses 2009
Advertising Expenses 2010
Advertising Expenses 2011
Advertising Expenses 2012
Company 1
$2,010
$2,271
$2,612
$3,056
Company 2
$2,555
$2,510
$3,160
$3,600
Company 3
$2,400
$2,400
$2,400
$2,400
Company 4
$2,200
$2,024
$1,850
$1,744
(in millions)
Research and Development
2009
Research and Development
2010
Research and Development
2011
Research and Development
2012
Company 1
$4,000,000
$4,000,000
$4,000,000
$4,000,000
Company 2
$3,800,000
$4,000,000
$4,200,000
$4,400,000
Company 3
$4,200,000
$4,640,000
$5,336,000
$6,200,000
Company 4
$4,300,000
$4,000,000
$3,500,000
$2,440,000
Based on this limited information, which company likely has the weakest quality of earnings at Year 4 or 2012?
a.Company 1
b.Company 2
c.Company 3
d.Company 4
6. When looking at the statement of comprehensive income in the 2009 annual reports of four similar companies in the same industry, you find the following:
Company 1
$5 million for litigation charges
Company 2
$5 million provision for restructuring
Company 3
$5 million for research and development
Company 4
$5 million charge for disposal of a segment
Which company has an expense item that is likely to be persistent in terms of earnings?
a.Company 1
b.Company 2
c.Company 3
d.Company 4
7.The following information is available on four different companies. All companies operate in the same industry, are of similar size, and use similar processes and equipment.
Price/Earnings Ratio
Company 1
Company 2
Company 3
Company 4
Industry Average
2008
10.0
9.9
7.0
11.0
9.8
2009
4.0
10.8
11.0
10.0
10.7
2010
5.0
11.5
10.9
9.0
11.4
Based on this limited information, which company likely has the highest quality of earnings at the end of the three year period?
a. Company 1
b. Company 2
c. Company 3
d. Company 4
8.The following information was taken from the 2009 annual reports of four different companies in the same industry.
Company 1
Company 2
Company 3
Company 4
Net income before taxes
$2,754
$1,097
1,630
1,585
Income tax expense
Current
1,107
465
520
535
Deferred
(104)
(43)
(184)
(188)
Total
$1,003
$422
$1,110
$1,050
Effective tax rate
36%
39%
36%
36%
Based on this limited data, which company appears to be more conservative and have stronger earning power?
a.Company 1
b.Company 2
c.Company 3
d.Company 4
