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