Chapter 4 Homework

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Jun 23, 2024

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Chapter 4 – Implementing accounting analysis Question 4.1 The first task in an accounting analysis is to: A. Determine how assets were measured. B. Make adjustments for any contingent liabilities. C. Determine what accounts may require adjusting. D. Recast the financial statements into a common format . Answer D Question 4.2 In which of the following ways might financial statements differ between firms and across the same firm over time? A. Terminology used when describing accounts. B. Classification of assets and liabilities. C. The format of the financial statements. D. All of these choices. Answer D Question 4.3 When using the worksheet approach which of the following accounts would not be a column? A. Assets. B. Liabilities. C. Equity. D. Expenses. Answer D Question 4.4 Financial statements may require adjusting because: A. Management have objectively set out the financial statements. B. The accounting standards reflect the underlying economics of the firm. C. There is too much management bias in the financial statements . D. The firm has used the same accounting choices within GAAP as it did in previous financial statements. Answer C Question 4.5 When writing down the value of an asset, which of the following accounts could potentially change in value? A. Asset. B. Liabilities. C. Equity.

D. Liabilities and equity. E. All of these choices. Answer E Question 4.6 When removing a deferred tax liability from a financial statement how would the relevant columns in an accounting worksheet change? A. A decrease in assets and a decrease in liabilities. B. An increase in assets and a decrease in liabilities. C. An increase in equity and a decrease in liabilities. D. A decrease in equity and an increase liabilities. Answer C Question 4.7 The accounting requirement to measure inventories at net realisable value (NRV) will likely result in assets that are not: A. Overvalued. B. Undervalued. C. Overvalued or undervalued assets depending on local tax requirements. D. All of these choices. Answer A Question 4.8 An issue that can arise when reporting liabilities is: A. The amount of the obligation is certain. B. There is little ambiguity as to whether an obligation has been incurred. C. A commitment may depend on an uncertain future event. D. All of these choices. Answer C Question 4.9 Recognising an accrual that increases income in one financial reporting period can result in which of the following occurring in later periods? A. Either a further increase in accruals or a decrease in accruals. B. A decrease in accruals. C. A further increase in accruals. D. None of these choices. Answer A Question 4.10 Managers have incentives to: A. Increase earnings. B. Decrease earnings.

C. Increase assets and liabilities. D. Decrease assets and liabilities. E. All of these choices . Answer E Question 4.11 Analysts may prefer to a remove deferred tax from the financial statements as: A. Deferred tax does not represent an amount that is owed from or to tax authorities. B. Analysts only require after-tax profit numbers. C. There are minor differences between tax accounting and GAAP accounting. D. Tax rates vary too much across jurisdictions and industries. Answer A Question 4.12 In what situation would management be most likely to distort the financial report? A. When earnings are higher than the level required to achieve their bonus. B. When they have just met an analyst’s forecast. C. When they have just enough assets to meet a financial covenant. D. All of these choices. Answer A Question 4.13 Which of the following should be removed from the financial statements? A. Items that are unique to the business and do not impact business value on a continuing basis . B. Items that are not unique to the business and impact business value on a continuing basis. C. Items that are unique to the business and impact business value on a continuing basis. D. Items that are not unique to the business and do impact business value on a continuing basis. Answer A Question 4.14 An analyst should make a full adjustment and not a partial adjustment because: A. Partial adjustments can potentially ignore the impact on the income statement. B. Partial adjustments can potentially ignore the impact on the balance sheet. C. Partial adjustments can potentially ignore the impact on accounting ratios. D. All of these choices. Answer D

Question 4.15 You notice that a firm has listed a helicopter in a fixed asset account. This helicopter is only used recreationally by one of the directors of the firm. Using the worksheet approach, what should you do? A. Decrease the asset account by the value of the helicopter and adjust it against another asset account. B. Make no adjustment. C. Decrease the asset account by the value of the helicopter and adjust it against an equity account. D. Decrease the asset account by the value of the helicopter and adjust it against a liability account. Answer C Question 4.16 Consider the following worksheet with information extracted from a financial statement: 2018 Assets Liabilities Equity Reported ($) 500 000 100 000 400 000 An analyst makes an adjustment that decreases goodwill by $100 000 and equity (profit) by $100 000. This goodwill was acquired on consolidation, hence there are no tax adjustments. Using the worksheet approach, what would be the change in the debt to assets ratio? A. An increase of 10%. B. An increase of 5%. C. A decrease of 5% D. A decrease of 10%. Answer B: Adjusted Assets = $500,000 - $100,000 = $400,000 Liabilities = $100,000 (unchanged) Initial debt to assets ratio = Liabilities / Assets = $100,000 / $500,000 = 0.2 or 20% Adjusted debt to assets ratio = Liabilities / Adjusted Assets = $100,000 / $400,000 = 0.25 or 25% Change in debt to assets ratio = 0.25 - 0.20 = 0.05 or 5% Question 4.17 Consider the following worksheet with information extracted from a financial statement: 2018 Assets Liabilities Equity Reported ($) 500 000 200 000 300 000 An analyst makes an adjustment for goodwill that decreases assets by $100 000 and decreases equity (profit) by $100 000. This decrease in equity has reduced profit to $50 000. Using the worksheet approach, what would be the reported return on assets? A. 30% B. 12.5% C. 37.5%

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