ACCT90002 Financial Statement Analysis
Semester 1, 2024
Mid-Semester Test (draft)
PART A - Multiple Choice Questions [1 mark each x 20 = 20 marks]
Question 1
Information intermediaries add value in which of the following ways?
A. Performing an analysis by using the financial statements.
B. Enhancing the credibility of financial reports.
C. Both enhancing the credibility of financial reports and analysing financial statements.
D. None of these choices.
Question 2
Which of the following best describes how firms can create value?
A. Steadily increasing revenue on a year-to-year basis.
B. Having a business strategy that is better than their competitors.
C. Generating returns that are in excess of the cost of maintaining capital.
D. Investing in risky projects.
Question 3
Why is there a need for accrual accounting?
A. Accrual accounting informs investors on the actual cash movements of a firm.
B. There is no need for accrual accounting as cash accounting satisfies investors’ needs.
C. The full economic consequences of transactions in a period are not fully accounted for by cash accounting.
D. None of these choices.
Question 4
Which of the following accounting practices assist in ensuring that managers objectively use their accounting flexibility?
A. Accrual accounting and accounting standards.
B. Accounting standards and internal audits.
C. Independent audits and accounting standards.
D. Accounting standards and accounting discretion.
E. Accounting discretion and independent audits.
Question 5
A potential limitation when evaluating industries is that:
A. Most industries are very competitive.
B. Industries may not always have clear boundaries.
C. Some industries have few competitors.
D. An industry may be comprised of firms that are listed and unlisted.
Question 6
Multi-business companies can experience a diversification discount as:
A. They suffer from incentive misalignment problems.
B. The decision to diversify is due to a desire to maximise the size of the company instead of increasing shareholder value.
C. It is difficult to value and monitor and value multi-business companies.
D. All of these choices.
Question 7
When analysing a firm that is a multi-business organisation, when should an analyst consider the economic consequences of managing different business units within the one firm?
A. When the firm is listed on the stock exchange.
B. Always.
C. When there is substantial competition on at least one of the business units.
D. Only if there are more than three business segments.
Question 8
Defining an industry in a way that is inappropriate can lead to:
A. Incomplete evaluation.
B. Both incomplete evaluation and inaccurate forecasts.
C. Inaccurate forecasts.
D. More accurate forecasts.
Question 9
What is the first thing an analyst should consider when conducting an accounting analysis?
A. What information can be used.
B. The end goal or purpose of the analysis.
C. If the firm had an auditor change.
D. None of these choices.
Question 10
Which of the following would be an objective of an accounting analysis?
A. Give an opinion on whether the financial statements are fairly presented.
B. Undo accounting distortions.
C. Reverse any internal transactions undertaken by the firm.
D. All of these choices.
Question 11
Accruals link which of the following?
A. Transactions and cash flows.
B. Cash balances and cash flows.
C. Income and cash flows.
D. Unusual transactions and cash flows.
Question 12
A new CEO significantly writes down the value of assets which drastically reduces profits and then blames this on the previous CEO. This is an example of:
A. Related party transaction.
B. Opinion shopping.
C. Off-balance sheet structuring.
D. Taking an accounting bath.
Question 13
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.
Question 14
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.
Question 15
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.
Question 16
An analyst makes an adjustment to the goodwill in a firm’s financial statements. This results in a decrease of assets and a decrease in equity. Which of the following financial ratios will be affected?
A. Debt to assets.
B. Return on assets.
C. Both debt to assets and return on assets will be affected.
D. None of these choices.
Question 17
Return on equity is an indicator of firm performance because it:
A. Shows how well managers are using funds from total share capital to generate returns.
B. Shows how well managers are using funds from retained earnings to generate returns.
C. Shows how managers are using funds from retained earnings and total share capital to generate returns.
D. Shows how well managers are using funds from ordinary share capital to generate returns.
Question 18
The profit margin is a measure of how much a company keeps as profit for each dollar of:
A. Current assets that are invested.
B. Revenue that is made.
C. Assets that are invested.
D. Equity that is invested.
Question 19
Firms classify cash flow into which of the following categories?
A. Cash flow from sales, cash flow from investing, and cash flow from financing.
B. Cash flow from operations, cash flow from sales, and cash flow from financing.
C. Cash flow from operations, cash flow from equity, and cash flow from financing.
D. Cash flow from operations, cash flow from investing, and cash flow from financing.
Question 20
In the long run, a firm generating ROEs in excess of its cost of equity capital will likely have:
A. A market value that is lower than its book value.
B. A market value that is higher than its book value.
C. A market value that is equivalent to its book value.
D. None of these choices.
Part B – Short Answer Questions
The following questions are based on the financial statements and financial data provided for Coles Group Ltd.
Question 21 [6 marks]
As a retailer, Coles has a material asset in its inventory. Identify and explain two (2) accounting choices with respect to inventory that could potentially be used to manipulate reported net income and their effect on reported net income.
Question 22 [6 marks]
Consider the Coles Group’s current ratio over the period FY2019 to FY2023 in a times- series comparison, and in relation to the industry average of 5.9 for FY2023 as a cross- sectional comparison.
(a) Why are benchmarks needed in ratio analysis? [1 mark]
(b) Explain whether the level of Coles’ current ratio is a cause for concern. [5 marks]
Question 23 [6 marks]
On 1 May 2023, Coles Group completed the sale of its fuel and convenience retailing business (Coles Express, previously presented as a reportable segment) to Viva Energy Group for $319 million.
(a) Why are segment reports important to analysts? [1 mark]
(b) Identify and explain which elements of Coles’ financial statements will be affected in the 2023 reporting period, and in future reporting periods by the sale of Coles Express. [5 marks]
Question 24 [6 marks]
Conduct a profitability analysis for Coles Group Ltd, by calculating its Return on Equity (ROE) and then decompose the ROE using the traditional (DuPont) method. You must show all workings. Comment on your results. Is ROE the best measure of firm profitability? Explain why or why not.
In addition to the profit margin, other alternative measures of profitability measure return on capital invested by all capital providers, unlike ROE which only measures returns to shareholders. ROE can also be manipulated by accounting choices (e.g, impairment charges) and distorted by reducing equity and increasing debt. However, the firm still has to earn profits to service its debt. Conclusion: ROE is one measure of profitability, but it doesn’t capture everything about a firm’s performance, and as always, it’s important to make industry comparisons.