FIN621 Finalterm Solved Paper 2009-3

FINALTERM EXAMINATION
Fall 2009
FIN621- Financial Statement Analysis (Session - 1)

FIN621 Question No: 1    ( M a r k s: 1 )   
 Which of the following arrangement is used to maintain the accounts?
 
       Sequentialy
 
       Alphabaticaly
 
       Monthly
 
       Orderly
 
   
FIN621 Question No: 2    ( M a r k s: 1 )   
 Which of the following represents the main step(s) of accounting cycle?
 
       Recording the transactions
 
       Classifying the transactions
 
        Ordering, summarizing, counting the transactions
 
       Recording, classifying, summarizing transactions
 
FIN621 Question No: 3    ( M a r k s: 1 )   
 Blankenship Company pays its employees every Friday for work rendered that week. The payroll is typically Rs.10,000 per week. Which of the following journal entries would Blankenship ordinarily record on the Friday payday?
 
       Salary expense Rs. 10,000 - Debit; Salary payable Rs. 10,000 - Credit
 
       Salary expense Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit
 
       Salary payable Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit
 
       Salary payable Rs. 10,000 - Debit; Salary expense Rs. 10,000 - Credit

FIN621 Question No: 4    ( M a r k s: 1 )   
 Retained earnings change over time because of several factors. Which of the following factors would explain an INCREASE in retained earnings?
 
       Net Income
 
       Dividends payment
 
 
       Investment by the stockholders
 
 
       Net Loss
 

FIN621 Question No: 5    ( M a r k s: 1 )   
 Which one of the following statements is TRUE regarding distributions to stockholders?
 
       The payment of dividends is not directly related to the profits of a given period
 
       Shareholders can individually decide on their distributions
 
       To receive a corporate dividend, stock must be owned on the date of declaration
 
       Corporate dividends reduce contributed capital and therefore, stockholders’ equity

   
FIN621 Question No: 6    ( M a r k s: 1 )   
 Which of the following is the largest single expense of most merchandising firms?
   
   Cost of goods sold
 
       Rent Expense
 
       Amortization Expense
 
       Salaries Expense
   
FIN621 Question No: 7    ( M a r k s: 1 )   
 Which of the following is NOT the most common example of cash equivalents?
 
       Savings deposits
       Certificates of Deposit (CDs)
       Stocks of other companies
       Money market mutual funds

FIN621 Question No: 8    ( M a r k s: 1 )   
 The statement of cash flow does NOT assist investors, creditors and others in assessing:
 
       The company’s ability to generate positive cash flows in future periods
       The company’s ability to meet its obligations and to pay dividends
       The company’s needs for external financing
       The company’s ability to forecast future losses

FIN621 Question No: 9    ( M a r k s: 1 )   
 When using the perpetual inventory system, each time a sale is recorded the:
 
       Inventory account is increased
       Inventory account is decreased
       Cost of Goods Sold account is decreased
       Cost of goods available for sale decreases

FIN621 Question No: 10    ( M a r k s: 1 )   
 In perpetual inventory system, a return of defective merchandise is recorded by crediting __________.
 
       Purchases
       Purchase Returns
       Purchase Allowance
       Merchandise Inventory

FIN621 Question No: 11    ( M a r k s: 1 )   
 Which factor would NOT affect the gross profit rate?
       An increase in the cost of heating the store
 
       An increase in the price of inventory items
 
       An increase in the sale of luxury items
 
       An increase in the use of “discount pricing” to sell merchandise

   
FIN621 Question No: 12    ( M a r k s: 1 )   
 Assets which have NO market value are called:
 
       Wasting assets
 
       Fictitious assets
 
       Quick assets
 
       Tangible assets

   
FIN621 Question No: 13    ( M a r k s: 1 )   
 Audit opinions can NOT be classified as which of the following?
       Adverse opinion
 
       Unqualified opinion
 
       Qualified opinion
 
       Disagreement of opinion
 
   
FIN621 Question No: 14    ( M a r k s: 1 )   
 The audit is NOT a necessary requirement for which of the following companies?
 
       Listed companies
       Corporations
       Sole proprietorship
       Partnerships
   
FIN621 Question No: 15    ( M a r k s: 1 )   
 Which of the following is NOT a part of the five-year summary of a company?
 
       Net income/Loss
 
       Total assets
 
       Discontinued operations
 
       Net sales
 
FIN621 Question No: 16    ( M a r k s: 1 )   
 Which of the following is NOT a limitation of financial statements for an investor?
       It provides complete basis for the analysis of a company
 
       Past financial performance does not signify what will happen with the investor in future
 
       The financial statements are useless without the notes to the financial statements
 
       Unless the statements are audited their authenticity is under doubt
 
FIN621 Question No: 17    ( M a r k s: 1 )   
 Which of the following is NOT a feature of preferred shares?
       Distributive
       Callable
 
       In arrears
 
       Cumulative

   
FIN621 Question No: 18    ( M a r k s: 1 )   
 Which of the following is a type of preferred stock that entitles the holder to a fixed dividend and, in addition, to the right to get any surplus profits after payment of agreed levels of dividends to holders of common stock?
       In arrears preferred shares
 
       Call able preferred shares
 
       Cumulative preferred shares
 
       Participating preferred shares 

   
FIN621 Question No: 19    ( M a r k s: 1 )   
 Which one of the following represents the value of shares in the market at any point of time?
       Par value
 
       Book value
 
       Face value
 
       Market value
 
   
FIN621 Question No: 20    ( M a r k s: 1 )   
 By computing component percentages for several successive balance sheets, which of the following can NOT be found?
 
       The increasing items
 
       The decreasing items
 
       The unchanged items
 
       The future profitable items
FIN621 Question No: 21    ( M a r k s: 1 )   
 Which of the following would NOT improve the current ratio?
       Issue long-term debt to buy inventory
 
       Sell common stock to reduce current liabilities
 
       Sell fixed assets to reduce accounts payable
 
       Borrow short term to finance additional fixed assets

   
FIN621 Question No: 22    ( M a r k s: 1 )   
 Krisle and Kringle's debt-to-total assets ratio is 4%. What is its debt-to-equity ratio?
 
       2%
 
       7%
 
       6%
 
       3%

FIN621 Question No: 23    ( M a r k s: 1 )   
 A company experiences a dramatic fall in its gross profit ratio. This could be the result of which of the following?
       An increase in competition in the company's main product market
 
       An increase in the incidence of bad debts
 
       An increase in overhead expenses
 
       An increase in demand for the company's products

   
FIN621 Question No: 24    ( M a r k s: 1 )   
 Which of the following is NOT an objective of fundamental analysis?
       To make projection on its business performance
       To predict the future stock price
       To evaluate its management and make internal business decisions
       To calculate its credit risk
   All of the given options are objectives of fundamental analysis.

FIN621 Question No: 25    ( M a r k s: 1 )   
 Which of the following is NOT a goal of analysis of financial statement?
       Assess the past performance
       Asses the current financial position
       Predict the future performance of the company
       Asses the working of management in the future
   
FIN621 Question No: 26    ( M a r k s: 1 )   
 In isolation, which of the following is TRUE about a financial ratio?
       Useless piece of information
          Useful piece of information
       Useful only for past performance
       Useful only for future predictions

FIN621 Question No: 27    ( M a r k s: 1 )   
 Financial statement ratio analysis may be undertaken to study liquidity, turnover, profitability, and other indicators.  To which does the current ratio most relate?
       Liquidity
       Turnover
       Profitability
       Other indicator

FIN621 Question No: 28    ( M a r k s: 1 )   
 Which of the following would NOT result in an improved overall gross margin of a business?
       A fall in raw material prices resulting in a lower cost of sales
       Higher discounts offered to customers
       Increased selling price of existing products
       Introduction of new products with a higher gross profit margin

FIN621 Question No: 29    ( M a r k s: 1 )   
 Which of the following would NOT improve the return on investment ratio?
       Reducing costs
       Increasing gains
       Accelerating gains
       Issuing treasury stock
   
FIN621 Question No: 30    ( M a r k s: 1 )   
 Which one of the following statement indicates the Inventory turnover ratio?
       How quickly company prepared its inventory
       How quickly company converts its inventory into cash
       How quickly company purchases its inventory
       How quickly company sells its inventory

FIN621 Question No: 31    ( M a r k s: 1 )   
 Which of the following is the ideal position of debt ratio?
       30%
       60%
       50%
       45%
   
FIN621 Question No: 32    ( M a r k s: 1 )   
 If current assets are Rs. 15.6 million, current liabilities Rs. 11.2 million and stocks Rs. 1.8 million, what is the acid test ratio?
       1.39
       1.23
       1.65
       0.89

FIN621 Question No: 33    ( M a r k s: 1 )   
 Which of the following is essential to conduct business activity, particularly in times of adversity?
       Profitability
       Liquidity
         Stability
       Solvency

FIN621 Question No: 34    ( M a r k s: 1 )   
 Which of the following explains the debit and credit rules relating to recording revenues and expenses?
 
       Realization and matching principle
       The effect of revenues and expenses in the owner’s equity
       Expenses appear on the left side of the income statement
       Liabilities are recorded as debit on the balance sheet

FIN621 Question No: 35    ( M a r k s: 1 )   
 Which of the following equations properly represents a derivation of the fundamental accounting equation?
       Assets + liabilities = owner's equity
       Assets = owner's equity
       Cash = assets
       Assets - liabilities = owner's equity
   
FIN621 Question No: 36    ( M a r k s: 1 )   
 How would the purchase of merchandise on account be represented in the buyer's records?
       Increase assets and increase expenses
         Increase assets and increase liabilities
       Increase liabilities and increase paid-in capital
       Increase liabilities and decrease assets
   
FIN621 Question No: 37    ( M a r k s: 1 )   
 Which of the following is NOT an advantage of the accrual basis of accounting?
 
       It is simple to see what payments to vendors are outstanding
       It is easy to see how much revenue is due the company
       It is much easier to assess the overall financial health of the company
       It is much easier and cheaper to maintain
   
FIN621 Question No: 38    ( M a r k s: 1 )   
 ABC company has decided to change the inventory system from FIFO to LIFO keeping in view the raising day by day inflation threat. What different things/factors Mr Ali, the auditor of the company, will have to notify or report?
       The purpose of switching
       The existing system drawbacks
       The new system threats
       All of the above
   
FIN621 Question No: 39    ( M a r k s: 1 )   
 Which of the following elements of financial statements is MOST closely related to measurement of financial position?
         Equity
       Income
       Expense
       Disclosures
   
FIN621 Question No: 40    ( M a r k s: 1 )   
 All of the following steps are considered during the formation of a company EXCEPT:
       The memorandum and articles of association of articles should be prepared
       Suitable persons should be appointed for the subscription of memorandum of association
       The election of the CEO of the company
       Registration fees should be deposited to registrar of companies and receipt of certificate of incorporation should be collected

FIN621 Question No: 41    ( M a r k s: 1 )   
 The basic type of capital stock issued by every corporation is known as:
       Common stock
       Preferred stock
       Class B
       Cumulative Stock
   
FIN621 Question No: 42    ( M a r k s: 1 )   
 Which of the following ratios provide a MORE penetrating measure of liquidity than does the current ratio?
       Assets Test Ratio
       Defensive interval ratio
       Investments ratio
       Current ratio

FIN621 Question No: 43    ( M a r k s: 1 )   
 Average payment period is calculated as:
       365 / Accounts payable turnover
       365 X Accounts payable turnover
       365/ Total purchases
       Accounts payable turnover / 365

FIN621 Question No: 44    ( M a r k s: 1 )   
 Which of the following ratios indicates in days how quickly inventory is sold?
       Inventory turnover Rate
       Inventory Turnover ratio
       Operating Cycle
       Days sales of inventory

FIN621 Question No: 45    ( M a r k s: 3 )
 How does working capital help management in making rationale decisions?
   
 
FIN621 Question No: 46    (M a r k s: 5 )
 Consider the following information.
 
Cash Rs. 15,000
Beginning net receivables Rs. 55,000
Ending net receivables Rs. 57,000
Net sales Rs. 640,000
Net credit sales Rs. 480,000
Cost of goods sold Rs. 390,000
Average inventory Rs. 62,000
 
Requirement:
Compute the receivable turnover to the nearest tenth.
 
 
Receivables turn over ratio   = Net credit sales /Average Debtors
                                      = 640,000 / [(55,000+57,000)/2]
                                      = 640,000 / 56,000
                                      = 11.43
 
 
FIN621 Question No: 47    (M a r k s: 5 )
 Assume that you are a commercial loan officer at a large bank. One of your clients recently submitted an application for Rs. 300,000 five year loan. You have worked with this business before on numerous occasions and have periodically been forced to deal with late and missed payments attributed to cash flow problems. Thus you are surprised to see in the business plan accompanying the application that the management expects to reduce the company’s operating cycle from 190 days to 90 days. A footnote to the business plan indicates that the reduction in the operating cycle will result from a tighter credit policy and the implementation of a just-in-time inventory system.
 
Requirement:
Would the company be able to reduce the operating cycle by applying the new strategy and would you give the loan to the company on this basis?
 
 
   
FIN621 Question No: 48    (M a r k s: 5 )
 Assume that you are a graduate student and going to form a web page consultancy firm. You are very young and compassionate to form this company. You need a bank loan of Rs.50,000 for computer equipment , as a collateral you have a bike your father gave you after securing 80% M a r k s in FSc. Not wanting to lose your bike and to protect yourself you decided to organize a corporation.  Explain will it be beneficial idea for you or not.
 
   
FIN621 Question No: 49    (M a r k s: 10 )
 The data shown below were taken from the financial records of J Ltd at the end of the year. The financial year of the company ends on 31, December each year.
 
 
Accounts Payable
Rs 50,000
Accrued Liabilities
Rs. 33,000
Cash
32,000
Inventories Jan
42,000
Inventories Dec
38,000
Marketable Securities
10,000
Operating Expenses
120,000
Prepaid Expenses
25,000
Purchases (Net)
360,000
Accounts Receivable Jan
61,000
Accounts Receivable Dec
61,000
Long Term Loan
150,000
Plant Assets
400,000
Sales
604,000
Sales Returns
20,000
Retained Earning
133,000
Share Capital (Rs.10 Par)
92,000
Market Price
18
Interest expense
30,000
 
 
On the basis of above information, calculate the following.
a.      Debt ratio (4)
     
b.      Debt to equity ratio (2)
 
c.      Debt to total asset ratio (4)
   
FIN621 Question No: 50    ( M a r k s: 10 )
 How many types of audit opinions are there? Assume that you have been appointed as an Auditor of the company, after the audit of the company, what can be your possible audit opinions. Briefly explain each of the audit opinion.

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