Financial Accounting Survey
Mid-term Exam Sample Questions

The requirements for your mid-term examination consist of analyzing the financial statements of a company yet to be determined. You will be given specific questions to answer regarding particular aspects of the financial statements. The questions which follow are representative of the types of questions which will be on the exam. You will also be requested to give your opinion on the overall health of the company and its strengths and weaknesses. To practice your skills prior to the exam, acquire an annual report of any company and locate the information requested in the study questions below. Your answers on the exam will be expected to be concise and complete.

  1. What was the company's net loss/income?

  2. What was the company's net cash provided by operating activities?

  3. Does the company use the direct method or the indirect method with regard to the Statement of Cash Flows? How can you tell which one is used?

  4. What are some reasons that the amount of net loss/income does not equal the net cash provided by operations?

  5. Explain the reason for the change in Retained Earnings from one year to the next.

  6. What was the amount of dividends paid (if any)?

  7. What was the number of shares of common stock outstanding at the end of each year presented? What was the weighted average number of shares outstanding? Explain the difference (if any) between the numbers.

  8. What is the number of shares of preferred stock authorized, issued, and outstanding?

  9. Calculate the book value per share of common stock. How does that relate to the market value?

  10. Look at the amount of stockholders' equity. Is this the amount that stockholders would receive if the company were liquidated?

  11. How mauch did the company earn or lose for each share of stock outstanding?

  12. Does the company disclose any significant customers? If so, how reliant is the company on these customers for business?

  13. How much did the company pay in income taxes?

  14. Does the company use a multiple step or a single-step income statement approach?

  15. Compute the gross margin percentages for each period presented. Has the percentage increased or decreased over time? What are the reasons for the current change?

  16. What was the single largest cash inflow received by the company?

  17. How many inventory accounts are reported on the balance sheet? How is the inventory broken down in the footnotes to the financial statements?

  18. What amount(if any) did the compnay spend on additions to property, plant, and equipment?

  19. Does the company report any franchise fees? If so, where are these fees located on the income statement?

  20. How are prepaid expenses (if any) classified on the balance sheet? What types of prepaid expenses would you expect the company to have?

  21. How does the company describe net sales on the face of the income statement? What information is provided about the net sales in the annual report?

  22. What depreciation method does the company use?

  23. What are the estimated useful lives of operating assets?

  24. What amount of assets was bought or sold during the year? Was there a gain or loss? Where is it presented?

  25. What are the accumulated depreciation and book values of PPE?

  26. In what category of the balance sheet are intangible assets included?

  27. What expenses would you expect to be included in the cost of sales reported on the income statement?

  28. Which inventory method does the company use? Is the company justified in using this method?

  29. Compute inventory turnover. What is the average length of time it takes to sell its inventory? Does this seem reasonable for this type of business?

  30. What portion of total assets is represented by inventory? Does this seem reasonable for this type of business?

  31. Does the company disclose which method it uses to account for bad debts? In what line item on the income statement would you expect bad debt expense to be included?

  32. What is the balance in the allowance for doubtful accounts at the end of each year presented?

  33. Calculate the ratio of the allowance for doubtful accounts to the gross accounts receivable at the end of each year presented.

  34. Compute accounts receivable turnover. What is the average length of time it takes to collect a receivable? Does this seem reasonable for the company?

  35. Does the company present a five year (or more) financial highlights summary? In terms of a trend over time, which item on the summary do you think is the most significant to a current or prospective shareholder of the company? Why?

  36. Based on the market price high for the fourth quarter, what was the PE ratio?

  37. Prepare common-size comparative balance sheets for two years presented. What observations can you make about the relative composition of the company's assets? What observations can be made about the changes in the relative composition of liabilities and owners' equity accounts?

  38. Compute the following ratios and other amounts for each year presented. Use year-end balances in lieu of average balances. Assume a 40% tax rate and a 360 day year. State any other necessary assumptions in making the calculations. Round all ratios to the nearest one-tenth of a percent.
    a. working capital
    b. current ratio
    c. acid-test ratio
    d. cash flow from operations to current liabilities
    e. number of days' sales in receivable
    f. number of days' sales in inventory
    g. debt-to-equity ratio
    h. times interest earned
    i. cash flow from operations to capital expenditures
    j. asset turnover
    k. return on sales
    l. return on assets
    m. return on stockholders' equity

  39. Don't forget to analyze all of the information you have compiled and draw conclusions regarding the overall financial health of the company.

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    Last updated: December 8, 1997