5.

03 Analyzing Balance Sheets

Question 1
A company reported a goodwill impairment of USD 800 million for the first quarter ending 20X2.
Based on only this information, it is most likely that:
A. net income was unaffected by the impairment.
B. investing cash flow was reduced by the amount of impairment.
C. management overpaid for one or more acquisitions in the past.

Question 2
An analyst compiles the following common-size balance sheet items for a company:

Based only on the data above, the most appropriate conclusion the analyst can draw is that
compared to 20X8, in 20X9 the company has:
A. increasing solvency risk.
B. a more liquid asset base.
C. not made any acquisitions.
Question 3
An analyst gathers the following data:

Which of the following companies most likely has the greatest ability to pay its current liabilities
based on the quick ratio?
A. Company A
B. Company B
C. Company C

Question 4
An analyst forecasts the upcoming year's fixed charge coverage ratio (FCCR) to be 2. Within
the forecast:
● EBIT is AUD 10 million,
● tax expense is AUD 1.5 million, and
● interest expense is AUD 4 million.
The forecasted lease amount (in AUD millions) is closest to:
A. 1.0
B. 2.0
C. 3.5

Question 5
An analyst collects the following year-end information on three companies:
On its common-size balance sheet, which company most likely reports the highest percentage
of inventory?
A. Company X
B. Company Y
C. Company Z

Question 6
Which of the following is most likely a disclosure for PPE that is required under IFRS but not
under US GAAP?
A. Useful lives
B. Gross carrying amounts
C. Estimated depreciation over the next five years

Question 7
An airline company reports the following information for 20X8:

The fixed charge coverage ratio for 20X8 is closest to:

Question 8
An analyst compiles the following financial data for two companies:

Based only on this data, which ratio indicates that Company A has a greater risk of being unable
to meet its short-term obligations than Company B?
A. Cash ratio
B. Quick ratio
C. Current ratio

Question 9
Over multiple fiscal years, a company's historical common-size balance sheets most likely
reflect a change in:
A. financial leverage.
B. operating cash flow.
C. cross-sectional profitability.

Question 10
A portfolio manager gathers the following data:
If the company has no other long-term debts, its long-term debt-to-equity ratio is closest to:
A. 0.38
B. 0.48
C. 1.08

Question 11
An acquiring company purchases a target company. The goodwill created from the transaction
is best described as the difference between the acquirer's purchase price and the target
company's:
A. book value of equity.
B. fair value of net assets.
C. market value of common stock.

Question 12
An analyst gathers the following information for a company:

Based on this information, the company's debt-to-capital ratio for 20X8 is closest to:
A. 0.50
B. 0.56
C. 0.60
Question 13
A company provides the following balance sheet information:

Compared to the prior year, a current year common-size balance sheet would most likely show
a(n):
A. increase in current assets.
B. increase in common stock.
C. decrease in current liabilities.

Question 14
An analyst collects the following information (in ¥ millions) for a company:

If there are no other current liabilities, compared with the industry average cash ratio of 0.4, the
company's cash ratio is most likely:
A. less than the industry average.
B. equal to the industry average.
C. greater than the industry average.

Question 15
An analyst collects the following selected financial statement items for a company:
Based on this information, and assuming straight-line depreciation, the estimated remaining
useful life of the company's noncurrent assets is closest to:
A. 3 years.
B. 13 years.
C. 16 years.

Question 16
An analyst gathers the following information about a company:
● In 20X1, the company borrowed using a 20-year mortgage.
● In May 20X3, the company received cash for services to be delivered in 20X5.
● In November 20X3, the company purchased inventory and will pay suppliers in February
20X4.
In 20X3, which of the following is most likely classified as a long-term liability?
A. The unearned revenue
B. The current portion of long-term debt
C. The debt payable from the inventory purchase

Question 17
An analyst evaluates the solvency of three companies and gathers the following information:

Based on the companies' financial leverage ratios, which company has the greatest ability to
meet long-term obligations?
A. Company X
B. Company Y
C. Company Z

Question 18
A bank examiner collects the following data:
Which company has the greatest value of assets?
A. Company X
B. Company Y
C. Company Z

Question 19
An analyst gathers the following information:

Based on the cash ratio, the company least able to meet its short-term obligations is:
A. Company X
B. Company Y
C. Company Z

Question 20
A company reports under US GAAP. The company's common-size balance sheet for 20X6 and
20X5 is listed below:
Assuming total assets remained the same from 20X5 to 20X6, which statement most accurately
describes what occurred during 20X6?
A. Working capital increased
B. The company made an acquisition
C. The financial leverage ratio decreased

Question 21
A company discloses its required depreciation expense for five years:

The company uses units of production to calculate depreciation expense. Based only on this
data, the company most likely expects an increase in:
A. unit cost.
B. net margin.
C. units produced.

Question 22
An analyst gathers the following selected information for a company:

Based on only this information, which of the following ratios most likely suggests decreased
financial risk in 20X5?
A. Cash ratio
B. Current ratio
C. Financial leverage ratio

Question 23
An analyst gathers the following information:

Based on this information, and assuming there are no other current assets, the company with
the largest quick ratio is most likely:
A. Company X
B. Company Y
C. Company Z