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Chapter 1 Assessment

Terms in this set (20)

The text presents a six-step analysis and valuation framework. Place these steps in the most appropriate chronological order:

A. Identify the strategies the firm pursues to gain and sustain a competitive advantage.

B. Analyze the current profitability and risk of the firm.

C. Value the firm.

D. Identify the economic characteristics and competitive dynamics of the industry in which the firm participates.

E. Assess the quality of the firm's financial statements and, if necessary, adjust them to more faithfully represent the underlying economics of the firm.

F. Prepare forecasted financial statements.
D, A, E, B, F, C
Porter's five forces framework suggests analyzing competition within an industry by focusing on the following five forces:
rivalry, threat of entrants, threat of substitutes, supplier power, and buyer power.
To be considered high quality, accounting information should
both be a fair and complete representation of the firm's economic performance, financial position, and risk; and provide relevant information to forecast the firm's expected future earnings and cash flows.
Which of the following asset and liability measurement methods is not acceptable under U.S. GAAP or IFRS?
a. Whatever feels right
b. Historical cost
c. Present value of future cash flows
d. Fair value based on current market value
a. Whatever feels right
GAAP and IFRS allow various treatments for revenue recognition. Which of the following correctly describes acceptable revenue recognition principles?
When the firm has completed all or substantially all of the revenue-generating processes by delivering goods or services to customers, and it is reasonable that it has generated an asset or satisfied a liability
Complete the following statement correctly. Cash flow
can arise from operating, investing, and financing activities.
The accrual method of accounting can be best described as
the method that aligns revenues and expenses with the appropriate period in which resources are generated and consumed.
Common-size financial statements are useful tools for
a. analyzing profit margins.
b. revealing relations between amounts for specific items in a financial statement and the relevant total for that statement.
c. showing the proportion of debt and equity financing used to finance the total assets of the firm.
d. All of these answer choices are correct.
d. All of these answer choices are correct
Percentage change financial statements are useful tools for
highlighting relative growth rates in financial statement amounts from one period to the next.
Empirical results in Nichols and Wahlen's study showed that
unexpected changes in earnings have a strong positive association with abnormal stock returns.
On a common size basis, which of the following assets is normally largest for a bank?
Cash and Marketable Securities
Which of the following would not appear as a liability on the balance sheet?
A purchase order
Which of the following assets would appear on the balance sheet at an amount greatly below its fair market value?
Patents
The accrual basis of accounting recognizes:
Revenue when performed
A value chain for an industry sets forth:
Sequence of activities involved in the creation, manufacture, and distribution of its products.
When attempting to identify the economic characteristics of the industry in which a particular firm participates an analyst might ask which of the following questions?
Are there barriers to entry?
What is the principal activity of security analysts?
To value firms.
Which strategy is used when a firm is attempting to create unique products or services for particular market?
A product differentiation strategy
Which two organizations are working together to harmonize financial reporting worldwide?
FASB and IASB
Why is the operating activities section of the statement of cash flows often believed to be the most important part of the statement?
Because it indicates a company's ability to generate cash from sales to meet current cash payments for goods or services.
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