NAME : RHEEIMA A/P HARI KRISHNAN

MATRICS NUMBER : A182088

Chapter 1 – A framework for business analysis and valuation using financial statements

Question 1.1 A lemons problem can arise when:

A. Investors lack the ability to interpret business opportunities.

B. Managers are more informed about the value of their business ideas than investors.
C. Communication from managers to investors is not entirely credible.
D. All of these choices.

Question 1.2 Which of the following is not a financial intermediary?

A. Bank.
B. Insurance company.
C. Financial news source.
D. Superannuation fund.

Question 1.3 Auditors and audit committees are examples of:

A. Regulatory intermediaries.
B. Information intermediaries.
C. Audit intermediaries.
D. Both information and regulation intermediaries.

Question 1.4 The Australian Securities Exchange (ASX) is an example of a/an:

A. Information intermediary.
B. Regulatory intermediary.
C. Financial intermediary.
D. Both a regulatory and financial intermediary.

Question 1.5 If a dispute arose between a buyer and a seller on a transaction involving a
shipment of grain, to where might the disgruntled party turn?

A. Financial intermediary.
NAME : RHEEIMA A/P HARI KRISHNAN
MATRICS NUMBER : A182088
B. Regulatory intermediary.
C. Transaction intermediary.
D. Information intermediary.

Question 1.6 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 1.7 What does the efficient market hypothesis state about asset prices?

A. The price of an asset is set to a level where all market participants can afford to
purchase it.
B. Markets are only efficient when they have regulatory and financial intermediaries.
C. All available information is incorporated and reflected in the price of the asset.
D. Investors can use the market to efficiently trade new information and earn a riskless
profit.

Question 1.8 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 1.9 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.
NAME : RHEEIMA A/P HARI KRISHNAN
MATRICS NUMBER : A182088

Question 1.10 A firm sells a pallet of goods to a customer who has yet to pay with cash. If
the firm recognises this as revenue in their financial statements, this would be an example
of:

A. Cash accounting.
B. Accrual accounting.
C. Cost accounting.
D. Revenue accounting.

Question 1.11 Why would a manager use accounting discretion to distort financial
information?

A. To increase their bargaining power in negotiating a debt contract.

B. To achieve a bonus which is tied to accounting performance in the form of profit.
C. Because they lack objectivity in assessing accounting estimates.
D. All of these choices.

Question 1.12 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 1.13 Which of the following would be a drawback of an accounting standard?

A. A reduction in the flexibility for managers to communicate complex economic

transactions in which they have substantial knowledge.
B. Increased comparability between organisations and time periods.
C. Similar economic transactions are recorded in a consistent manner where
management have substantial knowledge.
D. All of these choices.
NAME : RHEEIMA A/P HARI KRISHNAN
MATRICS NUMBER : A182088
Question 1.14 Disclosure requirements are usually prescribed at which level by accounting
regulations?

A. Maximum disclosure requirements.

B. Minimum disclosure requirements.
C. Voluntary disclosure requirements.
D. Both voluntary and minimum disclosure requirements.

Question 1.15 Why might a firm not voluntarily disclose sensitive information regarding the
operations of a business?

A. Because they are restricted from voluntarily disclosing this sort of information due to
accounting regulations.
B. They may not want to damage their competitive position.
C. They believe they have already reached the maximum disclosure requirements
allowed due to accounting regulations.
D. None of these choices.

Question 1.16 Which of the following is not one of the ways that the financial quality of data
is improved by auditing?

A. Auditors try to ensure that accounting estimates are reasonable .

B. Auditing verifies the integrity of financial statements.
C. Auditing ensures that accounting rules and conventions are not used consistently
over time.
D. All of these choices.

Question 1.17 An auditor argues with a standard setter about a new standard that makes
auditing certain transactions difficult. This is an example of:

A. Independent auditing.
B. Third-party auditing.
C. Internal auditing.
D. Legal auditing.
NAME : RHEEIMA A/P HARI KRISHNAN
MATRICS NUMBER : A182088
Question 1.18 Why might an investor discount a firm’s accounting performance?

A. In order to undo any accounting distortions.

B. In order to make a precise assessment of the firm’s accounting performance.
C. Because accounting distortions cannot be completely undone.
D. None of these.

Question 1.19 The business strategy analysis would be the:

A. Fourth step in analysing a firm.

B. First step in analysing a firm.
C. Second step in analysing a firm.
D. Third step in analysing a firm.
E. It does not matter when the business strategy analysis is conducted.

Question 1.20 Undoing accounting distortions is an example of:

A. Financial analysis.
B. Accounting analysis.
C. Prospective analysis.
D. Business strategy analysis.

Question 1.21 Analysing ratios is a typical example of conducting a:

A. Financial analysis.
B. Accounting analysis.
C. Prospective analysis.
D. None of these choices.

Question 1.22 Prospective analysis is the:

A. First step in a business analysis.

B. Second step in a business analysis.
C. Third step in a business analysis.
D. Fourth step in a business analysis.
NAME : RHEEIMA A/P HARI KRISHNAN
MATRICS NUMBER : A182088

Question 1.23 Making a prediction about the future performance of a firm is an example of:

A. Financial analysis.
B. Business strategy analysis.
C. Accounting analysis.
D. None of these choices.

Question 1.24 Which of the following are two commonly used financial tools when
conducting a financial analysis?

A. Undoing distortions and identifying areas of accounting flexibility.

B. Business risk and profit drivers.
C. Ratio analysis and cash flow analysis.
D. Valuation and financial statement forecasting.