Question

1/ Which one of the following steps adds the most value to a financial statement analysis?

a/ Determine the purpose of the analysis

b/ Develop conclusions

c/ Analyze and interpret the ratios

d/ Prepare common-size analysis

2/ In accounting terms, the different business activities that the firm engages in or the different geographic regions it does business in are referred to as

a/ operating activities.

b/ business segments.

c/ operating segments.

d/ operating divisions.

3/ The following data was taken from the accounting records of White Oleander Corporation:

	2020	2019
Total assets	$950,000	$850,000
Total liabilities	250,000	240,000
Preferred shares	75,000	75,000
Common shares	300,000	300,000
Retained earnings	325,000	235,000
Additional data:
Net income		140,000
Interest expense		25,000
Sales revenue		980,000

The return on equity for 2020 is

20.0%.

21.4%.

26.7%.

46.7%.

Answer 1

1. The correct answer should be C i.e. "Analyse and interpret the ratios"

Financial ratios are very powerful tools to perform some quick analysis of financial statements. Financial ratio analysis is a key part in financial statement analysis. They would help a long way to add the highest value to a financial statement analysis compared to the other options mentioned.

2. The correct answer is B i.e.Business segments.

A business segment is a part of a company that can be identified by the products it provides or by the services or geographical locations it operates in.

Whereas, Operating activities refer to the company's core business activities, such as manufacturing, distributing, marketing, and selling activities. An operating segment is a component of an entity that is a profit center and that has discrete financial information available. While operating divisions have been defined as divisions that are responsible for managing and executing the tasks allocated.

3. Return on Equity = (Net Income/ Shareholder's Equity) * 100

= 140,000/ (300,000 + 325,000 +75,000) * 100

= 20%