Question

1) All of the following are “red flags” when analyzing the quality of a company’s earnings except for:

	a.	Lower gross profit margin
	b.	Downward trend in administrative expenses
	c.	Downward trend in revenue growth
	d.	Lower research and development expenses (R&D)

2) What of the following data are important when analyzing a company?

(1) Income statement

(2) Balance sheet

(3) Statement of cash flows

(4) Footnotes to the financial statements

	a.	3 and 4
	b.	1 and 2
	c.	1, 2 and 3
	d.	1, 2, 3 and 4

3) The ABC Corporation achieved annual net profit margins of 3.5% in 2005, 3.75% in 2006, and 4.2% in 2007. Which of the following statements is incorrect?

	a.	The trend in net profits over the three-year period is positive
	b.	The annual growth rate in net profit margins is higher in the most current fiscal period than in the previous period
	c.	The annual earnings growth rate in 2006 is 6.7%
	d.	The annual earnings growth rate in 2007 is 12.0%

Answer 1

1. All of the following are “red flags” when analyzing the quality of a company’s earnings except for:

ANSWER : b : downward trend in administrative expenses

explanation : All other factors are directly connected with quality of earnings. Administrative expenses has nothing to do with the question. so it is only one which is not applicable

2. What of the following data are important when analyzing a company?

ANSWER : d : 1,2 3 AND 4

explanation : when any company is analyzed, we use balancesheet and P&L as it provides all data for analysis. but with that company's cash position is known by using cashflow statement & footnotes give an important indication about what policies are followed and what are the implications from it. so all are important

3

The ABC Corporation achieved annual net profit margins of 3.5% in 2005, 3.75% in 2006, and 4.2% in 2007. Which of the following statements is incorrect?
ANSWER : a : Trend in net profit over three year period is positive explanation: we dont the profit in dollar terms, so we can not say profit trend was positive rest are correct answers.