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45. An analyst finds information about significant uncertainties affecting a company’s liquidity, capital resources and results of operations in the:

A. notes to the financial statements.
B. balance sheet and income statement.
C. management discussion and analysis.

Answer: C
“Financial Statement Analysis: An Introduction,” Thomas R. Robinson, CFA, Jan Hennie van Greuning, CFA, Elaine Henry, CFA, and Michael A. Broihahn, CFA
2009 Modular Level I, Volume 3, p.18
Study Session 7-29-c Discuss the importance of financial statement notes and supplementary information, (including disclosures of accounting methods, estimates and assumptions) and management’s discussion and analysis. Management must highlight any favorable and unfavorable trends and identify significant events and uncertainties that affect the company’s liquidity, capital resources and results of operations in the management discussion and analysis (MD&A).

46. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted. Which of the following is least likely to be classified as a financial statement element?

A. Asset.
B. Revenue.
C. Net income.

Answer: C
“Financial Reporting Mechanics,” Thomas R. Robinson, CFA, Hennie van Greuning, CFA, Karen O’Connor Rubsam, CFA, Elaine Henry, CFA, and Michael A. Broihahn, CFA 2009 Modular Level I, Volume 3, pp.35-38
Study Session 7-30-b Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements.
Net income is not an element of the financial statements, but the net result of revenues less expenses. The elements are: assets, liabilities, owners’ equity, revenue and expenses.

47. An analyst prepares common-size balance sheets for two companies operating in the same industry. The analyst notes that both companies had the same proportion of current liabilities, long-term liabilities, and shareholders’ equity and the following ratios:

	Company 1	Company 2
Current ratio	2.0	2.0
Cash ratio	0.3	0.3
Quick ratio	0.5	0.8

The most reasonable conclusion is that, compared with Company 2, Company 1had a:

A. higher percentage of assets associated with inventory.
B. higher percentage of assets associated with accounts receivable.
C. lower percentage of assets associated with marketable securities.

Answer: A
“Financial Analysis Techniques,” Thomas R. Robinson, CFA, Hennie van
Greuning, CFA, Elaine Henry, CFA, and Michael A. Broihahn CFA 2009 Modular Level I, Volume 3, pp.490-491, 506-509
“Working Capital Management,” Edgar A. Norton, Jr., CFA, Kenneth L.
Parkinson, and Pamela P. Peterson, CFA 2009 Modular Level I, Volume 4, pp. 87-88
Study Session 10-39-a, c, 11-46-a Evaluate and compare companies using ratio analysis, common-size financial statements, and charts in financial analysis.
Calculate, classify, and interpret activity, liquidity, solvency, profitability, and valuation ratios.
Calculate and interpret liquidity measures using selected financial ratios for a company and compare it with peer companies.
The current ratio includes inventory but the quick ratio does not. (Current ratio is higher than quick ratio and quick ratio is higher than cash ratio.) The quick ratio includes accounts receivable but the cash ratio does not. The denominator for all three ratios is current liabilities, which are the same proportion for both companies. The difference in ratios is therefore created by inventory and accounts receivable. Company 1 has the higher percentage of inventory because the difference between the current ratio and quick ratio is greater for that company. Company 2 had the higher percentage of accounts receivable because the difference between the quick ratio and the cash ratio is greater for Company 2.