Exercise

Answer the following questions.

1. In fundamental stock analysis, the _____ is a snapshot of a company’s financial condition at a point in time, whereas the _____ shows the results of the company’s earnings and expenses over a particular period of time.

I. Income statement

II. Pro forma

III. Quick ratio

IV. Balance sheet

A. I, IV

B. II, IV

C. IV, I

D. III, II

2. In a typical income statement, which of the following items is not deducted from gross revenues to arrive at operating income?

A. Taxes

B. Selling, general, and administrative expenses

C. Depreciation and amortization

D. Cost of goods sold

3. A fundamental analyst is typically least interested in which of the following?

A. EPS

B. Cash flow

C. Performance of the S&P 500

D. P/E ratio

4. All of the following items are reported to the IRS on a corporation’s tax return, as well as being found on the company’s income statement except:

A. Sales

B. Cost of goods sold

C. Pre-tax income

D. Owner’s equity

5. What is the earnings per share of ABC Corporation, which reported before tax and interest earnings of $13,000,000; net income of $10,000,000; preferred dividends to be paid of $1,000,000; 5,000,000 issued shares of stock; and 3,000,000 outstanding shares of stock?

A. $10

B. $4

C. $3

D. $2

Answers

1. C. Income statements are always stated for a time period, whereas balance sheets are stated as of a particular date.

2. A. Taxes are the last item deducted, comprising the difference between pre-tax income and net income after tax.

3. C. A fundamental analyst is most concerned with the “fundamentals” of the company itself, such as the P/E ratio, EPS, and cash flow, and much less about the day-to-day activity of the stock or the market at large. In contra