Question #49
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 46
Status: Incorrect
Correct Answer: B
Your Answer: B
Question
Charles Nicholls, chief investment officer of Gertmann Money Management, is reviewing the year-end financial statements of Zartner Canneries. In those statements he sees a sharp increase in inventories well above the sales-growth rate, and an increase in the discount rate for its pension liabilities. To determine whether or not Zartner Canneries is cooking the books, what should Nicholls do?
Answer Choices:
A. Analyze trends in Zartner’s receivables and consider the changing characteristics of its work force
B. Check Zartner’s cash-flow statement and review its footnotes
C. Calculate Zartner’s turnover ratios and review the footnotes of its competitors
Explanation
To assess the meaning of the inventory increase, look for declines in inventory turnover.
And if Zartner changes its pension assumptions, Nicholls should see how those new
assumptions compare to those found in the footnotes of financial statements from other
companies in the same industry.