Question #10 - Reading 13 Integration of Financial Statement Analysis Techniques

Reading: Reading 13 Integration of Financial Statement Analysis Techniques

PDF File: Reading 13 Integration of Financial Statement Analysis Techniques.pdf

Page: 6

Status: Incorrect

Correct Answer: A

Your Answer: B

Shared Context

- Based on her calculations of accruals, Howard believes that NetPhoto has a higher accruals ratio over the recent past compared with SnapPrints. If both companies have recently had extreme earnings, Howard would most likely conclude that: A) NetPhoto’s income will revert to its mean more quickly than SnapPrints’. B) SnapPrints’ income will revert to its mean more quickly than NetPhoto’s. C) SnapPrints’ income will revert to its mean, but NetPhoto’s income will not.

Question

Based on the revenue and cash collections data for SnapPrints and NetPhoto, Howard would most likely conclude that:

Answer Choices:

A. NetPhoto is accelerating revenue

B. SnapPrints is misclassifying nonrecurring and nonoperating revenue

C. SnapPrints is accelerating revenue

Explanation

Typically, the ratio of revenue to cash collections is relatively stable. If a firm's ratio is increasing significantly over time (as NetPhoto's is), the firm may be accelerating revenue recognition through aggressive accounting methods. Comparative Revenue / Cash Collections by Firm 2009 2008 2007 2006 SnapPrints 105% 98% 101% 104% NetPhoto 200% 125% 135% 107%

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