Which of the following is not true about common size financial statements?
A. Such statements are used to uncover data irregularities.
B. Such statements are constructed by calculating the percentage each line item of the income statement, balance sheet, and cash flow statement is of annual sales.
C. Such statements are useful for comparing businesses of different sizes in the same industry at different moments in time.
D. Common size statements applied over a number of consecutive periods may be used to determine if the target firm is deferring necessary spending.
E. Common size statements may be calculated for both quarterly and annual financial data.
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Which of the following is not true about generally accepted accounting principles (GAAP)?
A. GAAP provide specific guidelines as to how to account for specific events impacting the financial performance of the firm.
B. The scrupulous application GAAP accounting rules does ensure consistency in comparing one firm’s financial performance to another.
C. It is customary for definitive agreements of purchase and sale to require that a target company represent that its financial books are kept in accordance with GAAP.
D. GAAP guarantees that a firm’s financial books are accurate.
E. Differences between how a firm records actual financial transactions and how they should be recorded based on GAAP may indicate fraud or mismanagement.
Which of the following is not typically true of LBOs?
A. Managers are generally also owners
B. Most employees are given the opportunity to participate in profit sharing plans
C. The focus tends to be on improving operational efficiency though cost cutting and improving productivity
D. R&D budgets following the creation of the LBO are always increased significantly
E. All of the above
LBOs often exhibit very high financial returns during the years following their creation. Which of the following best describes why this might occur?
A. LBOs invariably improve the firm’s operating efficiency
B. LBOs tend to increase investment in plant and equipment
C. The only LBOs that are taken public are those that have been the most successful
D. LBOs experience improved decision making during the post-buyout period
E. None of the above
LBO investors must be very careful not to overpay for a target firm because
A. Major competitors tend to become more aggressive when a firm takes on large amounts of debt
B. High leverage increases the break-even point of the firm
C. Projected cash flows are often subject to significant error limiting the ability of the firm to repay its debt
D. A and B only
E. A, B, and C
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