Question 1

Analysis of financial statements involves the comparison of a business's performance with that of other businesses in different industries

Accepted Answer

Analysis of financial statements involves the comparison of a business's performance with its own historical performance or with industry benchmarks in the same industry, not necessarily with businesses in different industries.

Question 2

Financial statement analysis helps business to correct its weaknesses and capitalize on its strengths.

Accepted Answer

Financial statement analysis allows businesses to identify areas of weakness in their operations, such as low profitability or inefficient use of assets, which can be addressed to improve the company's overall financial health. It also helps businesses identify their strengths, such as high profitability or strong cash flow, and leverage these advantages to further grow and succeed.

Question 3

Working capital is a ratio measure of long-term financial position.

Accepted Answer

Working capital is not a ratio measure, but rather a measure of a company's short-term financial liquidity. It is calculated by subtracting current liabilities from current assets.

Question 4

The Debt/Asset ratio is a measure of current financial performance

Accepted Answer

The debt/asset ratio is a financial ratio that indicates a company's leverage by comparing its total liabilities to its total assets. It is considered a measure of current financial performance because it shows the percentage of a company's assets that are financed through debt. A higher debt/asset ratio indicates that a company has more debt relative to its assets, which can be a cause for concern as it suggests a higher risk of default or bankruptcy.

Question 5

A high Debt/Equity ratio (D/E ratio) indicates that creditors are financing most of a business's operations.

Accepted Answer

A high D/E ratio means that a company has more debt than equity, indicating that it relies heavily on borrowing to finance its operations, hence, the creditors are financing most of the business's operations.

Question 6

In?come-statement ratios provide information on current operating performance and effi?ciency.

Accepted Answer

Income statement ratios such as gross profit margin, operating profit margin, net profit margin, and return on assets provide insights into a company's current operating performance and efficiency.

Question 7

The operating-expense ratio is calculated by dividing total operating expenses by net profit.

Accepted Answer

The operating-expense ratio is calculated by dividing total operating expenses by total revenue, not net profit.

Question 8

Inventory turnover calculates the number of times, on average, inventory is replaced during the year.

Accepted Answer

Inventory turnover is a ratio that measures how quickly a company sells its inventory and replaces it with new inventory. It is calculated by dividing the cost of goods sold by the average inventory during a period. The resulting number represents the number of times, on average, inventory is replaced during the year.

Question 9

ROA or the Rate of Return on Assets helps a venture owner to understand how management is performing with the resources available

Accepted Answer

ROA is a financial metric that evaluates how efficient a company is in generating profits from its assets. It measures the amount of net income earned per dollar of assets. By calculating ROA, a business owner can determine how effectively the resources are managed by the management team.

Question 10

A Z-score above 2.99 could be a sign that the business is heading towards bankruptcy.

Accepted Answer

A Z-score above 2.99 is considered a safe zone and indicates that the business is financially healthy. A Z-score below 1.80 indicates that the business may be heading towards bankruptcy.

Question 11

Current assets - Current Liabilities = ____________

Accepted Answer

The formula given (Current assets - Current liabilities) calculates working capital, which is a measure of a company's ability to cover its short-term expenses. A higher working capital indicates that the company has more cash and/or other current assets on hand to cover current liabilities, which is generally seen as a positive sign of financial health. Choices A, B, and D all involve other ratios that are calculated differently, and do not directly relate to the given formula.

Question 12

[Current Assets (Less Inventory & Prepaid Expenses) ] / Current liabilities = ___________

Accepted Answer

The calculation given is for the acid-test ratio, which measures a company's ability to pay off its current liabilities with its most liquid assets (i.e. those that can be easily converted to cash). The formula for the acid-test ratio is (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities.

Question 13

Total Operating Expenses / Net Sales = ____________

Accepted Answer

The formula provided is for operating-expense ratio, which is a measure of a company's operating efficiency. It expresses the percentage of net sales that is consumed by operating expenses. Therefore, the best choice would be B.

Question 14

Operating Income / Annual Financial Expense = _______________

Accepted Answer

Operating Income divided by Annual Financial Expense gives the number of times interest earned, also known as the interest coverage ratio. This ratio is a measure of a company's ability to pay its interest expenses on its outstanding debt. The higher the ratio, the better the company’s ability to cover its interest expenses.

Question 15

Cost of Goods Sold / Average Inventory = ________________

Accepted Answer

The formula for Cost of Goods Sold / Average Inventory is used to calculate the inventory turnover ratio. This ratio measures how many times a company's inventory is sold and replaced over a certain period of time. A higher inventory turnover ratio is generally desirable as it means the company is efficiently selling inventory and replenishing it.

Question 16

Average number of days to inventory turnover = _______________

Accepted Answer

The average number of days to inventory turnover is calculated by dividing the days in a year (usually 365) by the inventory turnover ratio. This formula gives the average number of days it takes for a company to sell through its inventory.

Question 17

Net Sales / Average accounts receivable = ____________

Accepted Answer

Net Sales / Average accounts receivable is used to calculate the accounts receivable turnover, which measures the number of times a company collects its accounts receivable balance throughout the year.

Question 18

Operating Income / Average Assets = _______________

Accepted Answer

This formula represents the rate of return on total assets (ROA), which measures the efficiency of a company in generating profits from its assets. It shows how much operating income is generated for every dollar of average assets held by the company. A higher ROA indicates better profitability and asset utilization.

Question 19

The primary budget for a new venture, from which all other budgets flow, is known as the _____

Accepted Answer

The sales budget is considered the primary budget for a new venture because it outlines the expected sales revenue, which serves as the foundation for all other financial planning and budgeting activities within the company. All other budgets, such as the production, purchasing, and labor budgets, are developed based on the sales forecast.

Question 20

In a Cash Budget, usually a business will estimate its needs for a ___________ day period and then determine how much money it is likely to collect during this time.

Accepted Answer

The answer of In a Cash Budget, usually a business...

Quiz 9: Financial Analysis: The Gauges