Question 1

The asset turnover measure indicates how much effective resource management contributed to the firm's ROE.

Accepted Answer

The asset turnover ratio measures how efficiently a company is using its assets to generate revenue. A higher ratio indicates that the company is utilizing its assets more effectively, which can lead to higher profits and a higher ROE. Therefore, it can be inferred that effective resource management can contribute to a firm's ROE through a higher asset turnover ratio.

Question 2

A grocery store chain with a high current ratio but a low quick ratio probably does not have a serious liquidity problem and would likely have little trouble selling inventory to meet the obligations of current liabilities.

Accepted Answer

A high current ratio indicates that the company has enough current assets to cover its current liabilities, while a low quick ratio suggests that the company relies heavily on inventory to meet its short-term obligations. Therefore, the company could easily sell its inventory to generate cash and pay off its current liabilities without facing serious liquidity issues.

Question 3

Some analysts claim that the true value of ratio analysis is not that ratios answer our questions,but rather that they help us ask better questions.

Accepted Answer

Ratio analysis helps us to understand the financial performance of a company by comparing different financial metrics. However, its true value lies in helping us to ask better questions about a company's financial state and how it can be improved. By analyzing ratios and asking relevant questions, we can identify potential problem areas and take corrective actions. Therefore, ratio analysis is a tool to enhance our understanding of a company's financial health and identify areas for improvement.

Question 4

ROE is an important benchmark because it indicates the overall profits of a firm for a particular period relative to the shareholders' investment in the firm.

Accepted Answer

ROE (Return on Equity) is a ratio that shows how efficiently a company generates profits from the investments made by the shareholders. It is one of the essential benchmarks to evaluate a company's financial health as it indicates the profitability of the company in relation to shareholder investment.

Question 5

A "qualified" opinion from an auditor is preferred to an "unqualified" opinion in a firm's annual report.

Accepted Answer

This statement is incorrect. A "qualified" opinion implies that there are issues with the financial statements and may indicate a lack of compliance with accounting standards or regulations. An "unqualified" opinion is a positive statement from the auditor, indicating that the financial statements are accurate and comply with accounting standards. Therefore, an unqualified opinion is preferred over a qualified opinion.

Question 6

Because a firm's performance measures reflect past performance,these measures can NOT be used to assist in forecasting future financial statements.

Accepted Answer

While a firm's performance measures do reflect past performance, they can be used as a basis to assist in forecasting future financial statements by identifying trends, growth rates, and patterns that may continue into the future.

Question 7

The higher a firm's long-term-debt-to-capital ratio is,the LESS financial risk the firm is taking on.

Accepted Answer

The statement is false. The higher a firm's long-term-debt-to-capital ratio is, the more financial risk the firm is taking on. This is because the higher the ratio, the more heavily the firm is relying on debt to finance its operations, which increases the likelihood of financial distress if the firm is unable to make its debt payments.

Question 8

Which of the following statement i s NOT accurate? Financial statements serve a number of purposes:

Accepted Answer

This statement is not accurate. Financial ratios can be useful for analyzing financial performance regardless of whether they are based on book values or market values. In fact, market-based ratios like price-to-earnings (P/E) ratio and market-to-book (M/B) ratio can provide additional insights into a company's financial health.

Question 9

The interested reader of a firm's annual report will find which of the following to be of little value?

Accepted Answer

All of the items mentioned - Management's discussion and analysis of financial conditions, legal proceedings in which the firm is involved, and a description of the firm's operations and strategy - are important pieces of information for interested readers of an annual report. Therefore, none of the options listed are of little value.

Question 10

You have been provided financial statements for Bacon Signs.With this information you are able to calculate a number of financial ratios.However,financial ratios,while often very useful,alone are insufficient for a thorough financial analysis.Identify at least 5 types of useful financial information you would like to use in conjunction with the ratios you could calculate from the information provided.

Accepted Answer

The answer of You have been provided financial statements for...

Question 11

Common-size statements allow us to level the playing field by examining trends across time or among competitors by focusing on percentages.

Accepted Answer

Common-size statements use percentages to show trends across time or among competitors, which helps level the playing field by removing the differences in absolute values.

Question 12

The author presents the Return on Equity (ROE)as one of our most important benchmarks because it measures the return to the owners of the firm.because stockholders own the firm,maximizing their returns is considered an important goal.Use the DuPont method to de construct the ROE into three components and briefly discuss what information each provides to the total ROE value.

Accepted Answer

The answer of The author presents the Return on Equity...

Question 13

Public corporations are NOT required to publish annual reports.

Accepted Answer

Public corporations are required by law to publish annual reports and disclose financial information to the public. This is to promote transparency and accountability to shareholders and the public.

Question 14

________ measures such as debt-to-capital along with coverage ratios focus on a firm's ability to meet its long-term debt obligations,as well as its optimal use of debt.

Accepted Answer

Leverage measures focus on a firm's ability to meet its long-term debt obligations and its use of debt. Debt-to-capital ratio is a leverage ratio that measures the proportion of debt financing in a firm's capital structure. Coverage ratios measure a company's ability to meet its interest and principal payments on debt. Therefore, the best choice is leverage.

Question 15

If a firm has any long-term debt then its ROE will exceed its ROA.

Accepted Answer

This statement is true because ROE or Return on Equity is calculated by dividing net income by equity. When a firm has long-term debt, the equity is reduced by the amount of debt, which means the denominator is lower. This results in a higher ROE as compared to ROA (Return on Assets) which only takes into account the profitability of a firm's assets without factoring in the debt.

Question 16

The age of accounts receivable measures the average time between the firm's purchase of materials (assumed to be on credit)and its payment to the suppliers of those materials.

Accepted Answer

The age of accounts receivable measures the average time it takes for customers to pay their outstanding invoices, not the time between the firm's purchase of materials and its payment to suppliers.

Question 17

A firm's ________ contains key financial statements,management's insights about performance and additional financial details to aid in understanding financial statements.

Accepted Answer

An annual report typically includes a firm's financial statements (including the balance sheet, income statement, and statement of cash flows), as well as management's analysis and commentary on the firm's performance and financial position. It may also include additional financial details and information about the firm's operations, strategy, and risks.

Question 18

Explain how to create a common size income statement and a common size balance sheet.Provide at least three reasons why analysts find the creation of common size statements to be a useful practice.

Accepted Answer

The answer of Explain how to create a common size...

Question 19

Which of the following is likely to be a part of the firm's annual report?

Accepted Answer

All of the above are likely to be a part of the firm's annual report. The 10-K report provides a comprehensive summary of the company's performance and financials over the past year. A letter from senior management to the shareholders provides the company's perspective on its achievements, challenges, and future plans. Footnotes to the financial statements provide additional details and explanations on specific items in the financial statements.

Question 20

Generally speaking,a higher financial leverage ratio will result in an increase in a firms ROE and also reduce risk to shareholders.

Accepted Answer

A higher financial leverage ratio can increase a firm's Return on Equity (ROE) by amplifying profits, but it also increases financial risk to shareholders, not reduces it, because of the higher interest obligations and increased burden during downturns.

Quiz 4: Measuring Financial Performance