Question 1

________ analysis involves comparison of current to past performance and the evaluation of developing trends.

Accepted Answer

Time-series analysis involves comparing current performance to past performance and identifying developing trends over time. This is particularly useful for evaluating the effectiveness of business strategies and forecasting future performance. Cross-sectional analysis, on the other hand, involves comparing data from different groups or categories at a point in time. Marginal analysis involves examining the incremental or additional costs and benefits of a particular decision or action. Break-even analysis involves identifying the point at which a company's revenue equals its total costs and expenses. While all four types of analysis can be useful in business decision-making, time-series analysis is the best choice for evaluating developing trends over time.

Question 2

The analyst should be careful when analyzing ratios that ________.

Accepted Answer

Proper interpretation of ratio values is crucial for accurate analysis. The analyst should understand the financial data being used and ensure that it is consistent across the firms being compared to make informed decisions. Pre-audited statements may have errors that could affect the ratios, and inflation must be accounted for while comparing data across different periods.

Question 3

Profitability ratios capture both risk and return.

Accepted Answer

Profitability ratios primarily measure a company's ability to generate earnings relative to its revenue, assets, or equity, focusing on return rather than risk.

Question 4

The use of the unaudited financial statements for ratio analysis is preferable because it reflects the firm's true financial condition.

Accepted Answer

Unaudited financial statements may contain errors, omissions, or misstatements. Audited financial statements are reviewed and verified by independent, objective auditors, ensuring the accuracy and reliability of the financial information. Therefore, audited financial statements are preferred for ratio analysis as they provide a more reliable and accurate reflection of the firm's financial condition.

Question 5

An analyst should be careful when conducting ratio analysis to ensure that ________.

Accepted Answer

It is important for an analyst to not solely rely on a single ratio to judge the overall performance of a firm. They should consider a range of ratios and other factors before reaching a conclusion.

Question 6

In ratio analysis, the financial statements being used for comparison should be dated at the same point in time during the year. If not, the effect of seasonality may produce erroneous conclusions and decisions.

Accepted Answer

Comparing financial statements from different time periods can be misleading due to seasonal fluctuations in business operations. To accurately analyze and compare financial ratios, the statements should be taken from the same point in time during the year.

Question 7

Market ratios only measure the risk.

Accepted Answer

Market ratios do not only measure risk. They also measure market valuations, profitability, and efficiency, among other factors.

Question 8

The primary concern of creditors when assessing the strength of a firm is its ________.

Accepted Answer

Creditors are primarily concerned with a firm's short-term liquidity because it indicates the firm's ability to meet its short-term obligations, including debts due in the near future.

Question 9

Which of the following is a limitation of ratio analysis?

Accepted Answer

The answer of Which of the following is a limitation...

Question 10

Which of the following is used to analyze a firm's financial performance over different years?

Accepted Answer

Time-series analysis is used to analyze a firm's financial performance over different years by comparing data from different time periods to identify trends, patterns or changes over time. This analysis helps the firm to understand the growth or decline of financial performance, and to adjust their strategies and make informed decisions accordingly. Break-even analysis, gap analysis and marginal analysis are used to analyze specific aspects of a firm's financial performance, but they do not provide an overview of performance over time.

Question 11

Cross-sectional ratio analysis is used to ________.

Accepted Answer

Cross-sectional ratio analysis is used to measure the relative performance of a firm with its peers. It involves comparing a company's ratios to industry averages to see how well it is performing in comparison to its competitors. It does not necessarily correct or isolate problems but rather helps identify areas where a company may need to improve to remain competitive. It also does not provide conclusive evidence of the existence of a problem, as further analysis may be needed to determine the root cause of any issues identified through ratio analysis.

Question 12

The liquidity of a firm is measured by its ability to satisfy its short-term obligations as they come due.

Accepted Answer

The answer of The liquidity of a firm is measured...

Question 13

The use of differing accounting treatments-especially relative to inventory and depreciation-can distort the results of ratio analysis, regardless of whether cross-sectional or time-series analysis is used.

Accepted Answer

Differing accounting treatments can lead to different valuation of inventory and different depreciation methods, which in turn can affect the results of ratio analysis and make it difficult to compare across different companies or time periods. Therefore, it is important to consider the accounting policies and methods used in preparing financial statements when conducting ratio analysis.

Question 14

________ analysis involves the comparison of different firms' financial ratios at the same point in time.

Accepted Answer

Cross-sectional analysis involves comparing the financial ratios of different firms at the same point in time, whereas time-series analysis involves comparing a firm's financial ratios over different points in time, and marginal analysis involves examining the incremental changes in a firm's financial ratios. Technical analysis is a method used to forecast future stock prices based on past market data.

Question 15

Inflation can distort ________.

Accepted Answer

Inflation can result in an increase in prices over time, which can distort the book value of inventory costs. This is because the cost of production and acquisition may have increased due to inflation, but the book value of inventory may not have been adjusted accordingly. As a result, the value of inventory on the balance sheet may not represent the actual cost of inventory in the current market.

Question 16

Present and prospective shareholders are mainly concerned with a firm's ________.

Accepted Answer

Shareholders are most concerned with the risk and return of a firm since they want to make sure that their investment is profitable, but also that it is not too risky. Profitability, leverage, and liquidity are also important factors, but they are more relevant to the firm's management and lenders.

Question 17

Time-series analysis is often used to ________.

Accepted Answer

Time-series analysis is a statistical technique that is used to analyze and identify patterns in data gathered over time. It helps to assess trends, patterns, and changes in data over a specified time period. Therefore, option A is the best choice.

Question 18

Which of the following is true of benchmarking?

Accepted Answer

Benchmarking is a process in which a firm compares its performance with that of its competitors or firms it wishes to emulate. This is typically done by comparing financial ratios such as profitability, liquidity, and efficiency ratios. Option A refers to fundamental analysis, option C refers to trend analysis, and option D refers to ratio analysis techniques but does not specifically describe benchmarking.

Question 19

In ratio analysis, a comparison to a standard industry ratio is made to isolate ________ deviations from the norm.

Accepted Answer

The answer of In ratio analysis, a comparison to a...

Question 20

Ratios provide a ________ measure of a company's performance and condition.

Accepted Answer

Ratios provide a relative measure of a company's performance and condition as they compare different elements of a company's financial statements to give a better understanding of its financial situation. Ratios cannot provide a definitive or absolute measure as they are dependent on the context and industry norms, and are not a gross measurement.

Quiz 3: Financial Statements and Ratio Analysis