Question 1

Which of the following is true of benchmarking?

Accepted Answer

Benchmarking is a process where a firm's performance is compared to that of its key competitors or other companies it wishes to emulate in order to identify areas where it can improve its performance. It involves analyzing a firm's ratio values and comparing them to the same ratios of other companies. Option A is incorrect because it describes fundamental analysis, not benchmarking. Option C is incorrect because it describes trend analysis, not benchmarking. Option D is incorrect because it describes ratio analysis, but not specifically benchmarking.

Question 2

Inflation can distort ________.

Accepted Answer

Inflation can cause an increase in the cost of inventory, which can distort the book value of inventory costs. This is because as the cost of goods increases due to inflation, the value of the inventory may be higher than what is recorded in the books. This can cause issues with accurate financial reporting and decision-making. Inflation does not generally have a direct impact on the market value of revenue or sales, or the book value of revenue.

Question 3

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

Differences in accounting treatments can lead to inconsistent and incomparable financial statements, which can distort the results of ratio analysis. This is true for both cross-sectional analysis (comparing ratios of different companies at a single point in time) and time-series analysis (comparing a company's ratios over different periods of time).

Question 4

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 5

________ 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. It is used to identify the relative strengths and weaknesses of different companies within the same industry or sector. Time-series analysis, on the other hand, involves comparing a firm's financial ratios over time, while marginal analysis looks at changes in a firm's financial ratios as output levels change. Technical analysis, meanwhile, is a method used in finance to predict future price levels based on past market data, and is not directly related to financial ratio analysis.

Question 6

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

Accepted Answer

Shareholders are mainly concerned with the risk and return of a firm, which will ultimately impact the value of their investment in the company. Profitability, leverage and liquidity are also important factors, but they are all ultimately tied back to risk and return.

Question 7

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 standard...

Question 8

The analyst should be careful when analyzing ratios that ________.

Accepted Answer

The right interpretation of the ratio value is crucial when analyzing ratios to ensure accurate analysis and decision-making. Pre-audited statements are not necessarily an issue as long as the analyst is aware of the limitations of unaudited statements. Comparing financial data that is not uniform or adjusting for inflation is also important in ratio analysis, but not as critical as ensuring the correct interpretation of the ratio value.

Question 9

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 looking at trends and patterns in the data over time. Break-even analysis is used to determine the point at which a company's revenue equals its expenses, while gap analysis is used to identify the difference between a company's current performance and its desired performance. Marginal analysis is used to analyze the costs and benefits of producing one additional unit of a product. Therefore, the best choice for analyzing a firm's financial performance over different years is time-series analysis.

Question 10

Market ratios only measure the risk.

Accepted Answer

Market ratios, such as price-to-earnings ratio and market-to-book ratio, do not only measure risk. They also provide insight into the valuation and performance of a company or industry.

Question 11

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 12

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 because they compare a company's financial data to another piece of data, such as another company, industry averages or previous financial periods. Ratios are not definitive or absolute because they can be interpreted in different ways and vary based on the context in which they are used. Gross ratios are a specific type of ratio that focus on the relationship between two specific accounts, such as cost of goods sold and revenue, and do not provide a broader picture of a company's performance.

Question 13

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

Accepted Answer

It is important for an analyst to consider multiple ratios and not focus on a single ratio to evaluate the overall performance of a firm. A narrow focus on any one ratio can be misleading and may not provide a complete picture of the company's financial health.

Question 14

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 or omissions that can affect the accuracy of the ratios calculated. Audited financial statements have been examined by an independent auditor and are considered more reliable for ratio analysis.

Question 15

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 16

Which of the following is a limitation of ratio analysis?

Accepted Answer

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

Question 17

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

Accepted Answer

Time-series analysis involves comparison of current to past performance and the evaluation of developing trends. This type of analysis is useful in determining whether a company's performance is improving, declining or remaining steady over time. By analyzing trend data, companies can identify areas where performance can be improved and take corrective action to address these issues. Time-series analysis is particularly useful in financial ratio analysis, forecasting and budgeting, and in the evaluation of key performance indicators.

Question 18

Cross-sectional ratio analysis is used to ________.

Accepted Answer

Cross-sectional ratio analysis is a tool used to compare the financial performance of a firm with that of its peers in the same industry. Therefore, it is used to measure relative performance of a firm with its peers.

Question 19

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

It is important for the financial statements to be dated at the same point in time during the year to avoid the influence of seasonal factors on the ratios being analyzed.

Question 20

Time-series analysis is often used to ________.

Accepted Answer

Time-series analysis involves analyzing data over time to identify trends and patterns. It is commonly used in economics, finance, and other fields to assess developing trends and make predictions based on past performance. Time-series analysis is not typically used to correct errors of judgment or evaluate the value of a firm or its assets, although it can be useful in certain applications. Standardization of results is not a primary objective of time-series analysis.

Quiz 3: Financial Statements and Ratio Analysis