Question 1

________ is where the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement.
A) Time-series analysis
B) Benchmarking
C) Combined analysis
D) None of the above

Accepted Answer

Benchmarking involves comparing a company's performance ratios to those of a key competitor or group of competitors to identify areas for improvement. Time-series analysis involves comparing a company's performance ratios to their own past performance, and combined analysis involves using both benchmarking and time-series analysis together.

Question 2

The comparison of a particular ratio to the standard (industry average) is made in order to isolate any deviations from the norm. In the case of ratios for which higher values are preferred, as long as the firm that is being analyzed has a value in excess of the industry average it can be viewed favorably.

Accepted Answer

A higher ratio than the industry average is not always favorable, as it may indicate inefficiencies or risks depending on the context of the ratio and the industry.

Question 3

The use of the audited financial statements for ratio analysis may not be preferable because there may be no reason to believe that the data contained in them reflect the firm's true financial condition.

Accepted Answer

Audited financial statements are reviewed and verified by independent auditors, which makes them a reliable source of data for ratio analysis. The purpose of auditing is to provide an opinion on whether the financial statements are free from material misstatements. Therefore, audited financial statements are preferred over unaudited financial statements for ratio analysis.

Question 4

Ratios provide a ________ measure of a company's performance and condition.
A) definitive
B) gross
C) relative
D) qualitative

Accepted Answer

Ratios provide a relative measure of a company's performance and condition by comparing different financial variables to one another. This enables analysts to better understand a company's financial position and make informed decisions. A definitive measure would be an exact value, while a gross measure is the total amount without any deductions. Qualitative measures are subjective and rely on opinions rather than objective data.

Question 5

Present and prospective shareholders and lenders pay close attention to the firm's degree of indebtedness and ability to repay debt. Shareholders are concerned since the claims of creditors must be satisfied prior to the distribution of earnings to them. Lenders are concerned since the more indebted the firm, the higher the probability that the firm will be unable to satisfy the claims of all its creditors.

Accepted Answer

This statement accurately reflects the concerns of both shareholders and lenders regarding a firm's level of indebtedness and ability to repay its debts.

Question 6

The analyst should be careful when evaluating a ratio analysis that
A) pre-audited statements are used.
B) the dates of the financial statements being compared are the same time.
C) neither A nor B.
D) both A and B.

Accepted Answer

The answer of The analyst should be careful when evaluating...

Question 7

The analyst should be careful when conducting ratio analysis to ensure that
A) the overall performance of the firm is not judged on a single ratio.
B) the dates of the financial statements being compared are the same.
C) audited statements are used.
D) the same accounting procedures were used.
E) all of the above.

Accepted Answer

All of the above choices are important considerations when conducting ratio analysis. A single ratio cannot provide a comprehensive assessment of a company's financial performance, so it is important to analyze multiple ratios. The dates of the financial statements being compared should be the same to ensure consistency. Audited statements are preferable as they have been reviewed by an independent party. The same accounting procedures should be used to maintain consistency in the calculations. Therefore, all of the choices are important for proper ratio analysis.

Question 8

________ evidence of the existence of a problem or outstanding management performance is provided by ratio analysis.
A) Conclusive
B) Inconclusive
C) Complete
D) Definitive

Accepted Answer

Ratio analysis can provide helpful information and insights, but it is not always conclusive or definitive evidence of a problem or outstanding management performance. Other factors and information should also be considered.

Question 9

To analyze the firm's financial performance, the following types of ratio analyses EXCEPT ________ may be used.
A) time-series analysis
B) cross-section analysis
C) combined analysis
D) marginal analysis

Accepted Answer

Time-series analysis, cross-section analysis, and combined analysis are all types of ratio analysis that can be used to analyze a firm's financial performance. Marginal analysis, however, is not a type of ratio analysis. Marginal analysis is a decision-making tool used to analyze the incremental costs and benefits of a specific decision. It is not specifically focused on a firm's financial performance.

Question 10

Both present and prospective shareholders are interested in the firm's current and future level of risk and return. These two dimensions directly affect share price.

Accepted Answer

Shareholders are interested in the firm's risk and return because it directly affects the share price. High levels of risk may deter some investors, while high levels of return may attract more investors, which can affect the demand and supply of shares and ultimately influence the share price.

Question 11

Inflationary effects typically have a greater impact the larger the differences in the age of the assets of the firms being compared. Without adjustment, inflation tends to cause older firms (with older fixed assets) to appear more efficient and profitable than newer firms (with newer fixed assets).

Accepted Answer

This statement is true. Inflation can cause older firms with older fixed assets to have a lower cost basis, resulting in higher profits and efficiency when compared to newer firms with newer fixed assets. Adjustments to account for inflation can help to level the playing field for comparisons between firms with different asset ages.

Question 12

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 variations in inventory and depreciation figures, which can affect the accuracy of ratio analysis. Therefore, the statement is true.

Question 13

Time-series analysis is often used to
A) assess developing trends.
B) correct errors of judgment.
C) reflect performance relative to some norm.
D) standardize results.

Accepted Answer

Time-series analysis is used to identify and understand trends in data over time. It can help in forecasting future trends and assessing the effectiveness of past actions. Time-series analysis does not correct errors of judgment, reflect performance relative to some norm, or standardize results.

Question 14

Cross-sectional ratio analysis is used to
A) correct expected problems in operations.
B) isolate the causes of problems.
C) provide conclusive evidence of the existence of a problem.
D) reflect the symptoms of a possible problem.

Accepted Answer

Cross-sectional ratio analysis helps to reflect the symptoms of a possible problem by comparing ratios of different companies in the same industry at the same point in time. While it can provide some indications of potential issues, it does not provide conclusive evidence or isolate causes of problems.

Question 15

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

The answer of In ratio analysis, the financial statements being...

Question 16

The primary concern of creditors when assessing the strength of a firm is the firm's
A) profitability.
B) leverage.
C) short-term liquidity.
D) share price.

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 and repay its debts.

Question 17

________ analysis involves the comparison of different firms' financial ratios at the same point in time.
A) Time-series
B) Cross-sectional
C) Marginal
D) Quantitative

Accepted Answer

Cross-sectional analysis compares the financial ratios of different firms at the same point in time. Time-series analysis involves comparing a firm's ratios over time, while marginal analysis looks at the change in a firm's ratios as output or sales change. Quantitative analysis is a broader term that can refer to any type of analysis that uses numerical data.

Question 18

In ratio analysis, a comparison to a standard industry ratio is made to isolate ________ deviations from the norm.
A) positive
B) negative
C) any
D) standard

Accepted Answer

In ratio analysis, comparisons are made to identify any deviations from the norm, whether positive or negative, to assess a company's performance relative to industry standards.

Question 19

Present and prospective shareholders are mainly concerned with a firm's
A) risk and return.
B) profitability.
C) leverage.
D) liquidity.

Accepted Answer

Present and prospective shareholders are mainly concerned with a firm's risk and return, meaning they want to know how much risk they are taking on with their investment and what returns they can expect to receive. Profitability, leverage, and liquidity are also important factors, but risk and return are the main priority for shareholders.

Question 20

________ analysis involves comparison of current to past performance and the evaluation of developing trends.
A) Time-series
B) Cross-sectional
C) Marginal
D) Quantitative

Accepted Answer

Time-series analysis involves comparing current performance to past performance and identifying trends over time. Cross-sectional analysis involves comparing data from different groups at a single point in time, while marginal analysis evaluates the impact of small changes in production or cost on overall performance. Quantitative analysis is a broad term that encompasses various statistical and mathematical methods used in business analysis.

Quiz 3: Financial Statements and Ratio Analysis

________ is where the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement.

The use of the audited financial statements for ratio analysis may not be preferable because there may be no reason to believe that the data contained in them reflect the firm's true financial condition.

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

The analyst should be careful when evaluating a ratio analysis that

The analyst should be careful when conducting ratio analysis to ensure that

________ evidence of the existence of a problem or outstanding management performance is provided by ratio analysis.

To analyze the firm's financial performance, the following types of ratio analyses EXCEPT ________ may be used.

Both present and prospective shareholders are interested in the firm's current and future level of risk and return. These two dimensions directly affect share price.

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.

Time-series analysis is often used to

Cross-sectional ratio analysis is used to

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.

The primary concern of creditors when assessing the strength of a firm is the firm's

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

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

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

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