Question 1

If a firm has high current and quick ratios, this always is a good indication that a firm is managing its liquidity position well.

Accepted Answer

High current and quick ratios indicate that a firm has more short-term assets relative to its short-term liabilities, which suggests good liquidity. However, excessively high ratios may also indicate that the firm is not using its assets efficiently or is under-leveraged, which could be a sign of poor financial management.

Question 2

Market value ratios provide management with a current assessment of how investors in the market view the firm's past performance and future prospects.

Accepted Answer

Market value ratios, such as price-to-earnings ratio and market-to-book ratio, reflect the market's perception of a company's financial performance and future growth prospects. Therefore, they can provide useful insights for management in assessing the market's valuation of the company.

Question 3

As long as sales revenues exceed all costs over part of an accounting period, a firm will avoid any cash shortage.

Accepted Answer

While sales revenues exceeding costs is certainly a positive sign for a firm and can contribute to its overall financial stability, cash flow can still be affected by other factors such as timing of payments, inventory management, and debt obligations. It is possible for a firm to experience cash shortages even if sales revenues exceed costs for a portion of the accounting period.

Question 4

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations.

Accepted Answer

Profitability ratios, such as return on assets (ROA) and return on equity (ROE), take into account the efficiency of an organization's use of assets and financing to generate earnings. Therefore, they reflect the impact of liquidity, assets, and debt management on the company's operations.

Question 5

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

Accepted Answer

The statement is true. Debt management ratios are financial ratios that indicate the extent to which a company uses debt financing to generate returns for its owners.

Question 6

The retained earnings account on the balance sheet does not represent cash and in fact, represents a claim against the existing assets of the firm.This implies that retained earnings are in fact the reinvested earnings of stockholders.

Accepted Answer

Retained earnings represent the portion of net income that has not been paid out as dividends and is instead reinvested back into the company by the stockholders. As a result, it is a claim against the assets of the company but does not represent cash on hand.

Question 7

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

Accepted Answer

A decline in the inventory turnover ratio suggests that the firm is taking longer to sell its inventory, which can be a sign of poor liquidity, as it may be tying up cash in inventory that is not being sold quickly. Therefore, a higher inventory turnover ratio indicates better liquidity.

Question 8

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.

Accepted Answer

The inventory turnover ratio and days sales outstanding (DSO) are indeed two ratios that are useful in measuring how well a company is managing its assets based on its current and projected operating levels.

Question 9

Funds supplied by common stockholders mainly include capital stock, paid-in capital, and retained earnings, while total equity is comprised of common equity plus preferred stock.

Accepted Answer

Capital stock, paid-in capital, and retained earnings are all forms of funding provided by common stockholders. Total equity includes common equity (which includes common stock and retained earnings) and preferred stock.

Question 10

The financial position of companies whose business is seasonal can be dramatically different depending upon the time of year chosen to construct financial statements.This time sensitivity is especially true with respect to the firm's balance sheet.

Accepted Answer

Seasonal businesses may experience significant fluctuations in assets such as inventory and accounts receivable depending on the time of year. This can have a significant impact on the company's balance sheet and overall financial position. Therefore, it is important to consider the seasonality of a business when analyzing its financial statements.

Question 11

In order to accurately estimate cash flow from operations, depreciation must be added back to net income.The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.

Accepted Answer

Depreciation is a non-cash expense, meaning it does not involve an actual outflow of cash. Therefore, it must be added back to net income when calculating cash flow from operations.

Question 12

Even if a stock split has no information content, and even if the dividend per share adjusted for the split does not increase, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Accepted Answer

While a stock split may not have any direct impact on the company's financials or the value of an individual shareholder's holdings, it can make the stock more affordable and appealing to a wider range of investors, potentially increasing demand for the stock and driving up its price in the short term. However, any such benefit is typically small and short-lived, and the long-term value of the stock will ultimately depend on the company's performance and fundamentals.

Question 13

The time dimension is important in financial statement analysis.While the balance sheet and income statements represent the firm's financial position at a point in time, the statement of cash flows reports changes that were made to the firm's accounts over a period of time.

Accepted Answer

The answer of The time dimension is important in financial...

Question 14

The times-interest-earned ratio is one indication of a firm's ability to meet both long-term and short-term obligations.

Accepted Answer

The times-interest-earned ratio measures a company's ability to cover its interest payments with its earnings before interest and taxes (EBIT). This ratio can provide insight into a company's ability to meet its long-term debt obligations and also indicates its capacity to pay its short-term interest expenses.

Question 15

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements.Trend analysis is one method of measuring a firm's performance over time.

Accepted Answer

Trend analysis involves comparing financial data from multiple periods to identify patterns and trends in a firm's performance. This method allows for a deeper understanding of whether a firm's financial position is improving or deteriorating.

Question 16

Differences in cash flow cycles and variations in accounting methods among firms can invalidate financial comparisons between firms.

Accepted Answer

Cash flow cycles and accounting methods can significantly affect financial statements of different firms, making comparisons between them invalid. Therefore, it is important to consider these factors before making any financial decisions.

Question 17

Retained earnings is the cash that has been generated by the firm through its operations which has not been paid out to stockholders as dividends.Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm.

Accepted Answer

The answer of Retained earnings is the cash that has...

Question 18

Since ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

Accepted Answer

Two firms with the same EBIT may have different ROA if they have different levels of assets. ROA is calculated as EBIT divided by total assets, so if one firm has more assets than the other, its ROA will be lower even if EBIT is the same.

Question 19

In accounting, emphasis is placed on determining net income.In finance, the primary emphasis also is on net income because that is what investors use to value the firm.However, a secondary consideration is cash flow because that's what is used to run the business.

Accepted Answer

In finance, the primary emphasis is on cash flow because it determines a firm's ability to fund operations, invest, and return value to shareholders. Net income is important but considered secondary because it is an accounting measure that can be influenced by non-cash items.

Question 20

A stock dividend and a stock split should, at least conceptually, have the same effect on shareholders' wealth.

Accepted Answer

Both a stock dividend and a stock split increase the number of shares outstanding without changing the overall value of the company. As a result, each shareholder's ownership percentage and overall wealth in the company should remain the same.

Quiz 7: Analysis of Financial Statements