Question 1

The inventory turnover and current ratio are related.The combination of a high current ratio and a low inventory turnover ratio,relative to industry norms,suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Accepted Answer

A high current ratio indicates that the firm has enough current assets to cover its current liabilities. However, a low inventory turnover ratio suggests that the company is not selling its inventory quickly enough. This combination can indicate that the firm is holding onto too much inventory, potentially including obsolete or damaged goods.

Question 2

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Accepted Answer

Market value ratios such as price-to-earnings and price-to-sales ratios are used by investors to assess a company's future growth potential, which in turn provides management with an idea of how the market perceives their past performance and future prospects.

Question 3

Since the 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 can have different ROAs if they have different asset bases. ROA is calculated as EBIT divided by total assets, so if one firm has a larger asset base, its ROA will be lower even with the same level of EBIT.

Question 4

High current and quick ratios always indicate that a firm is managing its liquidity position well.

Accepted Answer

High current and quick ratios are important indicators of a firm's liquidity position, but they do not always guarantee that a firm is managing its liquidity well. Other factors such as cash flow management, debt levels, and inventory control are also important considerations. Furthermore, a high current or quick ratio may indicate that a firm is holding excess cash or not investing in growth opportunities, which could negatively impact its long-term financial performance.

Question 5

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if all the firms being compared have the same proportion of fixed assets to total assets.

Accepted Answer

The answer of It is appropriate to use the fixed...

Question 6

Current ratio and quick ratio both help us measure the firm's liquidity.The current ratio measures the relationship of a firm's current assets to its current liabilities,while the quick ratio subtracts inventory from other current assets.

Accepted Answer

This statement is true as it accurately describes the difference between the current ratio and quick ratio. The current ratio includes all current assets in the calculation while the quick ratio only includes quick assets, which excludes inventory. Both ratios are used to measure a firm's short-term liquidity.

Question 7

A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving,i.e.,it is becoming more liquid.

Accepted Answer

A decline in inventory turnover ratio means that the company is selling goods at a slower rate or holding onto inventory for a longer period of time. This indicates inefficiency in managing inventory and can negatively impact liquidity as it ties up capital that could be used elsewhere.

Question 8

To take full advantage of the credit term provided,management should try to lengthen the average payables period with cautions.

Accepted Answer

Lengthening the average payables period can improve cash flow by providing more time to pay off creditors, but management should be cautious not to damage relationships with suppliers and risk jeopardizing the continuity of the supply chain. It is important to balance the need for cash with the need to maintain good credit standing and reliable supplier relationships.

Question 9

U.S.regulators are fundamentally opposed to changing from Generally Accepted Accounting Principles (GAPP) to International Financial Reporting Standards (IFRS).

Accepted Answer

U.S. regulators have expressed some concerns and reservations about adopting IFRS, but they have not fundamentally opposed changing from GAAP to IFRS. In fact, the Securities and Exchange Commission (SEC) has been working on a plan to potentially allow U.S. companies to use IFRS in their financial reporting.

Question 10

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

Accepted Answer

Profitability ratios measure a company's ability to generate profits from its operations, and they take into account various factors including liquidity, asset management, and debt management. Therefore, they reflect the combined effects of these factors on a company's operating results.

Question 11

The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically,depending on the time of year when the financial statements are constructed.

Accepted Answer

This statement is true. Seasonal companies may have higher sales and profits during certain times of the year, which can make their financial statements appear strong during those periods. However, their true financial position may not be accurately reflected if the statements are constructed during a slower period.

Question 12

The average collection period tells how many days it takes a business to pay money for trade credits to its suppliers.

Accepted Answer

The average collection period actually tells how many days it takes a business to collect payment from its customers, not how long it takes to pay suppliers for trade credits.

Question 13

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

Accepted Answer

Significant variations in accounting methods can lead to differences in reported figures and thus make it harder to compare ratios between firms. Standardizing accounting methods can help make comparisons more meaningful.

Question 14

"Mark to market" is the process of adjusting the valuation of assets from their recorded accounting value to a valuation based on market prices.

Accepted Answer

"Mark to market" is indeed the process of adjusting the valuation of assets to market prices.

Question 15

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year.Trend analysis is one method of measuring changes in a firm's performance over time.

Accepted Answer

Trend analysis is a method of measuring changes in a firm's performance over time by analyzing data from multiple years, not just a single year.

Question 16

The basic earning power ratio (BEP) shows the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

Accepted Answer

The basic earning power (BEP) ratio measures a firm's earning power from its assets before the influence of financial leverage and taxes, focusing solely on its operational efficiency.

Question 17

Although a full liquidity analysis requires the use of a cash budget,the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

Accepted Answer

The statement is true. While a cash budget provides a more detailed analysis of a firm's liquidity position, both the current and quick ratios are commonly used as quick measures of liquidity.

Question 18

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Accepted Answer

Debt management ratios, such as debt-to-equity ratio and interest coverage ratio, indicate the level of financial leverage utilized by a company. The higher the leverage, the greater the potential returns on owners' capital, but also the greater the risk. Therefore, these ratios are used to evaluate the effectiveness of a firm's debt management strategy in maximizing shareholder value.

Question 19

The times-interest-earned ratio is one,but not the only,indication of a firm's ability to meet its long-term and short-term debt obligations.

Accepted Answer

The times-interest-earned ratio is one of the indicators of a firm's ability to meet its debt obligations, but there are other ratios such as debt-to-equity ratio, debt-to-assets ratio, and current ratio that can also provide insight into the firm's financial health.

Question 20

The inventory turnover ratio and days sales outstanding (DSO) are two ratios used to assess how effectively a firm is managing its assets.

Accepted Answer

The inventory turnover ratio measures how quickly a company is selling and replacing its inventory, while the days sales outstanding (DSO) ratio measures how quickly a company is collecting payment from its customers. Both are metrics used to evaluate a company's asset management efficiency.

Quiz 3: Analysis of Financial Statements