Question 1

There are many practical and theoretical issues related to the computation of financial ratios.

Accepted Answer

The computation of financial ratios involves various practical and theoretical issues such as selection of appropriate ratios, accuracy of data used for calculation, comparability of ratios across different companies and industries, interpretation and analysis of results, and many more. Hence, the statement is true.

Question 2

Accounting policies that result in the fastest reporting of income are the most conservative.

Accepted Answer

Accounting policies that result in the fastest reporting of income are considered aggressive accounting policies. Conservative accounting policies result in a slower recognition of income and a more cautious approach to financial reporting.

Question 3

The completed-contract method recognizes all income when the contract is completed,while the percentage-of-completion method recognizes income as work progresses on the contract.The completed-contract method is the conservative method.

Accepted Answer

This is a true statement. The completed-contract method delays recognition of income until the contract is completed, while the percentage-of-completion method recognizes income as work progresses. Consequently, the completed-contract method is considered to be the more conservative of the two methods.

Question 4

Presently,no regulatory agency,such as the Securities and Exchange Commission or the Financial Accounting Standards Board,accepts responsibility for determining either the content of financial ratios or the format of presentation in annual reports.

Accepted Answer

Currently, there is no regulatory agency that takes responsibility for determining the content or format of financial ratios in annual reports.

Question 5

The straight-line depreciation method is a conservative depreciation method.

Accepted Answer

The straight-line depreciation method spreads the cost evenly over the useful life of an asset, which does not necessarily make it more conservative compared to methods like accelerated depreciation, which allocate more depreciation expense to earlier years.

Question 6

The straight-line depreciation method recognizes depreciation in equal amounts over each year of the life of the asset.Therefore,the straight-line depreciation method is a conservative depreciation method.

Accepted Answer

The straight-line depreciation method spreads the cost evenly over the life of the asset, but it is not necessarily more conservative than other methods like declining balance or double-declining balance, which might recognize more depreciation earlier in the asset's life.

Question 7

A univariate model to predict financial failure uses a single variable in a prediction model.

Accepted Answer

A univariate model only includes one variable in the prediction model.

Question 8

A review of the computational methodology used to compute the ratios for annual reports indicated that there were wide differences of opinion on how many of the ratios should have been computed.

Accepted Answer

The statement indicates that there were differences of opinion on how many ratios should have been computed.

Question 9

With the Altman model,the higher the Z score,the more likely the firm will go bankrupt.

Accepted Answer

The higher the Z score according to the Altman model, the less likely the firm will go bankrupt. The model calculates a score based on several financial ratios and if the score is higher than a certain threshold, it suggests that the company is financially healthy and less likely to go bankrupt.

Question 10

In general,controllers rate profitability ratios to have a higher significance than debt ratios.

Accepted Answer

Profitability ratios provide insights into the company's ability to generate profits from its operations, which is ultimately the goal of any business. Controllers are more concerned with the company's ability to generate profitable returns than the amount of debt it carries. However, debt ratios are still important as they provide an indication of the company's financial risk and ability to meet its debt obligations.

Question 11

An auditor can use financial ratios in analytical review procedures.

Accepted Answer

An auditor can use financial ratios in analytical review procedures to evaluate the financial performance and position of the entity being audited. This helps in identifying any potential risks or areas that need further investigation.

Question 12

Under inflationary conditions,the least conservative inventory method is lifo.

Accepted Answer

Under inflationary conditions, the least conservative inventory method is FIFO (First In, First Out) because it assumes that the oldest inventory is sold first, leading to lower cost of goods sold and higher reported profits compared to LIFO (Last In, First Out).

Question 13

There is a major effort to explain financial results by the disclosure of financial ratios in annual reports.

Accepted Answer

The answer of There is a major effort to explain...

Question 14

The interest rate that is assumed to be earned on pension funds can have a material influence on the pension expense and the pension liability.The higher the rate of interest assumed to be earned on pension funds,the higher the pension expense and the higher the pension liability.

Accepted Answer

A higher assumed rate of interest on pension funds typically leads to a lower pension expense and a lower pension liability because the expected return on plan assets reduces the amount the company needs to contribute in the present.

Question 15

It is likely that particular attention should be paid to cash,accounts receivable,and inventory when forecasting financial failure.

Accepted Answer

Cash, accounts receivable, and inventory are all components of a company's working capital and are directly connected to its liquidity. Therefore, forecasting financial failure requires close attention to these areas to ensure there is enough cash flow to meet obligations and maintain operations.

Question 16

Ratios with a primary measure of profitability appear frequently in loan agreements.

Accepted Answer

The answer of Ratios with a primary measure of profitability...

Question 17

It is logical that there would be a high correlation between ratios that are rated to be highly significant and ratios that are included in corporate objectives.

Accepted Answer

If a ratio is rated to be highly significant, it means it is deemed important for measuring the performance of the business. Therefore, it is likely to be included in corporate objectives, which aim to improve the overall performance of the business. Hence, there is a high correlation between highly significant ratios and ratios included in corporate objectives.

Question 18

Beaver did a study that indicated that failed firms have less cash but more inventory one year before failure than do similar firms that do not fail.

Accepted Answer

The answer of Beaver did a study that indicated that...

Question 19

Most of the ratios given a high significance rating by chartered financial analysts have a primary measure of profitability.

Accepted Answer

Chartered financial analysts consider ratios that measure profitability as important indicators of a company's financial health. These ratios include gross profit margin, net profit margin, return on equity, and return on assets, among others.

Question 20

Substantial research and development will result in more conservative earnings.

Accepted Answer

Research and development expenses are typically a long-term investment that may not result in immediate profits but can lead to future growth and profitability. As a result, earnings may be more conservative in the short term.

Quiz 11: Expanded Analysis