Question 1

If you were given the components of current assets and of current liabilities, what ratios could you compute?

Accepted Answer

Given the components of current assets and current liabilities, we can compute various liquidity ratios such as current ratio, quick ratio, and cash ratio. These ratios measure a company's ability to meet its short-term obligations using its current assets. Therefore, option D - liquidity ratios is the best choice in this case.

Question 2

Common size financial statements represent all figures on the financial statements

Accepted Answer

Common size financial statements express each line item as a percentage of either sales or total assets, making it easier to compare companies of different sizes or in different industries.

Question 3

Financial analysis is equally important to large corporations and small businesses.

Accepted Answer

Financial analysis helps in assessing the financial health of a business which is important for both large corporations and small businesses to make informed decisions about their future investments, expansion plans, and decision-making processes.

Question 4

If you were given the components of current assets and of current liabilities, what ratio(s) could you compute?

Accepted Answer

Both the Acid test or quick ratio (A) and Current ratio (C) can be computed using the components of current assets and current liabilities. Average collection period (B) cannot be computed solely from current assets and current liabilities.

Question 5

Which of the following parties would perform an external financial analysis?

Accepted Answer

A firm's creditors would perform an external financial analysis to assess the firm's creditworthiness and financial health before making lending decisions or evaluating existing loans.

Question 6

Individuals who do not work for a company rarely have enough information to perform a detailed financial analysis of the company.

Accepted Answer

The answer of Individuals who do not work for a...

Question 7

Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is

Accepted Answer

The answer of Given an accounts receivable turnover of 8...

Question 8

Which of the following parties would be interested in an analysis of the firm's financial statements?

Accepted Answer

All parties, including investors, creditors, and the firm's managers, would be interested in an analysis of the firm's financial statements to understand the financial performance and health of the company. Investors may use this analysis to make investment decisions, creditors may use it to determine if the company is creditworthy, and managers may use it to evaluate the company's financial position and make strategic decisions.

Question 9

On a common size income statement, EBIT is equal to 100%.

Accepted Answer

On a common size income statement, EBIT is shown as a percentage of revenue, but it is not necessarily equal to 100%. The percentage varies depending on the company's profitability and operating expenses.

Question 10

On a common size balance sheet, total assets are equal to 100%.

Accepted Answer

On a common size balance sheet, all items are expressed as a percentage of total assets, which by definition will always be 100%.

Question 11

Which of the following transactions does NOT affect the quick ratio?

Accepted Answer

The quick ratio excludes inventory and long-term assets like equipment, so purchasing equipment financed by long-term debt does not affect the quick ratio.

Question 12

Which of the following parties would perform an internal financial analysis?

Accepted Answer

An internal financial analysis is conducted by individuals within the organization to assess the financial health of the business. Therefore, a financial analyst within the organization would be the best choice to perform an internal financial analysis.

Question 13

The analysis of a firm's financial statements is usually of interest only to people who do not work for the company.

Accepted Answer

The analysis of a firm's financial statements is of interest to both people who work for the company (such as executives and finance professionals) and those who do not work for the company (such as investors, creditors, and analysts).

Question 14

By using common size income statements, firms can determine how various expenses as a percentage of total sales changed from period to period.

Accepted Answer

Common size income statements express every line item as a percentage of total sales, allowing firms to easily see changes in the proportion of expenses to sales from one period to the next.

Question 15

The debt ratio is a measure of a firm's

Accepted Answer

The debt ratio measures a company's total debt in relation to its total assets, indicating the level of leverage the company is using to finance its operations.

Question 16

Common size balance sheets represent all figures on the balance sheet

Accepted Answer

Common size balance sheets represent all figures on the balance sheet as a percentage of total assets. This allows for easy comparison and analysis of the relative proportions of different assets, liabilities, and equity on the balance sheet.

Question 17

Common size income statements represent all figures on the income statement

Accepted Answer

Common size income statements convert all line items to percentages of sales, allowing for easier comparison across time periods and with other companies.

Question 18

What is the purpose of using common size balance sheets and common size income statements?

Accepted Answer

The answer of What is the purpose of using common...

Question 19

The principal reason for preparing common size statements is

Accepted Answer

Common size statements normalize financial statements by expressing all items as a percentage of a common base, typically total assets or total revenue. This makes it easier to compare the financial performance of firms that are different sizes. By eliminating the influence of absolute values, common size statements provide a more accurate representation of the relative importance of each item. This allows for more meaningful comparisons between entities of different sizes.

Question 20

The analysis of a firm's financial statements can be an important factor in the firm's ability to borrow money.

Accepted Answer

Lenders often use financial statements to evaluate a firm's creditworthiness and ability to repay loans. A strong financial position indicated by the statements can increase the likelihood of a loan being approved, while a weak financial position can result in higher interest rates or denial of a loan.

Quiz 4: Financial Analysis-Sizing up Firm Performance