Question 1

The current ratio is calculated by dividing current assets by current liabilities.

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It is calculated by dividing current assets by current liabilities.

Question 2

There is more than one way to calculate the ROE.

Accepted Answer

ROE (Return on Equity) can be calculated using different formulas, such as the simple net income divided by shareholder's equity, or through the DuPont analysis which breaks it down into three components: profit margin, asset turnover, and financial leverage.

Question 3

The current ratio is calculated by dividing current assets minus inventory by current liabilities.

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities, not by subtracting inventory from current assets.

Question 4

Vertical analysis of an income statement is obtained by using Net Profit as a constant and dividing every figure on the income statement by Net Profit.

Accepted Answer

Vertical analysis of an income statement is typically performed by taking each item on the statement as a percentage of total sales or revenue, not Net Profit.

Question 5

Market ratios determine how well a company is marketing its products.

Accepted Answer

Market ratios are financial metrics used to evaluate a company's financial health and performance, such as its valuation and investor returns, not how well it is marketing its products.

Question 6

Liquidity ratios measure the ability of a firm to meet its long -term obligations.

Accepted Answer

Liquidity ratios measure a firm's ability to meet its short-term obligations, not its long-term obligations.

Question 7

Vertical analysis of a balance sheet is obtained by using Total Liabilities as a constant and dividing every figure on the balance sheet by Total Liabilities.

Accepted Answer

Vertical analysis of a balance sheet is typically obtained by using Total Assets as a base figure and dividing each individual line item by Total Assets to get a percentage of each item relative to total assets, not Total Liabilities.

Question 8

As long as you choose your method of financial analysis carefully, any single method will provide you with enough information to completely evaluate your firm

Accepted Answer

No single method of financial analysis can provide a complete evaluation of a firm's financial health as each method has its limitations and focuses on different aspects of the financial statements. A comprehensive evaluation typically requires a combination of methods.

Question 9

Horizontal Analysis is obtained by determining the dollar value change in an account from a base period to a successive time period.

Accepted Answer

The answer of Horizontal Analysis is obtained by determining the...

Question 10

Operating cash flow per share is a much better predictor of company stability than earnings per share.

Accepted Answer

Operating cash flow per share takes into account the cash that a company generates from its operations, which is a more direct indicator of a company's ability to sustain its operations and financial stability, unlike earnings per share which can be influenced by non-cash items and accounting practices.

Question 11

Vertical analysis of an income statement is obtained by using Net Sales as a constant and dividing every figure on the income statement by Net Sales.

Accepted Answer

Vertical analysis involves expressing each item on a financial statement as a percentage of a base amount. On the income statement, the base amount is typically Net Sales, and each item is divided by Net Sales to determine its proportion of total sales.

Question 12

It is advantageous for managers to increase debt financing and exhibit an increased ROE.

Accepted Answer

Increasing debt financing can lead to a higher Return on Equity (ROE) because it allows a company to invest in more projects or expand operations without needing additional equity capital, potentially increasing profits and thus the return on shareholders' equity.

Question 13

A ratio is a relationship between two numbers, expressed as a fraction.

Accepted Answer

A ratio is indeed a way to express the relationship between two numbers, showing how many times one value contains or is contained within the other, and it is often represented in the form of a fraction.

Question 14

Vertical analysis of a balance sheet is obtained by using Total Assets as a constant and dividing every figure on the balance sheet by Total Assets.

Accepted Answer

Vertical analysis of a balance sheet involves expressing each item on the balance sheet as a percentage of total assets, making total assets the base for comparison.

Question 15

If a company has no debt financing, its return on equity equals its return on assets.

Accepted Answer

When a company has no debt, its total assets are financed entirely by equity, making the return on equity (ROE) equal to the return on assets (ROA).

Question 16

A single ratio always provides us with meaningful information.

Accepted Answer

A single ratio might not provide meaningful information on its own because it needs to be compared to other data, such as industry averages or historical data, to derive meaningful insights.

Question 17

Horizontal Analysis is obtained by determining the percentage change in an account from a base period to a successive time period.

Accepted Answer

Horizontal analysis involves comparing financial data over a series of reporting periods, calculating the change in each item as a percentage of the value in the base period. This method helps in identifying trends over time.

Question 18

Market ratios indicate what price investors are willing to pay for ownership in the company.

Accepted Answer

Market ratios, such as the price-to-earnings (P/E) ratio, reflect the price investors are willing to pay for a share relative to the earnings of the company, indicating the market's valuation of the company's ownership.

Question 19

Profitability ratios determine how well a firm is using its assets and sales revenue to generate a positive return for its owners.

Accepted Answer

Profitability ratios measure a company's ability to generate earnings relative to its revenue, assets, equity, or other financial metrics, indicating how efficiently it is using its resources to produce profits for its owners or shareholders.

Question 20

As the debt to asset ratio increases, the ROE decreases.

Accepted Answer

The debt to asset ratio and ROE (Return on Equity) are not directly correlated in such a manner. An increase in the debt to asset ratio can actually lead to an increase in ROE if the borrowed funds are used for investments that generate returns higher than the cost of debt.

Quiz 4: Analysis of Financial Statements