Question 1

What are the four areas used when financial ratios are used to analyze a firm?

Accepted Answer

Profitability Liquidity Solvency Efficiency

Question 2

An important tool in monitoring a credit program is monthly aging of -------------------------------.

Accepted Answer

accounts receivable

Question 3

A profitability ratio potential investors often find useful when evaluating net income after all business expenses is -------------------------------.

Accepted Answer

return on equity

Question 4

------------------------------- analysis expresses the balance sheet and income statement figures as percentages of some key base figure.

Accepted Answer

The answer of ------------------------------- analysis expresses the balance sheet and...

Question 5

Financial analysis and records help to identify a firm's ------------------and-------------but do not solve problems

Accepted Answer

The answer of Financial analysis and records help to identify...

Question 6

The area of financial ratios used to analyze a firm's ability to take risks and potential losses is
A) Profitability
B) Liquidity
C) Solvency
D) Efficiency

Accepted Answer

Solvency ratios are used to analyze a firm's ability to take on risks and potential losses by measuring its capacity to meet long-term obligations. These ratios provide insight into the financial stability and health of a company, indicating whether it can sustain operations over the long term.

Question 7

The profitability ratio(s) included in the profitability linkage analysis model is (are) the
A) Return on investment
B) Return on equity
C) Return on sales
D) All of the above

Accepted Answer

The profitability linkage analysis model includes all of these ratios: Return on Investment (ROI), Return on Equity (ROE), and Return on Sales (ROS), as they all provide different perspectives on a company's profitability.

Question 8

The calculation of the various profitability ratios can be done before or after
A) Interest
B) Other income
C) Taxes
D) All of the above

Accepted Answer

The answer of The calculation of the various profitability ratios...

Question 9

Given the following balance sheet information, what is the quick ratio?
$\begin{array}{lrlc}
\text { Cash } & \$ 50,000 & \text { Accounts payable } & \$ 50,000 \
\text { Inventory } & 50,000 & \text { Accrued expenses } & 25,000 \
\text { Accounts receivable } & \underline {50,000} & \text { Short-term loan } & \underline {25,000} \
\text { Total Current Assets } & \$ 150,000 & \text { Total Current Liabilities } & \$ 100,000
\end{array}$
A) 0.5
B) 1.0
C) 1.5
D) None of the above

Accepted Answer

The quick ratio is calculated as (Cash + Accounts Receivable) / Total Current Liabilities = ($50,000 + $50,000) / $100,000 = 1.0.

Question 10

If the debt-to-equity ratio equals 1.0, then the debt-to-asset ratio will equal
A) 1.0
B) 2.0
C) 0.5
D) None of the above

Accepted Answer

A debt-to-equity ratio of 1.0 means that debt and equity are equal. Therefore, debt represents 50% of the total assets, making the debt-to-asset ratio 0.5.

Question 11

If a firm's ROI is 5 percent and its ROE is 10 percent , then its debt-to-asset ratio is
A) 25 percent
B) 50 percent
C) 75 percent
D) None of the above

Accepted Answer

The relationship between ROI, ROE, and the debt-to-asset ratio can be expressed as ROE = ROI * (1 + Debt-to-Equity Ratio). Given that ROE is double the ROI, it implies a Debt-to-Equity Ratio of 1, which corresponds to a Debt-to-Asset Ratio of 50%.

Question 12

Examples of liquidity measures include all the following except
A) Debt-to-equity ratio
B) Quick ratio
C) Current ratio
D) Working capital

Accepted Answer

The debt-to-equity ratio is not a liquidity measure; it is a leverage ratio that compares a company's total liabilities to its shareholder equity. Liquidity measures, such as the quick ratio, current ratio, and working capital, assess a company's ability to cover its short-term obligations.

Question 13

Ratios used to evaluate efficiency in the collection of accounts receivable include
A) Days sales in accounts receivable
B) Percentage change in credit sales
C) Bad debts as a percentage of credit sales
D) All of the above

Accepted Answer

Days sales in accounts receivable, percentage change in credit sales, and bad debts as a percentage of credit sales are all ratios used to evaluate efficiency in the collection of accounts receivable.

Question 14

Investors are probably most interested in which ratio?
A) ROE
B) ROA
C) ROS
D) None of the above

Accepted Answer

ROE (Return on Equity) measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. It's a key indicator of financial health and efficiency, often making it of high interest to investors who want to gauge the potential returns on their investments.

Question 15

Limitations of financial ratio analysis may include which of the following?
A) Cash basis of accounting is used to prepare the income statement
B) Market values are used to value assets on the balance sheet
C) Balance sheets are not prepared at the same time each year
D) All of the above

Accepted Answer

Financial ratio analysis can be limited by various accounting practices and timing issues, including the use of cash basis accounting for the income statement, the valuation of assets at market values on the balance sheet, and inconsistencies in the timing of balance sheet preparation.

Question 16

The ability of a firm to meet all financial commitments is called its solvency.

Accepted Answer

Solvency refers to a firm's ability to meet its long-term financial commitments and obligations, ensuring it can continue operations into the foreseeable future.

Question 17

The set of ratios that is used to evaluate an agribusiness firm may differ from the set of ratios used to evaluate a nonagricultural firm.

Accepted Answer

Agribusiness firms often have unique operational characteristics and financial structures compared to nonagricultural firms, leading to the use of different ratios for more relevant and accurate evaluation.

Question 18

Interest expense is subtracted from net income before interest when calculating the return on assets ratio.

Accepted Answer

Interest expense is not subtracted from net income when calculating the return on assets (ROA) ratio; ROA is calculated by dividing net income by total assets, and net income already includes the effect of interest expense.

Question 19

When evaluating the days in accounts receivable ratio, the result should at greater than the days in accounts payable ratio.

Accepted Answer

The days in accounts receivable ratio should ideally be less than the days in accounts payable ratio, indicating that a company collects payments from its customers faster than it pays its suppliers, which is beneficial for cash flow management.

Question 20

When calculating the leverage ratio used in the profitability analysis model, total assets is divided by total equity.

Accepted Answer

The leverage ratio, specifically the equity multiplier in this context, is calculated by dividing total assets by total equity, indicating how much of the company's assets are financed by equity.

Quiz 10: Analyzing ﬁnancial Statements

What are the four areas used when financial ratios are used to analyze a firm?

An important tool in monitoring a credit program is monthly aging of -------------------------------.

A profitability ratio potential investors often find useful when evaluating net income after all business expenses is -------------------------------.

------------------------------- analysis expresses the balance sheet and income statement figures as percentages of some key base figure.

Financial analysis and records help to identify a firm's ------------------and-------------but do not solve problems

The area of financial ratios used to analyze a firm's ability to take risks and potential losses is

The profitability ratio(s) included in the profitability linkage analysis model is (are) the

The calculation of the various profitability ratios can be done before or after

If the debt-to-equity ratio equals 1.0, then the debt-to-asset ratio will equal

If a firm's ROI is 5 percent and its ROE is 10 percent , then its debt-to-asset ratio is

Examples of liquidity measures include all the following except

Ratios used to evaluate efficiency in the collection of accounts receivable include

Investors are probably most interested in which ratio?

Limitations of financial ratio analysis may include which of the following?

The ability of a firm to meet all financial commitments is called its solvency.

The set of ratios that is used to evaluate an agribusiness firm may differ from the set of ratios used to evaluate a nonagricultural firm.

Interest expense is subtracted from net income before interest when calculating the return on assets ratio.

When evaluating the days in accounts receivable ratio, the result should at greater than the days in accounts payable ratio.

When calculating the leverage ratio used in the profitability analysis model, total assets is divided by total equity.