Question 1

In general,the greater the investment risk taken,the higher the return required as compensation.

Accepted Answer

This statement is generally true. Investors require a higher return to compensate for the added risk they take on when investing in higher risk assets, such as stocks or emerging markets. Conversely, lower-risk investments like bonds or savings accounts generally offer lower returns.

Question 2

The lower the current ratio,the more likely the company will be able to meet its liabilities.

Accepted Answer

The statement is incorrect. The higher the current ratio, the more likely the company will be able to meet its liabilities. A current ratio below 1 indicates that the company may have difficulty meeting its short-term obligations.

Question 3

The use of rule-of-thumb measures is superior to comparison of financial measures or ratios of the same company over a period of time.

Accepted Answer

The use of rule-of-thumb measures may provide a quick and simple estimate, but it can be unreliable and cannot provide a detailed analysis of a company's financial performance. Comparing financial measures or ratios of the same company over a period of time allows for a more in-depth analysis and can help identify trends in the company's financial health.

Question 4

Accounting methods may be a source of incomparability among companies.

Accepted Answer

Different companies may use different accounting methods which can lead to differences in financial reporting, making it difficult to make meaningful comparisons between companies.

Question 5

Profitability is the ability to pay bills when due and to meet unexpected needs for cash.

Accepted Answer

Profitability refers to a company's ability to generate income relative to its revenue, operating costs, and shareholders' equity over time, not directly to its ability to pay bills or meet unexpected cash needs.

Question 6

Interim financial statements are not subject to a full audit by an independent auditor.

Accepted Answer

Interim financial statements are typically reviewed by an independent auditor, but they are not subject to a full audit.

Question 7

Liquidity is the ability to earn a satisfactory net income.

Accepted Answer

Liquidity refers to the availability of cash or easily convertible assets to meet short-term obligations. It is not directly related to earning net income, although having sufficient liquidity can help a business to generate profits by ensuring that it is able to pay its bills on time and take advantage of opportunities as they arise.

Question 8

Disclosure of segment information is useful in the analysis of diversified companies.

Accepted Answer

Diversified companies often operate in multiple industries, businesses or product lines, and segment information helps to understand the performance of each segment. By analyzing the revenue, profitability, growth, and other metrics of each segment separately, investors and analysts can assess the strengths and weaknesses, risks and opportunities of the company's portfolio and strategy. Segment information can also provide insights into the contribution of each segment to the overall financial results, the allocation of resources, and the potential for synergies or conflicts among the segments. Overall, disclosure of segment information enhances the transparency, comparability, and confidence in the company's financial reporting.

Question 9

The analysis of risk and return is important to both investors and creditors.

Accepted Answer

The analysis of risk and return is essential for both investors and creditors. Investors need to assess the potential risks and returns of their investment options, while creditors must evaluate the risks associated with providing funding to a particular entity. Understanding the relationship between risk and return is crucial for both parties to make informed decisions and manage their financial resources effectively. Therefore, the statement is true.

Question 10

Most public companies issue interim financial statements to the public on a quarterly basis.

Accepted Answer

Most public companies issue interim financial statements to the public on a quarterly basis, typically within 45 days after the end of each fiscal quarter.

Question 11

A limitation of using industry norms in financial performance evaluation is that some companies in the same industry may not be strictly comparable.

Accepted Answer

Companies within the same industry can vary in terms of size, product offerings, and other factors that can affect their financial performance. Therefore, using industry norms may not provide a completely accurate picture of a company's financial standing.

Question 12

Form 10-QK refers to the annual report filed with the SEC.

Accepted Answer

The answer of Form 10-QK refers to the annual report...

Question 13

Both diversified companies and conglomerates operate in a single,well-defined industry.

Accepted Answer

Diversified companies operate in multiple industries, while conglomerates operate in unrelated industries.

Question 14

Diversified companies are required to report information that includes certain revenue and expense items and assets for each of its segments.

Accepted Answer

This statement is true. According to Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), diversified companies are required to report financial information that includes revenue and expense items and assets for each of its segments. This segment reporting helps investors and analysts to evaluate the performance of each business segment separately.

Question 15

Rule-of-thumb measures are the most precise and best standards of comparison in financial performance evaluation.

Accepted Answer

Rule-of-thumb measures, such as benchmarking against industry averages, can provide some general guidance but they may not be the most precise or accurate measures of financial performance evaluation. More specific and customized measures are often necessary to fully evaluate a company's performance.

Question 16

A a rule of thumb,a business starts to have trouble when its current liabilities to net worth ratio exceeds 50%.

Accepted Answer

The rule of thumb for financial health is often that a current liabilities to net worth ratio exceeding 100% may indicate potential trouble, not 50%.

Question 17

Financial statement analysis is used to show how items in a company's financial statements relate to the company's financial performance objectives.

Accepted Answer

Financial statement analysis is a tool used to evaluate a company's financial performance by interpreting various financial statements such as the income statement, balance sheet, and cash flow statement. It is used to identify trends, strengths, weaknesses, opportunities, and threats to the company's financial health and help make informed decisions. The analysis helps investors, creditors, and other stakeholders to assess the company's financial position and determine whether it is a good investment opportunity or not.

Question 18

In a diversified company,segments may be represented by different industries,geographical markets,and major customers.

Accepted Answer

This statement is true. Diversified companies may have multiple segments that are represented by different industries, geographical markets, and major customers. This allows the company to spread its risks and generate revenue from a variety of sources.

Question 19

Companies in the same industry are not required to use the same methods to value inventory and to depreciate similar assets.

Accepted Answer

Companies are free to use different methods to value their inventory and assets, as long as the methods are consistent with generally accepted accounting principles (GAAP) and accurately reflect the company's financial position. Different companies may have different methods based on their specific circumstances and the nature of their business operations.

Question 20

Interim financial statements report data for a period of less than one year.

Accepted Answer

Interim financial statements report data for a period of less than one year, such as for a quarter or a half-year.

Quiz 16: Financial Statement Analysis