Question 1

Which of the following is a limitation related to the usage of ratios when reviewing a firm's performance?
A)Ratios may change with economic conditions or technology.
B)Ratios may be similar for companies of different sizes.
C)Some ratios are percentages while others are multiples.
D)Ratios are usually calculated using end-of-period balances, which may not be typical.

Accepted Answer

The answer of Which of the following is a limitation...

Question 2

Briefly describe how a peer firm comparison may vary, depending on whether the analysis is internal or external.

Accepted Answer

The answer of Briefly describe how a peer firm comparison...

Question 3

Discuss the limitations of ratio analysis.

Accepted Answer

The answer of Discuss the limitations of ratio analysis....

Question 4

A serious pitfall in the interpretation of financial ratios arises when a company, whose business is seasonal, ends its accounting year on March 31, while most companies in the same industry end their accounting period on December 31.

Accepted Answer

If a company's accounting year-end is different from its competitors, its financial ratios will not be directly comparable to those of its competitors. This is especially significant if the company's business is seasonal, as its financial performance could vary significantly throughout the year. Comparing its ratios for the year ended March 31 with those of its competitors for the year ended December 31 would not provide an accurate picture of its relative financial performance.

Question 5

Differences in accounting practices limit the use of ratio analysis.

Accepted Answer

Different accounting standards and practices can affect the way financial statements are prepared and presented, which in turn can impact the ratios calculated from them. Therefore, comparing ratios between companies with different accounting practices may not yield accurate or meaningful results.

Question 6

Which of the following is a limitation related to the usage of ratios when reviewing a firm's performance?
A)Ratios reveal differences in policy and performance between years.
B)Ratios can be used to compare firms that are in the same industry if one firm's sales are higher than another firm's.
C)Financial ratios are designed for the use of creditors, not for managers.
D)Different accounting practices between firms can distort comparisons.

Accepted Answer

Different accounting practices between firms can distort comparisons. This means that if firms have different methods for accounting for the same item, it can make ratio analysis unreliable or meaningless. For example, if one firm uses the first-in, first-out (FIFO) method for inventory valuation and another uses the last-in, first-out (LIFO) method, it can significantly impact the inventory turnover ratio and make it difficult to compare the two firms' performances.

Question 7

Beginning in 1996, Dell Inc.'s inventory turnover ratio began to improve dramatically.One reason for this improvement was their new inventory management practice that required [blank] to carry the inventory.

Accepted Answer

The answer of Beginning in 1996, Dell Inc.'s inventory turnover...

Question 8

Which of the following statements is false?
A)The calculation of the accounts receivable average collection period (ACP)would generally produce a more realistic assessment of how a firm is managing its accounts receivable if the analyst were to calculate the ACP for each month and average the results, than if the analyst were to solely use the fiscal year-end accounts receivable value.
B)If an analyst were to compare the inventory turnover of one firm to that of another, the comparison can be distorted if the two firms use different methods of valuing ending inventory.
C)Assume that two firms are in the same industry and one reports a higher debt ratio than the other.We can safely say that the firm that has the highest debt ratio is the riskier of the two firms.
D)A firm that has a current ratio that is significantly above the industry norm will, as a direct consequence, also have a significantly better return on assets than if its current ratio was below the industry norm.

Accepted Answer

The answer of Which of the following statements is false?
A)The...

Question 9

Industry averages indicate what is typical, but not necessarily what is desirable.

Accepted Answer

Industry averages only reflect what is common or normal within an industry, but they may not represent the best or most effective practices. It's important to consider a variety of factors and gather additional information before concluding that an industry average is the ideal standard to follow.

Quiz 4: Financial Analysissizing up Firm Performance

Which of the following is a limitation related to the usage of ratios when reviewing a firm's performance?