Anlysis of Financial Statements.Lecture 3

ANALYSIS OF FINANCIAL STATEMENTS

LECTURE 3

(Difficulty: E = Easy, M = Medium, and T = Tough)

True-False

Easy:

Ratio analysis Answer: a Diff: E

. Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

a. True

b. False

Liquidity ratios Answer: b Diff: E

. The current ratio and inventory turnover ratio measure the liquidity of a firm. The current ratio measures the relationship of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash.

a. True

b. False

Current ratio Answer: b Diff: E

. If a firm has high current and quick ratios, this is always a good indication that a firm is managing its liquidity position well.

a. True

b. False

Asset management ratios Answer: a Diff: E

. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.

a. True

b. False

Inventory turnover ratio Answer: b Diff: E

. A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

a. True

b. False

Debt management ratios Answer: a Diff: E

. The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

a. True

b. False

TIE ratio Answer: a Diff: E

. The times-interest-earned ratio is one indication of a firm's ability to meet both long-term and short-term obligations.

a. True

b. False

Profitability ratios Answer: a Diff: E

. Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations.

a. True

b. False

ROA Answer: b Diff: E

. Since ROA measures the firm's...