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Chap019 - Multiple Choice Questions 1 A firm has a higher...

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Multiple Choice Questions 1. A firm has a higher quick (or acid test) ratio than the industry average, which implies. A) the firm has a higher P/E ratio than other firms in the industry. B) the firm is more likely to avoid insolvency in short run than other firms in the industry. C) the firm may be less profitable than other firms in the industry. D) A and B. E) B and C. Answer: E Difficulty: Easy Rationale: Current assets earn less than fixed assets; thus, a firm with a relatively high level of current assets may be less profitable than other firms. However, its high level of current assets makes it more liquid. 2. An example of a liquidity ratio is _______. 3. __________ a snapshot of the financial condition of the firm at a particular time.
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4. __________ of the cash flow generated by the firm's operations, investments and financial activities. 5. A firm has a higher asset turnover ratio than the industry average, which implies A) the firm has a higher P/E ratio than other firms in the industry. B) the firm is more likely to avoid insolvency in the short run than other firms in the industry. C) the firm is more profitable than other firms in the industry. D) the firm is utilizing assets more efficiently than other firms in the industry. E) the firm has higher spending on new fixed assets than other firms in the industry. Answer: D Difficulty: Easy Rationale: The higher the asset turnover ratio the more efficiently the firm is using assets. 6. If you wish to compute economic earnings and are trying to decide how to account for inventory, _______.
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Chapter 19 Financial Statement Analysis
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