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Ch 11 HW FIN4345

Ch 11 HW FIN4345 - Chapter 11 Expanded Analysis QUESTIONS...

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343 Chapter 11 Expanded Analysis QUESTIONS 11- 1. Based on the study reported in the text, liquidity and debt ratios are regarded as the most significant ratios by commercial loan officers. 11- 2. (a) Debt/equity, current ratio (b) Debt/equity, current ratio 11- 3. The dividend payout ratio does not primarily indicate liquidity, debt, or profitability. It is a ratio that is of interest to investors because it indicates the percentage of earnings that is being paid out in dividends. From a view of controlling a loan and preventing the stockholders from being paid before the bank is paid, the dividend payout ratio can be used as an effective ratio. 11- 4. Based on the study reported in the text, financial executives do regard profitability ratios as the most significant ratios. 11- 5. 1) Earnings per Share – profitability 2) Debt/Equity – debt 3) Return on Equity – profitability 4) Current Ratio – liquidity 5) Net Profit Margin – profitability 11- 6. The CPAs gave the highest significance rating to two liquidity ratios. These ratios are the current ratio and the accounts receivable turnover days. The highest-rated profitability ratio was after-tax return on equity, while the highest-rated debt ratio was debt/equity. 11- 7. According to the study reported in this book, financial ratios are not used extensively in annual reports to interpret and explain financial statements. Likely reasons for this are that management does not want to interpret and explain the financial statements to the users, or management is of the opinion that interpretations and explanations can be made more effectively in a descriptive way rather than by the use of financial ratios. Also, there are no authoritative guidelines as to what financial ratios should be included in the annual report, except for earnings per share. 11- 8. (a) Financial summary (b) Management highlights (c) Financial review (d) President’s letter (e) Management discussion 11- 9. Profitability ratios and ratios related to investing are the most likely to be included in annual reports. Profitability ratios are the most popular ratios with management. Ratios related to investing are logical to be included in the annual report because one of the major objectives of the annual report is to inform stockholders.
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344 11-10. Earnings per share is the only ratio that is required to be disclosed in the annual report. It must be disclosed at the bottom of the income statement. 11-11. Presently, no regulatory agency such as the Securities and Exchange Commission or the Financial Accounting Standards Board accepts responsibility for determining either the content of financial ratios or the format of presentation for annual reports. The exception to this is earnings per share. There are many practical and theoretical issues related to the computation of
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Ch 11 HW FIN4345 - Chapter 11 Expanded Analysis QUESTIONS...

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