Chap019 - Chapter 19 Financial Statement Analysis 462...

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Unformatted text preview: Chapter 19 Financial Statement Analysis 462 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 _______. A) fixed asset turnover B) current ratio C) acid test or quick ratio D) A and C E) B and C Answer: E Difficulty: Easy Rationale: Both B and C are measures of liquidity; A relates to fixed assets. 3. __________ a snapshot of the financial condition of the firm at a particular time. A) The balance sheet provides B) The income statement provides C) The statement of cash flows provides D) All of the above provide E) None of the above provides Answer: A Difficulty: Easy Rationale: The balance sheet is statement of assets, liabilities, and equity at one point in time. Chapter 19 Financial Statement Analysis 463 4. __________ of the cash flow generated by the firm's operations, investments and financial activities. A) The balance sheet is a report B) The income statement is a report C) The statement of cash flows is a report D) the auditor's statement of financial condition E) None of the above is a report Answer: C Difficulty: Easy Rationale: Only statement C is correct; the balance sheet reports assets, liabilities, and equity at a point in time; the income statement is a summary of earnings over a period of time. 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, _______. A) FIFO is better than LIFO B) LIFO is better than FIFO C) FIFO and LIFO are equally good D) FIFO and LIFO are equally bad E) none of the above Answer: B Difficulty: Easy Rationale: LIFO reflects the current cost of goods sold, and thus is a better determinant of economic earnings. Chapter 19 Financial Statement Analysis 464 7. __________ of the profitability of the firm over a period of time such as a year. 7....
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Chap019 - Chapter 19 Financial Statement Analysis 462...

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