Financial & Performance Evaluation Quiz

What is the main objective of financial statements in ratio analysis?

• To evaluate the efficiency of operations

• To assess the risk of operation

• To evaluate various aspects of financial and operating performance

• To determine the firm's declaration and payment of taxes

What does a high current ratio indicate?

• Inability to pay current bills

• Efficient management of assets in generating sales

• Ability to cover current liabilities with current assets

• Overreliance on inventory for current assets

What does a low inventory turnover ratio indicate?

• High marketability of inventory

• Poor liquidity

• Excess inventory and poor sales

• Efficient sales and inventory management

What is the purpose of the debt to equity ratio?

• To assess the firm's ability to pay high annual interest

• To measure the level of debt in the organization

• To show how effectively management uses equity financing

• To evaluate the firm's efficiency in utilizing assets to generate profits

What does a high gross profit margin indicate?

• Poor management of fixed assets

• Effective generation of gross net from sales

• Inefficient use of assets to generate profits

• Overreliance on debt financing

What is the implication of a high return on asset ratio?

• Overcapacity and idle assets

• Inability to pay high annual interest

• Effective management of assets to generate profits

• Overreliance on debt financing

What are the limitations of financial ratios according to the text?

• Average performance as shown in industry averages is always desirable

• Seasonal factors do not distort ratios

• Inflation does not distort the firm's financial statements

• Comparison with industry averages is easy for conglomerates

What is the main objective of external comparison in ratio analysis?

• To make comparisons of ratios of the firm with ratios of other firms in the industry

• To evaluate the firm's efficiency in utilizing assets to generate sales

• To measure how effectively a firm uses its materials and labor to produce and sell products profitably

• To assess the financial health and performance of a company

What does a low acid-test ratio indicate?

• Overreliance on equity financing

• High marketability of inventory

• Efficient management of fixed assets in generating sales

• Inability to cover current liabilities without selling inventory

What is the purpose of the times interest earned ratio?

• To show how effectively management uses equity financing

• To evaluate the firm's efficiency in utilizing assets to generate profits

• To assess the firm's ability to pay high annual interest

• To measure the level of debt in the organization