Financial Statement Analysis Quiz

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

• True

• False

High current and quick ratios always indicate that a firm is managing its liquidity position.

• True

• False

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time.

• True

• False

Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

• True

• False

What effect would the following actions have on a firm's current ratio? Assume that net working capital is positive. a. Inventory is purchased. b. A supplier is paid. c. A short-term bank loan is repaid. d. A long-term debt is paid off early. e. A customer pays off a credit account. f. Inventory is sold at cost. g. Inventory is sold for a profit.

Explain what it means for a firm to have a current ratio equal to .50. Would the firm be better off if the current ratio were 1.50? What if it were 15.0?

In recent years. Company A has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company improved?

Why is the Du Pont identity a valuable tool for analyzing the performance of a firm? Discuss the types of information it reveals compared to ROE considered by itself.

Suppose a company lengthens the time it takes to pay suppliers. How would this affect the statement of cash flows? How sustainable is the change in cash flows from this practice?

All else being equal, which of the following will increase a company's current ratio?

• An increase in accounts receivable.

• An increase in accounts payable.

• An increase in net fixed assets.

• Statements a and b are correct.