Answer To True Or False Question On Financial Statement Analysis/Ratio Analysis

November 24th, 2008 Comments off
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Answer to True Or False Question On Interpretation Of Financial Statement or Ratio Analysis

True

False

1.

Financial statements that reflect financial data for two or more periods are often referred to as comparative statements

X

2.

Development of data that measure changes occurring from one accounting period to another is a form of horizontal analysis

X

3.

One form of horizontal analysis is the development of an index- number trend series

X

4.

When preparing an index-number trend series, the first year presented must always be the base(ie 100%)

X

5.

Index numbers can only be computed when amounts are positive

X

6.

Common size financial statements are a widely used vertical analysis technique

X

7.

A common-size income statement usually shows each revenue or expense item as a percentage of net sales

X

8.

Comparability between enterprises is more difficult to obtain than comparability within a single enterprise

X

9.

Computation of ratios for an accounting period is a form of horizontal analysis

X

10.

Generally, the first concern of a financial analyst is a firm’s liquidity

X

11.

The working capital ratio is regarded as fundamental measurement of a company’s liquidity

X

12.

Normally, an analyst would believe that a manufacturing company with a current ratio of 3 to 1 was in serious liquidity trouble

X

13.

The acid test ratio is regarded primarily as a measure of a company’s long term liquidity situation

X

14.

Usually quick ratio of 1.5 o 1 would be considered satisfactory

X

15.

The accounts receivable turnover is both a measure of liquidity and a measure of activity

X

16.

Average receivables may also be expressed in terms of the number of days’ sales in receivables

X

17.

The receivable position and the approximate collection time may be evaluated by computing the accounts receivable turnover

X

18.

The inventory turnover is computed by dividing cost of goods sold by average inventory

X

19.

A natural business year relates to a fiscal year ending when operations are at their lowest point

X

20.

Normally a relatively low inventory turnover is desirable

X

21.

The ratio of the net sales to total assets is often called the profitability ratio

X

22.

The ratio called profit margin on sales is a measure of the profit percentage per dollar of sales

x

23.

Return on investment (ROI) is a measure of overall asset productivity

X

24.

The price earnings ratio is a measure of the relative attractiveness of common stock as an investment

X

25.

The use of borrowed funds is known as trading on the equity

X

26.

The internal users of financial statement are managers, employees and creditors

x

27.

Some external users of financial statement comprises Inland Revenue, existing shareholders and potential investors

X

28.

Horizontal analysis is a technique to compare company’s financial condition over a period of time

X

29.

Vertical analysis is a technique to evaluate each item in a financial statement as a percent of a base amount or item

X

30.

The four classification of ratio analysis are liquidity ratio, fixed asset ratio, profitability ratio and efficiency ratios

X

31.

Liquidity ratio measure the ability of a business to meet long term obligations

X

32.

Solvency ratios measure the business’ very short-term ability to meet all financial obligations

X

33

Total asset turnover measures the amount of sales generated by each dollar of asset

X

34

Debt to asset ratio measures the extent to which borrowed funds have been used to finance the acquisition of assets

X

35

Price earning ratio shows how much an investor is willing to pay for each dollar of earnings given the actual market price

X

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