Answer To True Or False Question On Financial Statement Analysis/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