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

2.

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

3.

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

4.

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

5.

Index numbers can only be computed when amounts are positive

6.

Common size financial statements are a widely used vertical analysis technique

7.

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

8.

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

9.

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

10.

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

11.

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

12.

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

13.

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

14.

Usually quick ratio of 1.5 o 1 would be considered satisfactory

15.

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

16.

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

17.

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

18.

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

19.

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

20.

Normally a relatively low inventory turnover is desirable

21.

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

22.

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

23.

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

24.

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

25.

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

26.

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

27.

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

28.

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

29.

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

30.

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

31.

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

32.

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

33

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

34

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

35

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