Module 20

Question 1

For financial ratio analysis, it has limited use as an analytical tool for?

Answer 1

comparing companies that use different accounting methods
The lack of consistency across companies makes comparability/interpretation difficult to analyze and limits the usefulness of ratio analysis.

Question 2

Interpreting ratios, for comparing to a benchmark (industry, comparable), we use:

Answer 2

cross sectional (comparing two company’s number at the same point in time)

Question 3

When interpreting ratios, for comparing to historical performance, we use

Answer 3

time-series (comparing one company’s numbers over a period of time)

Question 4

Which type of ratio bests measures operating performance?

Answer 4

activity ratios

Question 5

How efficiently is the company using it’s assets?

Answer 5

activity ratios

Question 6

An increase in number of days of payable, will have what effect on the cash conversion cycle?

Answer 6

shorten, improving liquidity

Question 7

In order to assess a company’s ability to fulfill its long-term obligations

Answer 7

solvency

Question 8

Increasing debt to equity will tell us what about a company’s solvency?

Answer 8

solvency is decreasing- the company is taking on more debt, therefore having more debt to pay off in the long term

Question 9

Decline in a company’s equity could indicate that the company is:

Answer 9

incurring losses
paying dividends greater than income
repurchasing shares

Question 10

Is the book value of a company’s equity impacted by the changes in MV of it’s common stock?

Answer 10

No
* Beginning equity + New shares issuance – Shares repurchased + Comprehensive income – Dividends = Ending equity

Question 11

Creditworthiness is not evaluated based on how much a company has ______ but rather on its willingness and ability to pay its obligations

Answer 11

increased its debt

Question 12

Current ratio shows a company’s ____?

Answer 12

liquidity; ability to make its short term obligations

Question 13

Dupont analysis=?

Answer 13

ROA * leverage
net profit margin * asset turnover * leverage ratio

Question 14

5 point dupont analysis=?

Answer 14

= tax burden * interest burden * EBIT margin* asset turnover (efficiency) * leverage

Question 15

Common size income statement divides all accounts by?

Answer 15

Total sales

Question 16

Common size balance sheet divides all account by?

Answer 16

Total assets

Question 17

If a current asset and current liability decrease by the same amount and the current ratio is greater than 1, then the numerator ______ less in percentage terms than the denominator, and the current ratio ______.

Answer 17

decreases
increases

Question 18

When inventory is purchased, what happens to the quick ratio?

Answer 18

Inventory is not included in the quick ratio as an asset, but the cash used to fund the purchase would decrease, thus decreasing the numerator & decreasing the quick ratio

Question 19

If Current Ratio is > 1, and if CA and CL both fall, the overall ratio will _____.

Answer 19

increase; the numerator decreases by less percentages than the denominator

Question 20

The PE ratio divides _____ by ____?

Answer 20

current market price of a share of stock / EPS

Question 21

Diluted EPS is calculated to be the ______ EPS that could have been reported if all dilutive securities were converted.

Answer 21

Lowest possible EPS

Question 22

Per share valuation ratio?

Answer 22

Earnings per share (EPS)

Question 23

Per share measures are not comparable amongst firms because why?

Answer 23

the number of shares outstanding (the denominator) differ amongst firms

Question 24

Dividends are declared on a _____ basis

Answer 24

per common share basis

Question 25

RE is the earning that are used _____, rather than ______

Answer 25

grow the firm, rather than be distributed to equity shareholders

Question 26

The proportion of earnings reinvested

Answer 26

retention rate

Question 27

Measures how fast a company can grow without additional external equity issues, while holding leverage constant

Answer 27

Sustainable growth rate

Question 28

Growth in shareholders’ equity, in isolation, will indicate what about profitability?

Answer 28

Nothing; does not provide enough information to assess profitability

Question 29

Measures the “multiple” that the stock market places on a company’s EPS

Answer 29

P/E ratio

Question 30

A company must disclose separate information about any operating segment that constitutes 10% or more of the combined operating segments’ _____, _____, _____.

Answer 30

revenue, assets, or operating profit/loss

Question 31

Forecasts should involve _______. The results of financial analysis are integral to this process, along with ______

Answer 31

a range of possibilities
judgment of the analysts

Question 32

Shows the range of possible outcomes as specific assumptions are changed

Answer 32

Sensitivity analysis; “what if” analysis

Question 33

Shows changes in key financial quantities that result from given economic events

Answer 33

Scenario analysis

Question 34

Computer-generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes

Answer 34

Simulation

Question 35

Profitability ratios include:

Answer 35

dividing by revenue
return on ratios

Question 36

Accounting standards require segment for a distinguishable part of a firm that compromises at least:

Answer 36

10%