Section 10

Question 1

Ratio Analysis

Answer 1

comparisons of information provided in the financial statements designed to provide insights on a company’s financial status and prospects for the future

Question 2

current ratio measures

Answer 2

liquidity

Question 3

acid test

Answer 3

a more stringent test of liquidity

Question 4

acid test aka

Answer 4

quick ratio

Question 5

a higher current ratio means

Answer 5

the more liquid the business

Question 6

leverage

Answer 6

the measure of a company’s debt relative to equity financing

Question 7

debt ratio aka

Answer 7

debt to total asset ratio

Question 8

debt to equity ratio means

Answer 8

that for every dollar of owners’ equity there is debt equity of

Question 9

Earnings Per Share is

Answer 9

a measure of profitability

Question 10

improved efficiency in managing inventory will be reflected in the inventory turnover ratio by

Answer 10

an increase in the ratio from one period to the next

Question 11

if a company improves their timely collection of AR reducing the avg period of time ARs are outstanding then AR turnover has

Answer 11

increased

Question 12

a debt to equity ratio in excess of 1 means that

Answer 12

more than 1/2 of the company’s assets have been financed w/ debt

the debt to total asset ratio exceeds .5 or 50%

Question 13

increased leverage in a business means

Answer 13

increased debt relative to equity financing

Question 14

What is a possible effect of stricter credit requirements?

Answer 14

it could negatively affect sales volume reducing the company’s overall profit

Question 15

companies that turnover their inventory quickly, converting inventory to cash in a short period of time, need LESS OR MORE liquidity than companies that have slower moving inventory

Answer 15

Less

Question 16

T/F it is possible for a company to have too much liquidity in its efforts to maximize profits

Answer 16

true

Question 17

financial analysis is a process designed to examine

Answer 17

a company’s current financial position and performance in an attempt to project the company’s prospects for the future

Question 18

t/f a high P/E ratio is an indicator that the price of a company’s stock is overvalued.

Answer 18

false

Question 19

a high P/E ratio is an indicator that investors are

Answer 19

optimistic about the company’s prospects for future growth

Question 20

whether in fact stock is overvalued will depend upon

Answer 20

the company’s future performance

Question 21

vertical analysis is an important tool in trying to project a company’s

Answer 21

future profitability

Question 22

vertical analysis eliminates

Answer 22

the effects of changes in volume in analyzing the relationship of income statement categories

Question 23

debt ratio is a measure of

Answer 23

leverage

Question 24

a good way to measure the effectiveness of a company’s management is by

Answer 24

accounts receivable turnover

Question 25

Days sales in A/R is

Answer 25

the average collection period

Question 26

what is a measure of profitability

Answer 26

EPS

Question 27

What is the best measurement of a stock’s FMV?

Answer 27

P/E ratio

Question 28

the P/E ratio serves as an

Answer 28

index of the investor’s expectations of a company’s earnings potential in the future

Question 29

What is Days Sales in A/R?

Answer 29

how many days it takes to collect on an account

Question 30

how does a higher inventory ratio affect days sales in inventory?

Answer 30

a higher ratio decreases days sales