Assignment 3-9

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CHAPTER 3 ANALYSIS OF FINANCIAL STATEMENTS
Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines.

True/False Easy: We tell our students (1) that to answer some of these questions it is useful to write out the relevant ratio or ratios, then think about how the ratios would change if the accounting data changed, and (2) that sometimes it is useful to make up illustrative data to help see what would happen. (3.1) Answe Ratio r: a analy sis EASY

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F K Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength. a. b. True False (3.2) Answe Liqui r: a dity ratio s EASY

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F K The current ratio and inventory turnover ratios both help

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 3: Financial Analysis

True/False

Page 1

us measure the firm's liquidity. The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash. a. b. True False (3.2) Answe Liqui r: a dity ratio s EASY

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F K Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position. True Fals e

a. b.

(3.2) Answe Curre r: b nt ratio

EASY

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. a. b.

F K High current and quick ratios always indicate that a firm is managing its liquidity position well. True False

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 2

True/False

Chapter 3: Financial Analysis

(3.3) Answe Asset r: a manag ement ratio s
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EASY

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F K The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets. a. b. True False (3.3) Answe Inven r: b tory turno ver ratio EASY

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F K A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid. a. b. True False (3.4) Answe Debt r: a manag ement ratio s EASY

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 3: Financial Analysis

True/False

Page 3

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F K Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage. a. b. True False (3.4) Answe TIE r: a ratio EASY

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F K The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations. a. b. True False (3.5) Answe Profi r: a tabil ity ratio s EASY

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F K Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results. a. b. True False (3.6) Answe Marke r: a t value ratio s EASY

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 4

True/False

Chapter 3: Financial Analysis

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F K Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects. a. b. True False

(3.7) Answe Trend r: a analy sis

EASY

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F K Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time. a. b....
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