Financial Management: Theory and Practice

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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) Ratio analysis F K | Answer: a | EASY | . | Ratio analysis involves analyzing financial statements in order to appraise a firm 's financial position and strength. | | | | | | | | | | | | a. | True | | | | | | | | | b. | False | | | | | | | | | | | | | | | | | | | (3.2) Liquidity ratios F K | Answer: a | EASY | . | The current ratio and inventory turnover ratios both help 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. | True | | | | | | | | | b. | False | | | | | | | | | | | | | | | | | | | (3.2) Liquidity ratios F K | Answer: a | EASY | . | 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. | | | | | | | | | | | a. | True | | | | | | | | | b. | False | | | | | | | | | | | | | | | | | | | | (3.2) Current ratio F K | Answer: b | EASY | . | High current and quick ratios always indicate that a firm is managing its liquidity position well. | | | | | | | | | | | | a. |

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