Chapter 3 Quiz

Which of the following is a potential problem of utilizing ratio analysis?

All of the options Firms within an industry may not use similar accounting methods. Trends and industry averages are historical in nature. Financial data may be distorted due to price-level changes.

Ratio analysis can be useful for

All of the options are true.

A conservative company experiencing rapid price increases for its products would use LIFO to try to:

Allow the inventory that was just purchased at a higher price to remain in ending inventory values and move older inventory to cost of goods sold, showing a higher net income.

Which two ratios are used in the Du Pont system to create return on assets?

Profit margin and asset turnover

Which of the following is not an asset utilization ratio?

Return on assets

A quick ratio that is much smaller than the current ratio reflects

a large portion of current assets is in inventory.

In examining the liquidity ratios, the primary emphasis is the firm's

ability to pay short-term obligations on time.

Total asset turnover indicates the firm's

ability to use its assets to generate sales.

Investors and financial analysts wanting to evaluate the operating efficiency of a firm's managers would primarily look at the firm's

asset utilization ratios.

Industries most sensitive to inflation-induced profits are those with

cyclical products.

A short-term creditor would be most interested in

liquidity ratios.

The most rigorous test of a firm's ability to pay its short-term obligations is its

quick ratio.

Asset utilization ratios

relate balance sheet assets to income statement sales.

An increasing average receivables collection period indicates

the company is becoming less efficient in its collection policy.

In addition to comparison with industry ratios, it is also helpful to analyze ratios using

trend analysis and historical comparisons.