D076 - Finance by ME (Lesson Checks)
Which statement below is an example of how ratios are used in the field of finance? a) A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. Correct! This is called cross-sectional analysis and is common in financial analysis. b) A firm's ratios may vary year over year, so they are not helpful for evaluating whether firm goals are met. c) Ratios are helpful only when comparing companies that are the same size and that use the same operational style. d) Ratio analysis is performed based on a strict set of rules governed by generally accepted accounting principles.
a) A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. This is called cross-sectional analysis and is common in financial analysis.
Why are ratios considered flexible? a) Because they are not regulated and can be changed or invented according to a firm's needs Correct! Because financial ratios are an internal management tool, they are not subject to external rules and regulations. b) Because there are five ratios that must always be calculated and then reported on public financial statements c) Because they are based on estimates and thus do not have to be exact d) Because they do not require historical financial data in order to analyze a firm
a) Because they are not regulated and can be changed or invented according to a firm's needs Because financial ratios are an internal management tool, they are not subject to external rules and regulations.
A firm has paid off its short-term loans more quickly in the past couple of years. What might this trend indicate about the firm's financial ratios? a) Its liquidity ratio is increasing. b) Its activity ratio is increasing. c) Its profitability ratio is decreasing. d) Its leverage ratio is decreasing.
a) Its liquidity ratio is increasing. Liquidity is a measure of the ability of a firm to convert short-term assets into cash. Paying off short-term loans quickly is an indication that a firm is quite liquid, so the firm's liquidity ratio would be increasing.
How might calculating financial ratios help shareholders? a) Ratios can be used to determine whether a firm is maximizing shareholder wealth. Correct! Ratios are used to evaluate managerial actions so shareholders can determine how effectively and profitably managers are using their invested capital. b) Ratios help shareholders audit firms to make sure they are in accordance with GAAP standards. c) Ratios allow shareholders to participate in management decisions. d) Ratios can be used to know what exactly is happening in a firm by answering questions about the firm.
a) Ratios can be used to determine whether a firm is maximizing shareholder wealth. Ratios are used to evaluate managerial actions so shareholders can determine how effectively and profitably managers are using their invested capital.
Why are several different types of ratios used to analyze a firm? a) Because ratios are sometimes inaccurate, and firms have a greater chance of calculating an accurate ratio if they calculate multiple ratios b) Because different types of ratios are needed to get information about different parts of a firm c) Because other ratios must be calculated before the main ratio can be calculated d) Because certain types of ratios become obsolete as a firm innovates
b) Because different types of ratios are needed to get information about different parts of a firm Using only one type of ratio in a full financial analysis of a firm would not tell you very much information about the firm. It is through the calculation of many ratios that an analyst will be able to see the bigger picture of the firm.
What do leverage ratios describe? a) How efficiently a firm is using its assets b) What proportions of equity and debt a firm uses to finance its assets c) How easily a firm can convert assets into cash d) What return shareholders will earn on their investment in a firm
b) What proportions of equity and debt a firm uses to finance its assets This information gives insight into the financial structure of a firm.
The firm Betsy's Books conducts a financial analysis using ratios to know how it is performing in comparison to other similar firms. What is this process called? a) Equity valuation b) Maximization c) Auditing d) Benchmarking
d) Benchmarking Benchmarking allows management to see how firms differ from one another and evaluate their performance relative to each other.
What type of ratio is used to assess a firm's ability to meet short-term obligations without raising external capital? a) Market ratios b) Activity ratios c) Profitability ratios d) Liquidity ratios
d) Liquidity ratios Liquidity ratios measure a firm's ability to meet short-term obligations without raising external capital.