Chapter 5 FRA

Bondholders

Bondholders would be most interested in the long-term borrowing capacity since this measures the risk of default.

Liquidity

Liquidity ratios measure the firm's ability to pay its current obligations.

Long-term borrowing ability

Long-term borrowing ability measures the degree of protection of long-term suppliers of funds.

Potential stockholders

Potential stockholders would be most interested in the earning ability of the firm since they share in residual profits.

Profitability

Profitability ratios measure the earning ability of the firm.

Suppliers of raw materials

Suppliers of raw materials would be most interested in liquidity since their goods and related obligations are primarily short-term.

Which of the following does not represent a problem with financial analysis? a. Financial statement analysis is an art; it requires judgment decisions on the part of the analyst. b. Financial analysis can be used to detect apparent liquidity problems. c. There are as many ratios for financial analysis as there are pairs of figures. d. Some industry ratio formulas vary from source to source. e. Adequate detailed disclosure of how the industry ratios are computed is often lacking.

b

Which of the following is not a source of industry statistics? a. Annual Statement Studies b. Mergent Dividend Record c. Value Line d. Standard and Poor's Industry Surveys e. The Department of Commerce Financial Report

b

A retailing firm has which type of inventory? a. raw materials b. work in process c. merchandise d. raw materials and merchandise e. raw materials, work in process, and merchandise

c

Annual Statement Studies reported the following figures for manufacturers of screw machine products for the ratio of current assets to current debt. The following figures are for a particular industry's current ratio: 1.6; 1.3; 1.2. Which best describes these three numbers? a. One third of each of the companies experienced each of the ratios. b. The average ratio was 1.3. The best firm had 1.6; The worst had 1.2. c. The median was 1.3. 1.6 is the figure for the upper quartile; 1.2 is the figure for the lower quartile. d. The median was 1.3. 1.6 is the figure for the lower quartile; 1.2 is the figure for the upper quartile. e. None of the answers are correct.

c

In financial statement analysis, ratios are: a. the only type of analysis where industry data are available b. absolute numbers converted to a common base c. fractions usually expressed in percent or times d. the only indication of the financial position of the firm e. none of the answers are correct

c

Various techniques are used in the analysis of financial data to emphasize the comparative and relative importance of the data presented and to evaluate the position of the firm. Which of the following is not one of the techniques used in analysis? a. ratio analysis b. common-size analysis c. theory consistency d. examination of relative size among firms e. review of descriptive material

c

Denver Dynamics has net income of $2,000,000. Oakland Enterprises has net income of $2,500,000. Which of the following best compares the profitability of Denver and Oakland? a. Oakland Enterprises is 25% more profitable than Denver Dynamics. b. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't be quantified. c. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics. d. Further information is needed for a reasonable comparison. e. Oakland Enterprises is more profitable if it is a larger firm than Denver Dynamics.

d

Liquidity ratios can be used: a. to measure the degree of protection of long-term suppliers of funds b. to measure borrowing capacity c. to measure the earning ability of a firm d. to measure the firm's ability to meet its current obligations e. to measure the worth of the firm

d

Statements in which all items are expressed only in relative terms (percentages of a base) are termed: a. Vertical Statements b. Horizontal Statements c. Funds Statements d. Common-Size Statements e. none of the answers are correct

d

Suppose you are comparing two firms in the steel industry. One firm is large and the other is small. Which type of numbers would be most meaningful for statement analysis? a. Absolute numbers would be most meaningful for both the large and small firm. b. Absolute numbers would be most meaningful in the large firm; relative numbers would be most meaningful in the small firm. c. Relative numbers would be most meaningful for the large firm; absolute numbers would be most meaningful for the small firm. d. Relative numbers would be most meaningful for both the large and small firm, especially for interfirm comparisons. e. It is not meaningful to compare a large firm with a small firm.

d

Which of the following can offer a type of comparison in financial statement analysis? a. past ratios and figures b. industry averages c. statistics of competitors d. all of the answers are correct e. none of the answers are correct

d

Which of the following is a false statement as it relates to analysis? a. Profitability may not be a major consideration as long as the resources for repayment can be projected. b. Equity capital provides creditors with a cushion against loss. c. There is a difference between the objectives that are sought by short-term grantors of credit and those sought by long-term grantors of credit. d. If merchandise with a 20% markup is sold on credit, it would take ten successful sales of the same amount to make up for one sale not collected. e. The financial structure of the entity is of interest to creditors.

d

Which of the following is a government document that provides industry statistics? a. The Wall Street Journal b. Business Week c. Dun's d. The Department of Commerce Financial Report e. Standard and Poor's Industry Survey

d

A manufacturing firm will most likely have the heaviest investment in which type of assets? a. cash b. inventory c. accounts receivable d. investments e. plant, property, and equipment

e

Management is a user of financial analysis. Which of the following comments does not represent a fair statement as to the management perspective? a. Management is interested in the view of investors. b. Management is interested in the view of creditors. c. Management is interested in the financial structure of the entity. d. Management is interested in the asset structure of the entity. e. Management is always interested in maximum profitability.

e

Which of the following statements is incorrect? a. The North American Industry Classification System (NAICS) was created jointly by the United States, Canada, and Mexico. b. For the NAICS, economic units with similar production processes are classified in the same industry, and the lines drawn between industries demarcate differences in production processes. c. NAICS provides enhanced industry comparability among the three NAFTA trading partners. d. NAICS divides the economy into twenty sectors. e. In most sectors, NAICS provides for compatibility at the industry (six-digit) level.

e

Which of the following would not be a user of financial statements? a. management b. bankers c. employee unions d. investment analysts e. all of the above are users

e

Which of these statements is false? a. A ratio can be computed from any pair of numbers. b. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be derived. c. Comparing ratios computed from income statement and balance sheet numbers can create difficulties due to the timing of the financial statements. d. Financial ratios are usually expressed in percent or times. e. In vertical analysis, a figure from the year's statement is compared with a base selected from the prior statement.

e

Which of these statements is false? a. Many companies will not clearly fit into any one industry. b. A financial service uses its best judgment as to which industry the firm best fits. c. The analysis of an entity's financial statements can be more meaningful if the results are compared with industry averages and with results of competitors. d. When using industry averages, it is often necessary to use an industry that the firm best fits. e. A company comparison should not be made with industry averages if the company does not clearly fit into any one industry.

e