QUESTION 1
Which of the following statements is true?
A creditor's objective is ultimately concerned with estimating a company's future earnings.
An investor's objective is to determine the ability of a firm to make interest and principal payments.
The investment analyst uses historical financial statement data to forecast the future with the ultimate objective to determine whether the investment is sound.
A creditor is ultimately concerned with the company's performance record, risk inherent in the capital structure, and the competitive position of the company.
QUESTION 2
All of the following statements are true except:
Financial ratios can indicate areas of potential strength or weakness and reveal matters that need further investigation.
Financial ratios can serve as screening devices.
Although extremely valuable as analytical tools, financial ratios also have limitations.
There are uniform definitions for financial ratios and rules of thumb that apply when interpreting ratios.
QUESTION 3
Liquidity ratios measure:
a firm's ability to meet cash needs as they arise.
the liquidity of specific assets and the efficiency of managing assets.
the liquidity of specific liabilities and the efficiency of managing debt.
the ability to cover debt and fixed interest and lease payments.
QUESTION 4
Which of the following statements is false?
If the current ratio increases, then the quick and cash flow liquidity ratios will also increase.
The quick ratio is a more rigorous test of short-run solvency than the current ratio.
The cash flow liquidity ratio considers cash flow from operating activities.
The current ratio is a commonly used measure of short-run solvency.
QUESTION 5
All of the following are true except:
The average collection period helps gauge the liquidity of accounts receivable, the ability of the firm to collect from customers.
The days inventory held is the maximum allowed days a firm may store inventory before selling it to customers.
The days payable outstanding is the average number of days it takes to pay payables in cash.
The cash conversion cycle is the normal operating cycle of a firm that consists of buying or manufacturing inventory, with some purchases on credit and the creation of accounts payable, selling inventory, with some sales on credit and the creation of accounts receivable, and colleting the cash.
QUESTION 6
All of the following statements are true except:
The fixed asset turnover considers only the firm's investment in property, plant, and equipment and is extremely important for a capital-intensive firm.
The fixed and total asset turnover ratios are two approaches to assessing management's effectiveness in generating sales from investments in assets.
Large amounts of cash, cash equivalents, marketable securities, and long-term investments unrelated to core operations will cause the total asset turnover to be higher as the return on these items is recorded in sales.
The accounts receivable, inventory and payable turnover ratios are mathematical complements to the ratios that make up the cash conversion cycle, and therefore, measure exactly what the average collection period, days inventory held, and days payable outstanding measure for a firm.
QUESTION 7
Why is the analysis of debt ratios of importance to analysts?
The amount and proportion of debt in the company's capital structure is important because of the trade-off between risk and return.
The higher the debt, the higher the benefit is for stockholders and creditors.
The debt ratio and debt to equity ratio indicate how well the firm generates cash flows to pay debt.
Debt ratio analysis is not important due to the fact that credit rating agencies evaluate the leverage ratios and analysts can rely on credit ratings.
QUESTION 8
All of the following statements are true except:
Cash used for dividends should be generated internally by the company, rather than by borrowing.
Companies over the long run should generate enough cash flow from operations to cover investing and financing activities of the firm.
In the long run, borrowing each year to pay dividends and repay debt is a normal cycle which would not concern an analyst.
Credit rating agencies often use cash flow adequacy ratios to evaluate how well a company can cover annual payments of items such as debt, capital expenditures, and dividends from operating cash flow.