Financial Statement Analysis & Understanding Financials
Financial Statement Analysis & Understanding Financials
Questions and Answers
- 1.
Tick the correct answer: A firm has a higher quick (or acid test) ratio than the industry average, which implies ___________________.
- A.
The firm has a higher P/E ratio than other firms in the industry
- B.
The firm is more likely to avoid insolvency in short run than other firms in the industry
- C.
The firm may be less profitable than other firms in the industry
- D.
A and B
- E.
B and C
Correct Answer
E. B and CExplanation
A firm having a higher quick ratio than the industry average implies that the firm is more likely to avoid insolvency in the short run than other firms in the industry. Additionally, it suggests that the firm may be less profitable than other firms in the industry.Rate this question:
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- 2.
Tick the correct answer: A firm has a lower quick (or acid test) ratio than the industry average, which implies _________________.
- A.
The firm has a lower P/E ratio than other firms in the industry
- B.
The firm is less likely to avoid insolvency in short run than other firms in the industry
- C.
The firm may be more profitable than other firms in the industry
- D.
B and C
- E.
A and B
Correct Answer
D. B and CExplanation
A firm having a lower quick (or acid test) ratio than the industry average implies that the firm is less likely to avoid insolvency in the short run than other firms in the industry. Additionally, it also suggests that the firm may be more profitable than other firms in the industry.Rate this question:
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- 3.
State True or False: Internal users use the financial statements for Planning, Evaluation, promotion and controlling business operations.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Internal users, such as managers and executives within a company, utilize financial statements for various purposes. They rely on these statements for planning future business activities, evaluating the company's performance, making informed decisions about promotions or demotions, and controlling and monitoring the operations of the business. Therefore, the statement that internal users use financial statements for planning, evaluation, promotion, and controlling business operations is true.Rate this question:
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- 4.
State True or False: External users uses the financial statement for Assessing past performance and current financial position and making predictions about the future profitability and solvency of the company as well as evaluating the effectiveness of management.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
External users, such as investors, creditors, and analysts, rely on financial statements to assess a company's past performance and current financial position. They also use these statements to make predictions about the future profitability and solvency of the company. Furthermore, financial statements help external users evaluate the effectiveness of management in running the business. Therefore, the statement is true.Rate this question:
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- 5.
State True or False: Income Statement- A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because an income statement is not a summary of a firm's financial position on a given date. Instead, it is a financial statement that shows a firm's revenues, expenses, and net income or loss over a specific period of time. The equation total assets = total liabilities + owners' equity is actually a representation of the balance sheet, which provides a snapshot of a firm's financial position at a specific point in time.Rate this question:
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- 6.
State True or False: Balance Sheet- A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because a balance sheet is not a summary of a firm's revenues and expenses. Instead, it is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It consists of three main sections: assets, liabilities, and shareholders' equity. The balance sheet shows what a company owns (assets), what it owes (liabilities), and the remaining value for shareholders (equity). It does not include information about revenues, expenses, or net income/loss, which are typically found in the income statement.Rate this question:
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- 7.
State True or False: Statement of Retained Earnings: A statement of all transactions affecting the balance of a company's retained earnings account.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement of retained earnings is indeed a statement that reflects all the transactions that have impacted the balance of a company's retained earnings account. This statement provides information about the changes in retained earnings over a specific period, including net income or loss, dividends, and other adjustments. It helps stakeholders understand how the company's earnings have been retained or distributed. Therefore, the given answer, "True," is correct.Rate this question:
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- 8.
State True or False: Annual Report: Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, as well as balance sheet, income statement, and cash flow statement information. SEC rules require that it be distributed to all shareholders. A more detailed version is called a 10-K.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement provided accurately describes an annual report. It states that an annual report is a yearly record of a publicly held company's financial condition, including information about the firm's operations, balance sheet, income statement, and cash flow statement. It also mentions that SEC rules require the distribution of the annual report to all shareholders. Additionally, it mentions that a more detailed version of the annual report is called a 10-K. Therefore, the given answer, "True," is correct.Rate this question:
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- 9.
State True or False: Ratio analysis of a firm’s financial statements is of interest to shareholders, creditors, and the firm’s management. Stockholders are interested in the firm’s current and future level of risk and return, which directly affect the stock price.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Ratio analysis of a firm's financial statements is indeed of interest to shareholders, creditors, and the firm's management. Shareholders are particularly interested in the firm's current and future level of risk and return, as these factors directly impact the stock price. By analyzing ratios such as profitability, liquidity, and solvency, shareholders can assess the financial health and performance of the company, which in turn affects their investment decisions. Therefore, the statement is true.Rate this question:
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- 10.
State True or False: Liquidity Ratios: Indicator of short-term debt-paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Liquidity ratios are indeed indicators of a company's ability to pay off its short-term debts. These ratios are calculated by dividing current assets by current liabilities. A higher liquidity ratio suggests that the company has more liquid assets available to cover its short-term obligations, indicating a stronger ability to meet its debt payments. Therefore, the statement is true.Rate this question:
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- 11.
State True or False: Current Ratio: Ratios that measure a firm's ability to meet its short-term financial obligations on time.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true. The current ratio is a financial ratio that measures a company's ability to pay off its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a company has more assets to cover its current obligations, which implies a better ability to meet its short-term financial obligations on time. Therefore, the given statement is correct.Rate this question:
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- 12.
Tick the correct answer: An example of a liquidity ratio is _____________.
- A.
Fixed Asset Turnover
- B.
Current Ratio
- C.
Acid Test or Quick Ratio
- D.
A and C
- E.
B and C
Correct Answer
E. B and CExplanation
The correct answer is B and C. The current ratio and the acid test or quick ratio are both examples of liquidity ratios. The current ratio measures a company's ability to pay off its short-term liabilities with its short-term assets, while the acid test or quick ratio is a more stringent measure of liquidity that excludes inventory from the calculation. Both ratios provide insight into a company's ability to meet its short-term obligations.Rate this question:
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- 13.
Tick the correct answer: ____________ provides a snapshot of the financial condition of the firm at a particular time.
- A.
The balance sheet
- B.
The statement of cash flows
- C.
The income statement
- D.
All of these
- E.
None of these
Correct Answer
A. The balance sheetExplanation
The balance sheet provides a snapshot of the financial condition of the firm at a particular time. It includes information about the company's assets, liabilities, and shareholders' equity. This statement helps to assess the financial health and stability of the company by showing what it owns, what it owes, and the net worth of the business. The income statement, on the other hand, shows the company's revenues, expenses, and net income over a specific period. The statement of cash flows provides information about the cash inflows and outflows of the company during a given period.Rate this question:
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- 14.
Tick the correct answer: __________ is a report of the cash flow generated by the firm's operations, investments and financial activities.
- A.
The balance sheet
- B.
The statement of cash flows
- C.
The income statement
- D.
The auditor's statement of financial condition
- E.
None of these
Correct Answer
B. The statement of cash flowsExplanation
The statement of cash flows is a report that shows the cash flow generated by the firm's operations, investments, and financial activities. It provides information on how cash is being generated and used within the organization. This statement is important for understanding the liquidity and financial health of the company and is often used by investors, creditors, and other stakeholders to assess the company's ability to generate cash and manage its cash flow effectively.Rate this question:
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- 15.
Tick the correct answer: A firm has a higher asset turnover ratio than the industry average, which implies ______________.
- A.
The firm has a higher P/E ratio than other firms in the industry
- B.
The firm is more likely to avoid insolvency in the short run than other firms in the industry
- C.
The firm is more profitable than other firms in the industry
- D.
The firm is utilizing assets more efficiently than other firms in the industry
- E.
The firm has higher spending on new fixed assets than other firms in the industry
Correct Answer
D. The firm is utilizing assets more efficiently than other firms in the industryExplanation
A higher asset turnover ratio indicates that the firm is utilizing its assets more efficiently compared to other firms in the industry. This means that the firm is generating more sales revenue for each unit of assets it owns. It implies that the firm is able to generate higher sales without the need for significant investment in additional assets. This efficiency can lead to higher profitability as well.Rate this question:
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- 16.
Tick the correct answer: A firm has a lower asset turnover ratio than the industry average, which implies ________________.
- A.
The firm has a lower P/E ratio than other firms in the industry
- B.
The firm is less likely to avoid insolvency in the short run than other firms in the industry
- C.
The firm is less profitable than other firms in the industry
- D.
The firm is utilizing assets less efficiently than other firms in the industry
- E.
The firm has lower spending on new fixed assets than other firms in the industry
Correct Answer
D. The firm is utilizing assets less efficiently than other firms in the industryExplanation
The firm having a lower asset turnover ratio than the industry average implies that the firm is utilizing its assets less efficiently than other firms in the industry. This means that the firm is not generating as much revenue from its assets compared to its competitors. Lower asset turnover indicates that the firm may have excess or underutilized assets, leading to lower profitability and potentially lower overall performance compared to other firms in the industry.Rate this question:
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- 17.
Tick the correct answer: If you wish to compute economic earnings and are trying to decide how to account for inventory, ______________.
- A.
FIFO is better than LIFO
- B.
LIFO is better than FIFO
- C.
FIFO and LIFO are equally good
- D.
FIFO and LIFO are equally bad
- E.
None of these
Correct Answer
B. LIFO is better than FIFO -
- 18.
Tick the correct answer: ____________ is a summary of the profitability of the firm over a period of time such as a year.
- A.
The balance sheet
- B.
The income statement
- C.
The statement of cash flows
- D.
The audit report
- E.
None of these
Correct Answer
B. The income statementExplanation
The income statement is a financial statement that summarizes the profitability of a firm over a specific period, typically a year. It includes information about revenues, expenses, and net income. This statement helps stakeholders, such as investors and creditors, assess the financial performance of the company and make informed decisions. The income statement is an essential tool for evaluating the profitability and financial health of a business.Rate this question:
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Current Version
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Mar 21, 2023Quiz Edited by
ProProfs Editorial Team -
Feb 25, 2014Quiz Created by
Leena_longiany14
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