FM14e-TB-CHAPTER 3 ANALYSIS OF FINANCIAL STATEMENTS
TRUE/FALSE
1. Ratio analysis involves analyzing financial statements in order to appraise
... [Show More] a
firm's financial position and strength.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 3-1 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Ratio analysis KEY: Bloom’s:
Knowledge
2. The current ratio and inventory turnover ratios both help us measure the
firm's liquidity. The current ratio measures the relationship of a firm's current assets to its
current liabilities, while the inventory turnover ratio gives us an indication of how long it
takes the firm to convert its inventory into cash.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 3-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Liquidity ratios KEY: Bloom’s:
Knowledge
3. Although a full liquidity analysis requires the use of a cash budget, the
current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 3-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Liquidity ratios KEY: Bloom’s:
Knowledge
4. High current and quick ratios always indicate that a firm is managing its
liquidity position well.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 3-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Current ratio KEY: Bloom’s: Knowledge
5. The inventory turnover ratio and days sales outstanding (DSO) are two ratios
that are used to assess how effectively a firm is managing its assets.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 3-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Asset management ratios KEY: Bloom’s:
Knowledge
6. A decline in a firm's inventory turnover ratio suggests that it is managing its
inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming
more liquid.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 3-3 NAT: BUSPROG: Reflective Thinking [Show Less]