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Financial Analysis and Limitations Quiz

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Questions and Answers

How can the current ratio be improved near the end of the year?

Delaying payments to suppliers

Increasing long-term debt

Paying off short-term debt using cash (correct)

Investing in long-term assets

Why may year-end data not be typical of the entity's position during the year?

Transactions near year-end aimed at improving ratios

Lack of disclosure in financial reports

Exclusion of one-off items in financial reports

Low activity at financial year-end affecting account balances (correct)

What might inhibit the extent of analysis in general purpose financial reports?

Comparability between entities

Lack of disclosure in financial reports (correct)

One-off items in profit statements

Modifications in accompanying documents

Why might analysts choose to exclude one-off items from financial ratios?

To determine trends accurately Signup and view all the answers

What factor may hinder the comparability between competing entities in financial analysis?

Use of different accounting methods Signup and view all the answers

In financial analysis, why might management enter into certain types of transactions near the end of the year?

To improve certain ratios calculated at year-end. Signup and view all the answers

Which factor may distort the representation of account balances like receivables, payables, and inventories at year-end?

Low point of activity in the operating cycle coinciding with the financial year-end. Signup and view all the answers

Why do many analysts exclude one-off or non-recurring items from financial ratios?

To accurately assess trends in business efficiency. Signup and view all the answers

What may be subject to modifications, supplementations, and qualifications expressed in accompanying documents in general purpose financial reports?

The information provided in directors' and auditors' reports. Signup and view all the answers

What factor hinders comparability between competing entities in financial analysis?

Size and diversification of product lines. Signup and view all the answers