Financial Analysis Limitations
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Questions and Answers

How can management attempt to improve the current ratio near the end of the year?

  • Using cash to pay off short-term debt (correct)
  • Increasing long-term debt
  • Investing excess cash in long-term assets
  • Delaying payments to suppliers
  • Why might account balances like receivables, payables, and inventories not be representative at year-end?

  • Due to entering into long-term contracts
  • Financial year-end coinciding with a low point in activity (correct)
  • Excessive use of cash for investments
  • Because of high activity in the operating cycle
  • Why do many analysts exclude one-off or non-recurring items from ratios?

  • To inflate profitability figures
  • To reduce net income
  • To improve comparability between entities
  • To determine more accurate trends and assess business efficiency (correct)
  • What factor may hinder meaningful comparisons between competing entities?

    <p>Different diversification of product lines</p> Signup and view all the answers

    Why should analysis and interpretation take into consideration modifications, supplementations, and qualifications expressed in accompanying documents?

    <p>To fully understand the financial position of the entity</p> Signup and view all the answers

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