24 Questions
Which type of analysis is used to evaluate financial statements by expressing each line item as a percentage of the base amount for that period?
Vertical Common-Size Analysis
What is the primary purpose of financial ratios in financial analysis?
To gain meaningful information about a company's performance
Which type of analysis involves the use of statistical methods to estimate relationships between variables?
Regression Analysis
What is the primary focus of an Activity Ratio in financial analysis?
Assessing the effectiveness of a company's operations
What is the primary difference between Vertical and Horizontal Common-Size Analysis?
One evaluates a single period, the other evaluates multiple periods
What is the primary focus of a Liquidity Ratio in financial analysis?
Assessing a company's ability to meet short-term obligations
What does the solvency ratio indicate about a company's financial health?
Whether its cash flow is sufficient to meet its long-term liabilities
What does the total asset turnover ratio depict?
A company's ability to generate revenue using its assets
What does the debt to equity ratio aim to determine?
The amount of total debt a business has undertaken vis-à-vis its equity
What does the inventory turnover ratio indicate?
The frequency of a company's inventory turnover
What does the fixed asset turnover ratio measure?
The efficiency of a company's fixed assets in generating revenue
What does the liquidity ratio indicate about a company?
Its ability to meet short-term obligations
Which type of mutual fund is considered to have the highest risk but with the potential for the biggest returns in the long term?
Stock/Equity Funds
What is the primary goal of an investment objective to 'Fight Inflation'?
To maintain purchasing power
Which ratio determines the proportion of a company's total assets financed by debt?
Debt Ratio
What is a characteristic of a Balanced Fund?
It features a combination of stocks, bonds, and/or money market funds
What is the main advantage of investing in Mutual Funds?
Diversified holdings professionally managed
What is the purpose of the Profitability Ratio?
To assess a business's ability to generate earnings
What type of mutual fund is considered the safest and generates the least amount of return?
Money Market Fund
What is often considered the holy grail of all metrics when it comes to assembling one’s portfolio?
Return on Investment (ROI)
What type of investments are known for their safety and stability, and are popular among the Indian middle class?
Government bonds and fixed deposits
What is the general rule of thumb for allocating one’s income in personal finance?
50:30:20 rule
What type of planning is considered a cornerstone of personal investing?
Goal-based planning
What dictates the boundaries of the investment strategy for each goal in goal-based planning?
Time horizon
Study Notes
Financial Analysis Tools
- Graphics Analysis: visually represents data or information using pies, charts, graphs, and other visual representations.
- Regression Analysis: a set of statistical methods used to estimate relationships between a dependent variable and one or more independent variables.
Common-Size Analysis
- Vertical Common-Size: analyzes financial statements by expressing each line item as a percentage of the base amount for that period.
- Horizontal Common-Size: looks at the amounts over a longer period, like a trend analysis, and gathers the base amount from an earlier period, such as from three years ago.
Financial Ratio Analysis
- Financial ratios are created using numerical values taken from financial statements to gain meaningful information about a company.
- Ratios are indicators, not answers, used to assess various aspects of a company's financial health.
Categories of Financial Ratios
- Activity Ratio: measures how effective a firm's operations and management of assets are.
- Liquidity Ratio: measures how well a firm is positioned to meet short-term obligations.
- Solvency Ratio: measures how well a firm is positioned to meet long-term obligations.
- Profitability Ratio: measures how and how much a firm is achieving returns on its investments.
Activity Ratios
- Inventory Turn Over Ratio: measures how often the inventory has been sold completely in one accounting period.
- Receivable Turnover Ratio: measures how good a business is at giving credit to its customers and collecting debts.
- Total Asset Turnover Ratio: measures a business's ability to generate revenue using its assets.
- Fixed Asset Turnover Ratio: measures a business's ability to generate revenue using its fixed assets.
Liquidity and Solvency Ratios
- Liquidity Ratio: measures a firm's ability to meet short-term obligations.
- Solvency Ratio: measures a firm's ability to meet long-term obligations.
- Debt to Equity Ratio: measures the amount of total debt a business has undertaken compared to its equity.
- Equity Ratio: measures how much shareholder funds have been invested in a business's assets.
- Debt Ratio: measures the proportion of a company's total assets financed by debt.
Investment Objectives
- Increase income
- Finance expenses
- Increase Savings
- Fight Inflation
- Reduce Tax Liability
Investment Instruments
- Stocks
- Bonds
- Cash
- Annuities
- Real estate
- Hedge Funds
- Mutual Funds
- Emerging Markets
Mutual Funds
- An investment program funded by shareholders that trades in diversified holdings and is professionally managed.
- Benefits: expertise, liquidity, high return, economical, and manages inflation.
Types of Mutual Funds
- Stock/Equity Funds: high risk, high return, invests primarily in stocks and equities.
- Fixed Income Funds: low risk, low return, invests in fixed-income investments like treasury notes, government securities, and commercial papers.
- Balanced Funds: moderate risk, moderate return, features a combination of stocks, bonds, and/or money market funds in its portfolio.
This quiz covers various financial analysis tools, including graphics analysis, regression analysis, and common-size analysis. These tools are used to visually represent data, estimate relationships between variables, and analyze financial statements.
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