Ratio Analysis Session 3 Recap and Categories
16 Questions
2 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the main challenge in interpreting financial ratios?

  • Ratios are difficult to calculate
  • Ratios must refer to an economically important relation to be meaningful (correct)
  • Ratios express a mathematical relation between two quantities
  • Calculating the ratios is time-consuming

    • Which type of analysis involves comparing financial ratios with those of another source to ensure comparability?

  • Horizontal Comparative Analysis (correct)
  • Vertical or Common Size Analysis
  • Trend Analysis
  • Management’s Discussion and Analysis (MD&A)

    • What is the purpose of the DuPont Analysis?

  • To analyze the company's liquidity
  • To analyze the components of return on equity (ROE) (correct)
  • To analyze the company's solvency
  • To analyze the company's turnover

    • Which ratio assesses a company's ability to meet short-term obligations using its most liquid assets?

    <p>Liquidity Ratios</p> Signup and view all the answers

    What does the Altman Z-Score measure?

    <p>Probability of bankruptcy</p> Signup and view all the answers

    In ratio analysis, what does the term 'vertical or common size analysis' refer to?

    <p>Expressing each line item on a financial statement as a percentage of a base amount</p> Signup and view all the answers

    What is the purpose of comparing ratios to a benchmark?

    <p>To make valid comparisons across different time periods or with other firms</p> Signup and view all the answers

    Why does using ratios eliminate the size problem?

    <p>By dividing out the effect of differences in company size</p> Signup and view all the answers

    What is a limitation of standard ratios?

    <p>No authoritative bodies specify an exact formula for computing ratios</p> Signup and view all the answers

    Why can major changes in the firm distort time-series analysis?

    <p>Because they may affect the financial data used in the analysis</p> Signup and view all the answers

    What is a potential distortion in cross-sectional analysis?

    <p>Differences in business strategy and capital structure</p> Signup and view all the answers

    Why can managerial actions manipulate ratios?

    <p>By altering the financial data used in the analysis</p> Signup and view all the answers

    What do financial ratios help assess?

    <p>The growth potential and risk of a business</p> Signup and view all the answers

    What is a limitation of ratio analysis according to the text?

    <p>Not all ratios are necessarily relevant to a particular analysis</p> Signup and view all the answers

    Why do differences in accounting policies distort ratios?

    <p>Because they can conceal or exaggerate true financial performance</p> Signup and view all the answers

    What is one source for conducting ratio analysis?

    <p>Various databases including Annual Statement Studies by RMA, Bloomberg, Reuters, and others</p> Signup and view all the answers

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser