Assignment 2 PDF

**Section A: Financial Statement Analysis Basics** 1. **Financial statement analysis** is primarily used by: - \(a) Investors - \(b) Creditors - \(c) Management - \(d) All of the above - **Answer:** (d) All of the above 2. **Financial statements** include:...

**Section A: Financial Statement Analysis Basics** 1. **Financial statement analysis** is primarily used by: - \(a) Investors - \(b) Creditors - \(c) Management - \(d) All of the above - **Answer:** (d) All of the above 2. **Financial statements** include: - \(a) Income statement - \(b) Balance sheet - \(c) Cash flow statement - \(d) All of the above - **Answer:** (d) All of the above 3. **Liquidity ratios** measure: - \(a) A company\'s ability to generate profits - \(b) A company\'s ability to meet short-term obligations - \(c) A company\'s long-term solvency - \(d) A company\'s efficiency in using assets - **Answer:** (b) A company\'s ability to meet short-term obligations 4. **Solvency ratios** measure: - \(a) A company\'s ability to generate profits - \(b) A company\'s ability to meet short-term obligations - \(c) A company\'s long-term solvency - \(d) A company\'s efficiency in using assets - **Answer:** (c) A company\'s long-term solvency 5. **Profitability ratios** measure: - \(a) A company\'s ability to generate profits - \(b) A company\'s ability to meet short-term obligations - \(c) A company\'s long-term solvency - \(d) A company\'s efficiency in using assets - **Answer:** (a) A company\'s ability to generate profits **Section B: Ratio Analysis** 6. The **current ratio** is calculated as: - \(a) Current assets / Current liabilities - \(b) Current liabilities / Current assets - \(c) Total assets / Total liabilities   - \(d) Net income / Total assets - **Answer:** (a) Current assets / Current liabilities 7. The **quick ratio** is calculated as: - \(a) Current assets / Current liabilities - \(b) (Current assets - Inventory) / Current liabilities - \(c) Total assets / Total liabilities - \(d) Net income / Total assets - **Answer:** (b) (Current assets - Inventory) / Current liabilities 8. The **debt-to-equity ratio** is calculated as: - \(a) Total liabilities / Total equity - \(b) Total equity / Total liabilities - \(c) Net income / Total assets - \(d) Total assets / Total liabilities - **Answer:** (a) Total liabilities / Total equity 9. The **return on assets (ROA)** is calculated as: - \(a) Net income / Total assets - \(b) Net income / Total equity - \(c) Total assets / Total liabilities - \(d) Total liabilities / Total equity - **Answer:** (a) Net income / Total assets 10. The **return on equity (ROE)** is calculated as: - \(a) Net income / Total assets - \(b) Net income / Total equity - \(c) Total assets / Total liabilities - \(d) Total liabilities / Total equity - **Answer:** (b) Net income / Total equity **Section C: Common Size Analysis and Trend Analysis** 11. **Common size analysis** expresses financial statement items as a percentage of: - \(a) Total assets - \(b) Total liabilities - \(c) Net income - \(d) Total revenue - **Answer:** (d) Total revenue 12. **Trend analysis** compares financial statement data: - \(a) Across different industries - \(b) Over time - \(c) Between different companies - \(d) All of the above - **Answer:** (b) Over time **Section D: Cash Flow Analysis** 13. The **operating activities** section of the cash flow statement typically includes: - \(a) Cash from investing activities - \(b) Cash from financing activities - \(c) Cash from changes in working capital - \(d) All of the above - **Answer:** (c) Cash from changes in working capital 14. The **investing activities** section of the cash flow statement typically includes: - \(a) Cash from investing activities - \(b) Cash from financing activities - \(c) Cash from changes in working capital - \(d) All of the above - **Answer:** (a) Cash from investing activities 15. The **financing activities** section of the cash flow statement typically includes: - \(a) Cash from investing activities - \(b) Cash from financing activities - \(c) Cash from changes in working capital - \(d) All of the above - **Answer:** (b) Cash from financing activities **Section E: Advanced Financial Statement Analysis** 16. **DuPont analysis** breaks down ROE into its components: - \(a) Profit margin, asset turnover, and financial leverage - \(b) Current ratio, quick ratio, and debt-to-equity ratio - \(c) Return on assets, return on equity, and profit margin - \(d) Total assets, total liabilities, and total equity - **Answer:** (a) Profit margin, asset turnover, and financial leverage 17. **EVA (Economic Value Added)** measures: - \(a) A company\'s profitability - \(b) A company\'s ability to create shareholder value - \(c) A company\'s liquidity - \(d) A company\'s solvency - **Answer:** (b) A company\'s ability to create shareholder value 18. **Cash flow from operations** is often considered the most important indicator of: - \(a) A company\'s profitability - \(b) A company\'s liquidity - \(c) A company\'s solvency - \(d) A company\'s ability to create shareholder value - **Answer:** (b) A company\'s liquidity 19. **Horizontal analysis** compares financial statement data: - \(a) Across different industries - \(b) Over time - \(c) Between different companies - \(d) All of the above - **Answer:** (b) Over time 20. **Vertical analysis** expresses financial statement items as a percentage of: - \(a) Total assets - \(b) Total liabilities - \(c) Net income - \(d) Total revenue - **Answer:** (d) Total revenue **Section F: Limitations of Financial Statement Analysis** 21. **Limitations of financial statement analysis** include: - \(a) Reliance on historical data - \(b) Non-financial factors - \(c) Window dressing techniques - \(d) All of the above - **Answer:** (d) All of the above 22. **Window dressing** techniques can distort financial statement data by: - \(a) Overstating assets - \(b) Understating liabilities - \(c) Both (a) and (b) - \(d) Neither (a) nor (b) - **Answer:** (c) Both (a) and (b) 23. **Non-financial factors** that can affect a company\'s performance include: - \(a) Quality of management - \(b) Industry trends - \(c) Economic conditions - \(d) All of the above - **Answer:** (d) All of the above 24. **Financial statement analysis** should be used in conjunction with other information sources, such as: - \(a) Industry analysis - \(b) Economic analysis - \(c) Qualitative information - \(d) All of the above - **Answer:** (d) All of the above 25. **Ratio analysis** can be misleading if: - \(a) The industry average is used as a benchmark - \(b) The company\'s size and industry are not considered - \(c) The data is not comparable - \(d) All of the above - **Answer:** (d) All of the above