There are those that believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

There are those that believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

A) Ratio analysis requires the analyst to evaluate a firm's performance over too many years to be of any value.
B) Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated.
C) Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret.
D) Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.

Answer: D

Which of the following is not a method of "benchmarking"?

Which of the following is not a method of "benchmarking"?

A) Conduct an industry group analysis.
B) Utilize the DuPont system to analyze a firm's performance.
C) Evaluating a single firm's performance over time.
D) Identify a group of firms that compete with the company being analyzed.

Answer: B

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

A) The quick ratio more accurately reflects a firm's profitability.
B) It omits the least liquid current asset from the numerator of the ratio.
C) The current ratio does not include accounts receivable.
D) It measures how "quickly" cash flows through the firm.

Answer: B

Which of the following is a benefit of a common-size income statement?

Which of the following is a benefit of a common-size income statement?

A) It is very useful to assess how effectively a firm collected its accounts receivable.
B) It reveals a great deal of information about the adequacy of a firm's net working capital.
C) It can tell the analyst a great deal about the firm's efficiency and profitability.
D) It reveals how effectively a firm has increased its sales.

Answer: C