Which is not a potential problem of utilizing ratio analysis? A. trends and industry averages are historical in nature. B. financial data may be distorted due to price-level changes. C. firms within an industry may not use similar accounting methods. D. all of the above E. answer not given

Which is not a potential problem of utilizing ratio analysis? A. trends and industry averages are historical in nature. B. financial data may be distorted due to price-level changes. C. firms within an industry may not use similar accounting methods. D. all of the above E. answer not given

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter15: Financial Statement Analysis

Section: Chapter Questions

Problem 7DQ

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Question

Which is not a potential problem of utilizing ratio analysis?
A. trends and industry averages are historical in nature.
B. financial data may be distorted due to price-level changes.
C. firms within an industry may not use similar accounting methods.
D. all of the above
E. answer not given

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Which is wrong about the use of financial statement analysis? a. Seasonality factors may contribute to a sort of distortion on the financial ratio’s trends. b. Activity ratios, such as profit margin and return on asset, tells how efficient the company uses its resources and assets c. Horizontal analysis of financial statements is conducted by analyzing inter-period financial statements d. The Liquidity of the company can be determined using acid-test ratio and current ratio
9. Technical analysts feel that financial accounting statements lack information, or report it in a way that makes comparisons difficult. Which of the following does not constitute a problem? a. Detailed information concerning sales and expenses by product line. b. Statements of change in financial position. c. Alternative ways of reporting expenses. d. Alternative ways of reporting assets and liabilities. e. The availability of psychological and nonquantitative variables.
Explain why balance sheet accounts are generally “averaged” and income statement figures are just lifted from the income statement when using them as factors in a particular financial statement ratio? How do the DuPont technique helps the firm’s managers to further analyze its returns?
In regards to benchmarking, which of the following statements is incorrect? A. Benchmarking is the practice of comparing a company with other leading companies. B. The two main types of benchmarks in financial statement analysis include benchmarking against the industry average and benchmarking against a key competitor. C.The industry average is not a useful benchmark for evaluating a company. D. Providing commonminus−size percentages in a graphical manner highlights differences
20. Which of the following factor does not affect a company's financial ratios? Select one: a. Aggressive revenue recognition practices. b. Accounting for similar economic fundamentals in a similar fashion c. The timing of asset purchases. d. The presence of nonrecurring items among the firms being analysed.
Which of the following is not a limitation of the income statement? a. Comparability between companies may suffer because companies don't have enough leeway to choose between accounting methods. b. The use of different formats by companies within the same industry may hide differences in operating results. c. The use of functional classifications, instead of activity classifications, for operating expenses may not provide sufficient information for predicting future cash outflows. d. The matching of allocated historical costs against current revenues may not provide an accurate measure of a return on capital.
Which of the following may reduce the effectiveness of ratio analysis? a. Highly diversified companies may have activities that obscure trends that may appear more clearly in single function companies. b. Management may use window dressing at the end of the year to improve apparent performance. c. Companies in the same industry may use different accounting practices which may indicate differing levels of performance that don't really exist. d. Book values may not be comparable from company to company because of the age of the asset, inflation, etc. e. All of these can reduce the effectiveness of ratio analysis.
Which of the following is not one of the typical uses of financial ratios? a. Comparisons to a company’s historic values b. Comparison to benchmarksc. Comparison to competitors’ values d. Comparison to zero with positive values indicating desirable ratios and negative values indicating undesirable ratios.
When using ratio data for comparison to other companies, analysts should: not interpret the data as a way of determining which companies will survive and outperform others. only use data from one time period. not assume that all companies in the industry are in direct competition. use industry averages, rather than individual companies, for the comparison.
Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry?
Ratio analysis is the most important tool of financial analysis. Ratios like statistics have an a of precision and finality about them which at times may be misleading. That's why it becomes necessary to know some of the limitations from which they suffer. Discuss.
Which of the following is NOT a type of ratio analysis used by managers to interpret the numbers in financial statements? O liquidity O operating O activity O profitability