C214 TOPIC 4 Questions with
complete solution 2026
There are no rules for ratios. - correct answer ✔You can make your own to meet your needs
Using ratios to assess cost structure and creating new ratios to assess cost structure are examples of
"Focus" and "flexibility" in ratio analysis. Using ratios to assess three companies is an example of
"standardization". - correct answer ✔Ratios do NOT answer questions; rather, they indicate where the
analyst should dig deeper to understand differences or changes.
Ratios tell you - correct answer ✔what questions to ask about the company.
We discuss 4 ratios in the textbook: - correct answer ✔Liquidity, Asset Use Efficiency, Financing
(Leverage), and Profitability.
If the current ratio of a company is higher than the industry, then: - correct answer ✔You cannot tell
without looking at other liquidity ratios.
Suppose the inventory turnover of a company is higher than the industry. Based on this one ratio, which
of the following is most likely to be correct? - correct answer ✔The firm has too little inventory
resulting in lost sales or stock-outs.
While GAAP rules must be understood, ratio analysis - correct answer ✔is not standardized by GAAP.
The flexibility aspect of ratios and ratio analysis refers to which of the following? - correct answer
✔Analysts can create new ratios if needed.
, Suppose an analyst is reviewing the profitability ratios for a firm. Which of the following statements
represents the most valid insight for the analyst? - correct answer ✔Since the profitability ratios of the
firm declined, the analyst devotes additional effort to understanding revenues and costs.
As the textbook states, ratios do not tell you about the company; rather, ratios helps you know what
questions to ask.
Ratios - correct answer ✔help identify the areas of a firm that need investigation.
Using the accrual accounting system to increase net income is known as - correct answer ✔earnings
management. Since the firms are economically identical, Hoogle's use of accruals to increase net income
and OIROI is just a ruse.
AR Turnover = credit sales/AR = - correct answer ✔15000/3700 = 4.055. Average Collection Period =
365/AR Turnover = 90.0 days. (Note: in the absence of other information, all sales are assumed to be on
credit).
GAAP accounting standards allow for significant managerial discretion in reported financial statements. -
correct answer ✔Within the confines of GAAP, managers still have significant discretion over reported
results.
Current ratio = CA/CL = - correct answer ✔12,550/4260 = 2.95
Macrosoft has a higher current ratio while the quick ratio is lower. This means that the company must
be carrying a large amount of inventory (i.e., when we take inventory out of the numerator, the ratio
falls significantly).
In order to make ratio analysis a more effective tool, you should carefully consider: - correct answer
✔Demographic trends
Bubbles and recessions
Technological changes
complete solution 2026
There are no rules for ratios. - correct answer ✔You can make your own to meet your needs
Using ratios to assess cost structure and creating new ratios to assess cost structure are examples of
"Focus" and "flexibility" in ratio analysis. Using ratios to assess three companies is an example of
"standardization". - correct answer ✔Ratios do NOT answer questions; rather, they indicate where the
analyst should dig deeper to understand differences or changes.
Ratios tell you - correct answer ✔what questions to ask about the company.
We discuss 4 ratios in the textbook: - correct answer ✔Liquidity, Asset Use Efficiency, Financing
(Leverage), and Profitability.
If the current ratio of a company is higher than the industry, then: - correct answer ✔You cannot tell
without looking at other liquidity ratios.
Suppose the inventory turnover of a company is higher than the industry. Based on this one ratio, which
of the following is most likely to be correct? - correct answer ✔The firm has too little inventory
resulting in lost sales or stock-outs.
While GAAP rules must be understood, ratio analysis - correct answer ✔is not standardized by GAAP.
The flexibility aspect of ratios and ratio analysis refers to which of the following? - correct answer
✔Analysts can create new ratios if needed.
, Suppose an analyst is reviewing the profitability ratios for a firm. Which of the following statements
represents the most valid insight for the analyst? - correct answer ✔Since the profitability ratios of the
firm declined, the analyst devotes additional effort to understanding revenues and costs.
As the textbook states, ratios do not tell you about the company; rather, ratios helps you know what
questions to ask.
Ratios - correct answer ✔help identify the areas of a firm that need investigation.
Using the accrual accounting system to increase net income is known as - correct answer ✔earnings
management. Since the firms are economically identical, Hoogle's use of accruals to increase net income
and OIROI is just a ruse.
AR Turnover = credit sales/AR = - correct answer ✔15000/3700 = 4.055. Average Collection Period =
365/AR Turnover = 90.0 days. (Note: in the absence of other information, all sales are assumed to be on
credit).
GAAP accounting standards allow for significant managerial discretion in reported financial statements. -
correct answer ✔Within the confines of GAAP, managers still have significant discretion over reported
results.
Current ratio = CA/CL = - correct answer ✔12,550/4260 = 2.95
Macrosoft has a higher current ratio while the quick ratio is lower. This means that the company must
be carrying a large amount of inventory (i.e., when we take inventory out of the numerator, the ratio
falls significantly).
In order to make ratio analysis a more effective tool, you should carefully consider: - correct answer
✔Demographic trends
Bubbles and recessions
Technological changes
