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D076 Pre-Assessment Questions with
Detailed Verified Answers
Which principle of ratio analysis means that ratios are open for analyst
interpretation, are not governed by rules, and allow creativity to work
according to a particular company or asset? Ans: Flexibility
Comparing a firm's ratios across time. Ans: Trend Analysis
Comparing a firm's financial ratios to other firms' ratios or industry
averages. Ans: Cross-sectional Analysis
As an active investor, Maria is analyzing her portfolio to decide if there
are any stocks she should remove from her pool of financial securities. A
company she has invested in, Quiet Flag Industries, just released its
annual report.
Which kind of method should Maria use to see if the company has
improved? Ans: Trend analysis
An investment analyst is concerned about a construction company's
ability to sell its inventory to meet current obligations, because much of
the inventory (commercial buildings) it builds and sells takes longer than
a year to construct.
Which ratio should this analyst use to consider the effect of the firm's
inventory on the firm's ability to meet current obligations? Ans: Quick
ratio
Why are ratios considered flexible? Ans: Because they are not regulated
and can be changed or invented according to a firm's needs
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Which statement below is an example of how ratios are used in the field
of finance? Ans: A firm's ratios are compared with those of a
benchmark peer group to determine the firm's relative strength and
performance.
How might calculating financial ratios help shareholders? Ans: Ratios
can be used to determine whether a firm is maximizing shareholder
wealth.
The firm Betsy's Books conducts a financial analysis using ratios to know
how it is performing in comparison to other similar firms. What is this
process called? Ans: Benchmarking
measure a firm's ability to meet short-term obligations without raising
external capital. Ans: Liquidity ratios
(also called efficiency ratios) measure how well the company uses its
assets to generate sales or cash—the firm's operational efficiency and
profitability. Ans: Activity ratios
consider how the firm is financed. Ans: Leverage ratios
Which action will increase the return on equity of a firm? Ans:
Increasing the asset usage efficiency of the firm
Which type of ratio should be used to examine the cost efficiency of a
firm's production? Ans: Profitability
They are commonly used to directly judge how profitable the company is
and how well management is doing as they strive to maximize owner
wealth. Ans: Profitability ratios
are used to evaluate the current share price of a public firm's stock.
Ans: Market ratios
What type of ratio is used to assess a firm's ability to meet short-term
obligations without raising external capital? Ans: Liquidity ratios
D076 Pre-Assessment Questions with
Detailed Verified Answers
Which principle of ratio analysis means that ratios are open for analyst
interpretation, are not governed by rules, and allow creativity to work
according to a particular company or asset? Ans: Flexibility
Comparing a firm's ratios across time. Ans: Trend Analysis
Comparing a firm's financial ratios to other firms' ratios or industry
averages. Ans: Cross-sectional Analysis
As an active investor, Maria is analyzing her portfolio to decide if there
are any stocks she should remove from her pool of financial securities. A
company she has invested in, Quiet Flag Industries, just released its
annual report.
Which kind of method should Maria use to see if the company has
improved? Ans: Trend analysis
An investment analyst is concerned about a construction company's
ability to sell its inventory to meet current obligations, because much of
the inventory (commercial buildings) it builds and sells takes longer than
a year to construct.
Which ratio should this analyst use to consider the effect of the firm's
inventory on the firm's ability to meet current obligations? Ans: Quick
ratio
Why are ratios considered flexible? Ans: Because they are not regulated
and can be changed or invented according to a firm's needs
, Page | 2
Which statement below is an example of how ratios are used in the field
of finance? Ans: A firm's ratios are compared with those of a
benchmark peer group to determine the firm's relative strength and
performance.
How might calculating financial ratios help shareholders? Ans: Ratios
can be used to determine whether a firm is maximizing shareholder
wealth.
The firm Betsy's Books conducts a financial analysis using ratios to know
how it is performing in comparison to other similar firms. What is this
process called? Ans: Benchmarking
measure a firm's ability to meet short-term obligations without raising
external capital. Ans: Liquidity ratios
(also called efficiency ratios) measure how well the company uses its
assets to generate sales or cash—the firm's operational efficiency and
profitability. Ans: Activity ratios
consider how the firm is financed. Ans: Leverage ratios
Which action will increase the return on equity of a firm? Ans:
Increasing the asset usage efficiency of the firm
Which type of ratio should be used to examine the cost efficiency of a
firm's production? Ans: Profitability
They are commonly used to directly judge how profitable the company is
and how well management is doing as they strive to maximize owner
wealth. Ans: Profitability ratios
are used to evaluate the current share price of a public firm's stock.
Ans: Market ratios
What type of ratio is used to assess a firm's ability to meet short-term
obligations without raising external capital? Ans: Liquidity ratios
