D076 Pre-Assessment QUESTION AND ANSWER VERIFIED

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? - Flexibility Comparing a firm's ratios across time. - Trend Analysis Comparing a firm's financial ratios to other firms' ratios or industry averages. - 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? - 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? - Quick ratio Why are ratios considered flexible? - Because they are not regulated and can be changed or invented according to a firm's needs Which statement below is an example of how ratios are used in the field of finance? - A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance.