Term
Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength.
a. True
b. False |
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Definition
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Term
The current and quick ratios both help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm’s ability to pay off short-term obligations without relying on the sale of inventories.
a. True
b. False |
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Definition
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Term
Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.
a. True
b. False |
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Definition
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Term
High current and quick ratios always indicate that the firm is managing its liquidity position well.
a. True
b. False |
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Definition
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Term
If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.
a. True
b. False |
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Definition
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Term
If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.
a. True
b. False |
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Definition
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Term
If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.
a. True
b. False |
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Definition
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Term
The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
a. True
b. False |
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Definition
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Term
A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.
a. True
b. False |
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Definition
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Term
In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
a. True
b. False |
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Definition
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Term
The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.
a. True
b. False |
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Definition
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Term
If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.
a. True
b. False |
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Definition
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Term
Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.
a. True
b. False |
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Definition
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Term
The more conservative a firm's management is, the higher its debt ratio is likely to be.
a. True
b. False |
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Definition
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Term
Other things held constant, the higher a firm's debt ratio, the higher its TIE ratio will be.
a. True
b. False |
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Definition
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Term
The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.
a. True
b. False |
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Definition
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Term
Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results.
a. True
b. False |
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Definition
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Term
The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.
a. True
b. False |
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Definition
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Term
The operating margin measures operating income per dollar of assets.
a. True
b. False |
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Definition
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