question archive 1) Below is information related to two companies: Company 1 Company 2 Return on assets 8
1) Below is information related to two companies: Company 1 Company 2 Return on assets 8
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1) Below is information related to two companies:
| Company 1 | Company 2 | ||||||
| Return on assets | 8.2 | % | 6.3 | % | |||
| Debt to equity | 67.2 | % | 53.4 | % | |||
Based on the ratios above, what is generally true about these two companies?
Multiple Choice
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Company 1 has lower profitability and higher risk.
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Company 1 has higher profitability and higher risk.
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Company 1 has lower profitability and lower risk.
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Company 1 has higher profitability and lower risk.
2) Quality of earnings refers to:
Multiple Choice
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Positive net income.
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Ability of reported earnings to reflect the company’s true earnings.
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An increasing trend in profitability.
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All of the other answer choices are correct.
3) Which of the following is a result of conservative accounting practices Select one:
A. Higher income, higher assets, and lower liabilities.
B. Lower income, lower assets, and higher liabilities.
C. Higher income, lower assets, and lower liabilities.
D. Lower income, higher assets, and lower liabilities.
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Answer:
1.
Option B
Company 1 has higher profitability and higher risk
Return on Assets - Higher ratio is preferred
Debt to equity - Risky if the ratio is higher.
2.
Correct Option B i.e. Ability of reported earnings to reflect the company’s true earnings.
Quality of earning here means that company's reported earnings that are not affected by the company's aggresive accounting policies or window dressing. A true picture of earnings by using consistent and conservative accounting policies are required for higher quality of earning.
Other given options are not explaning the concept of quality of earning such as Positive income and An increasing trend in profitability.
3.
Option " B " is correct.
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