Solution for QID #84997: Chapter 4 Analysis of Financial Statements Self-test Questio | StudyHelpMe

Chapter 4 Analysis of Financial Statements Self-test Questions 1. Why are financial ratios used? List the five major categories of ratios presented in the chapter. 2. What are the characteristics of a liquid asset? 3. Which current asset is typically the least liquid? Why? 4. Identify and write out the equations for two ratios that are used to analyze a firm’s liquidity position. What do each of these ratios specifically measure? 5. Identify and write out the equations for four ratios that are used to measure how effectively a firm is managing its assets. What do each of these ratios specifically measure? (2pts) 6. If one firm is growing rapidly and another is not, how might this distort a comparison of their inventory turnover ratios? 7. If you wanted to evaluate a firm’s DSO, with what could you compare it? 8. What problem might arise when comparing different firms’ fixed assets turnover ratios? 9. How does the use of financial leverage affect current stockholders’ control position? 10. How does the decision to use debt involve a risk-versus-return trade-off? 11. Explain the following statement: “Analysts look at both balance sheet and income statement ratios when appraising a firm’s financial condition.” 12. Identify and write out the equations for two ratios that are used to measure how the firm has financed its assets as well as the firm’s ability to repay its long-term debt. What do each of these ratios specifically measure? 13. Identify and write out the equations for six profitability ratios. What do each of these ratios specifically measure? (3pts) 14. Why does the use of debt lower the profit margin and the ROA? 15. Identify and write out the equations for four market value ratios. What do each of these ratios specifically measure? (2pts) 16. What are the three primary ways the market value ratios are used? 17. If one firm’s P/E ratio is lower than that of another, what are some factors that might explain the difference? 18. Explain why book values often deviate from market values. 19. What is the equity multiplier? Is it better to have a high EM or a low EM? Explain. 20. How can management use the DuPont equation to analyze ways of improving the firm’s performance? 21. What is comparative analysis, benchmarking, and trend analysis? 22. Different groups conduct financial ratio analysis. These groups could include managers, credit analysts, and stock analysts. What is the primary emphasis of each of these groups in evaluating ratios? 23. List at least three potential problems with ratio analysis.