Lecture 4 Quiz - Financial Statement Analysis

Which of the following stakeholder care most about a company's current ratio?

• Its shareholders

• Its suppliers

• Its competitors

• Its customers

Answer explanation

Current ratio measures the company's ability to repay short-term debt with its short-term assets. Its important to suppliers because they want to be paid on time.

2. Which of the following companies is most likely to have the highest inventory turnover?

• Subway, a fast food company

• Books-A-Million, a bookstore chain

• Whole Foods, a grocery chain

• British Airways, an airline

Answer explanation

High inventory turnover measures how fast a company sells its inventory. Food companies typically sell out inventory fastest.

Other companies have nonfood items (e.g. grocery stores has nonfood items)

Which supplier of funds bears the greatest risk and should earn the greatest return?

• Bondholder

• Banks

• Common shareholders

• Preferred shareholders

Answer explanation

The suppliers that has the most to lose should earn the greatest return.

Common shareholders may get nothing if the company goes bankrupt

Market value ratios indicate

• whether the firm is using its asset productively

• whether the firm is liquid

• whether the firm is profitable

• how highly the firm is valued by investors

Answer explanation

Compared to other ratios, market value ratios considers a company's potential

When a firm improves (decreases) its days of inventory, it generally

• requires additional cash investment in inventory

• releases cash locked up in inventory

• does not alter its cash position

• cannot reduce its inventories

Answer explanation

The faster a firm sell off its inventories, the quicker they collect money.

True of False: Financial ratios can help you ask the right questions but they rarely answer these questions on their own

• True

• False

Answer explanation

Financial ratios provides numeric information but no reasons behind these numbers.

For example, if profit margin is -4%, it does not explain why a decline in profit is happening

True or False: When a firm improves (increases) its average collection period, it improves the firm's liquidity position

• True

• False

Answer explanation

False. The faster a firm collect cash from sales (decrease in accounts receivable), the more cash will be available to the firm to pay its current liabilities

True or False: DuPont analysis can help investors understand how a company is generating its ROE

• True

• False

Answer explanation

Dupont Analysis can help investors understand how the company generate its ROE - whether it's through efficient use of assets, high profit margins, or leverage.