Chap 1 Financial statement analysis

1. What does the term "Creative Accounting" refer to?

a) Strict adherence to accounting standards without any alterations.

b) The manipulation of financial statements to present a favorable view within the confines of accounting standards.

c) The process of auditing financial statements.

d) The technique of financial forecasting.

• a

• b

• c

• d

2. Which ratio is used to measure a company's ability to meet its short-term obligations with its most liquid assets?

a) Debt to Equity Ratio

b) Current Ratio

c) Quick Ratio

d) Gross Profit Margin

• a

• b

• c

• d

3. What is the Altman Z-Score primarily used for?

a) Calculating a company's tax liabilities.

b) Predicting the probability of a company's bankruptcy.

c) Measuring the effectiveness of a company’s asset usage.

d) Evaluating the performance of a company’s management team.

• a

• b

• c

• d

4. Which of the following is a technique of creative accounting and earnings management?

a) Regular financial auditing

b) Overvaluation of assets and underestimation of liabilities

c) Strict adherence to ethical accounting practices

d) Public disclosure of all financial transactions

• a

• b

• c

• d

5. What is the primary purpose of the statement of cash flows in financial analysis?

a) To show the company's revenue and expense over a period.

b) To detail the company's investments in different stocks and bonds.

c) To provide information about a company's cash inflows and outflows over a period.

d) To outline the company's future financial plans and strategies.

• a

• b

• c

• d

6. What does a high current ratio indicate about a company's financial health?

a) The company has a high level of debt.

b) The company is efficiently using its assets to generate sales.

c) The company may have difficulties in meeting its short-term obligations.

d) The company has sufficient liquidity to cover its short-term liabilities.

• a

• b

• c

• d

7. Which of the following best describes 'Financial Leverage'?

a) The use of borrowed funds to increase the return on equity.

b) The reduction of risk through diversification of investments.

c) The ability to cover all operating expenses.

d) The practice of minimizing tax liabilities through legal means.

• a

• b

• c

• d

8. In financial statement analysis, what does the 'Price-to-Earnings Ratio' indicate?

a) The financial stability of a company.

b) The amount of debt a company has.

c) How much the market is willing to pay for each dollar of earnings.

d) The ratio of a company's current share price to its per-share earnings.

• a

• b

• c

• d

1. The __________ ratio measures a company's ability to pay off its current liabilities with its current assets.

2. Earnings per Share (EPS) is calculated by dividing the company's net income by the total number of __________.