BIT INTERNATIONAL COLLEGE

Tagbilaran City

FM 6
Chapter 10 Quiz
Analysis of Financial Statement

Name: ______________________________ Course & Year: ___________________

I. Identify the correct terms referred by each statement. Write your answer on the space
provided.
1. _________________ normalize balance sheet and income statement items to allow easier
comparison of different sized firms.
2. _________________ a very useful measure of overall internal liquidity which combines
information from the receivables turnover and the accounts payable.
3. _________________ examines the uncertainty of income flows for the total firm and for the
individual sources of capital.
4. _________________ is the prime determinant of operating earnings variability.
5. _________________ indicate what proportion of the firm’s capital is derived from debt
compared to other sources of capital, such as preferred stock, common stock and retained
earnings.
6. _________________ involves an estimate of the present value of a firms future required lease
payments.
7. _________________ are intended to provide information on the resources available to
management how these resources were financed and what firm accomplished with them.
8. _________________ modifies cash flow from operations to recognize that some investing and
financing activities are critical to the firm.
9. _________________ are intended to indicate the ability of the firm to meet future short-term
financial obligations.
10. _________________ is the uncertainty of operating income caused by the firms industry.

II. Multiple Choice: Encircle the letter that corresponds to your answer.
1. It shows what resources the firm controls and how it has financed these assets.
a. Income statement c. balance sheet
b. Statement of cash flow d. financial ratio
2. Contains information on the operating performance of the firm during some period of time.
a. Income Statement c. Balance Sheet
b. Statement of Cash Flow d. Financial Ratio
3. Integrates the effects on the firms cash flow of income flows and changes on the balance sheet.
a. Income Statement c. Balance Sheet
b. Statement of Cash Flow d. Financial Ratio
4. In which a firm examine a firm’s relative performance overtime to determine whether it is
progressing or declining and helpful when estimating future performance.
a. Risk Analysis c. Growth Analysis
b. Time Series Analysis d. Liquidity Analysis
5. It is the additional uncertainty of returns to equity holders due to a firm’s use of fixed financial
obligation securities.
a. Business Risk c. External Liquidity Risk
 b. Internal Risk d. Financial Risk
6. It is the uncertainty of operating income caused by the firms industry.
a. Business Risk c. External Liquidity Risk
b. Internal Risk d. Financial Risk
7. It examines the relationship between current assets and current liabilities.
a. Liquidity Ratio c. Current Ratio
b. Quick Ratio d. Cash Ratio
8. It relates current liabilities to only relatively liquid current assets which referred to as:
a. Liquidity Ratio c. Current Ratio
b. Quick Ratio d. Cash Ratio
9. It is the most conservative liquidity ratio which relates the firm’s cash and short-term
marketable securities to its current liabilities.
a. Liquidity Ratio c. Current Ratio
b. Quick Ratio d. Cash Ratio
10. A very useful measure of overall internal liquidity which combines information from the
receivables turnover, the inventory turnover and the accounts payable turnover.
a. Receivables Turnover c. Cash Conversion Cycle
b. Operating Profit Margin d. Return on Owner’s Equity

III. Identify whether the statement is TRUE or FALSE.

1. Efficiency ratios examine how the management uses its assets and capital, measured by dollars
of sales generated by various asset or capital categories.
2. The variability of the operating profit margin overtime is a prime indicator of the business risk
for a firm.
3. The rate of profit on sales and the volatility of the firm’s sales overtime are the two facets of
profitability.
4. Operating profit is gross profit minus sales, general, and administrative expenses.
5. The more a firm reinvests, the greater it’s potential for growth.
6. A quality balance sheet contains assets with market values lower than their book value.
7. Analysis of financial statements allows the analyst to gain knowledge of a firms operating and
financial strategy and structure.
8. The return on equity is a decision by the board of directors based on the investment
opportunities available to the firm.
9. The analysis of sustainable growth potential examines ratios that indicate how fast a firm should
grow.
10. Debt ratios can be computed with and without deferred taxes.
 ANSWER KEY

I. IDENTIFICATION
1. Common Size Statements
2. Cash Conversion Cycle
3. Risk Analysis
4. Sales Variability
5. The proportion of debt ratios
6. Capitalizing Operating Leases
7. Financial Statements
8. Free Cash Flow
9. Internal Liquidity Ratios
10. Business Risk

II. MULTIPLE CHOICE

1. C
2. A
3. B
4. B
5. D
6. A
7. C
8. B
9. D
10. C

III. TRUE OR FALSE

1. TRUE
2. TRUE
3. FALSE - the volatility of the firm’s sales overtime (Ans. The percentage return on capital
employed)
4. TRUE
5. TRUE
6. FALSE – lower (Ans. Higher)
7. TRUE
8. FALSE – Return on equity (Ans. Retention Rate)
9. TRUE
10. TRUE