Chapter two

Answer by true or false:

1- One way of establishing references & managing the financial affairs of
an organization is to use income statement.
2- Ratio analysis is used to compare a company’s performance and status
with itself or another company over time.
3- The basic inputs to ratio analysis is items from cash flow statement and
audit report.
4- Calculation is important than interpretation in ratio analysis.
5- A single ratio provides insufficient information to judge firm overall
performance.
6- Financial statements being compared should be dated at same point in
time during year.
7- Times series ratio is the evaluation of company’s performance over time
utilizing financial ratio analysis.
8- Cross sectional ratio is the comparison of different companies’ ratios at
same point in time, involves comparing to industry leader or industry
average.
9- Analyzing liquidity is measured by ability of the firm to satisfy its long-
term obligations.
10- Current ratio equals current assets minus current liabilities.
11- The least liquid current asset is the capital.
12- Quick ratio is known as Acid-Test ratio.
13- Acid-Test ratio equals (current assets – inventory) ➗ current liabilities.
14- Net working capital equals current assets minus current liabilities.
15- Net working capital is used for comparison with other companies.
16- The higher the value, the less liquid the firm.
17- Asset management is also known as risk management.
18- High risk increases profitability.
19- Fixed assets are more profitable / productive than current assets.
20- current liabilities are less expensive financing source than long term
funding.
21- Activity ratios are used to measure the speed through which various
accounts are converted into sales/ cash.
22- Inventory turnover measures the activity or liquidity of a firm’s capital.
23- The average length of time inventory held by the firm is the inventory
turnover.
24- The average amount of time needed to collect accounts receivable is
the average payment period.
25- Average payment period equals COGS ➗ A/P.
26- Fixed assets turnover measures the efficiency through which the firm is
using fixed or earning assets to generate sales.
27- Analyzing debt is the amount of the firm’s money being used to
generate sales.
28- The more debt a firm uses, the low its financial leverage.
29- Debt ratio measures the ratio of fixed assets financed by firm’s
creditors.
30- Debt-Equity ratio measures the ratio of long-term debt to stockholders’
equity.

Choose the correct answer:

1- The basic inputs to ratio analysis are items from:
A. Income statement & Cash flow statement B. Audit report
C. Income statement & Balance Sheet D. All of the above
2- Evaluation of a company’s financial performance over time utilizing
financial ratio analysis is:
A. Combined analysis B. Time series
C. Cross sectional D. None of the above
3- Current ratio equals:
A. Current assets ➗ Current liabilities
B. Current liabilities + Current assets
C. Current liabilities – Current assets
D. None of the above
4- Quick ratio equals:
A. (Current assets + Current liabilities) ➗ Inventory
B. (Current assets – Inventory) ➗ Current liabilities
C. (Current liabilities – Current assets) ➗ Inventory
D. (Current liabilities – Inventory) ➗ Inventory
5- Net working capital equals:
A. Current assets ➗ Current liabilities
B. Current liabilities – Current assets
C. Current assets + Current liabilities
D. Current assets – Current liabilities
6- It is only used for internal control inside the company:
A. Quick ratio B. Current ratio
7-C.Used to measure
Net Working the speed through which various
Capital D. Cashaccounts
ratio are
converted into sales or cash:
 A. Analyzing Activity a
C. Analyzing Debt
8- Inventory Turnover equals:
A. (COGS + Inventory)
C. (COGS – Inventory)
9- Inventory Days on Hand equals:
A. (365 ➗ Inventory turnover)
C. (365 – Inventory turnover)
10- A/R Turnover equals:
A. (COGS ➗ A/R)
C. (Sales ➗ A/P)
11- Average Collection Period equals:
A. (365 + A/R Turnover)
C. (365 + A/P turnover)
12- A/P Turnover equals:
A. (Sales – A/P)
C. (COGS + A/R)
13- Average Payment Period equals:
A. (365 ➗ A/P turnover)
C. (365 – A/R turnover)
14- Fixed Assets Turnover equals:
A. (COGS ➗ Net fixed assets)
C. (365 ➗ Net fixed assets)
15- Total assets turnover equals:
A. (Sales ➗ Total assets)
B. Analyzing Liquidity
D. Analyzing Profitability
B. (COGS ➗ Inventory)
D. None of the above
B. (365 +Inventory turnover)
D. None of the above
B. (Sales ➗ A/R)
D. None of the above
B. (365 ➗ A/R turnover)
D. (365 – A/P turnover)
B. (COGS ➗A/P)
D. None of the above
B. (365 + A/P turnover)
D. (365 ➗ Sales)
B. (Sales ➗ Net fixed assets)
D. (365 + Net fixed assets)
B. (COGS ➗ Total assets)
 C. (365 ➗ Total assets) D. (365 + Total assets)
16- It indicates the amount of other people’s money being used to generate
profits:
A. Analyzing activity B. Analyzing liquidity
C. Analyzing profitability D. Analyzing Debt
17- Debt ratio equals:
A. (Total assets – Total liabilities)
B. (Total assets ➗ Total liabilities)
C. ( Total liabilities – Total assets)
D. (Total liabilities ➗ Total assets)
18- Debt-Equity ratio equals:
A. (Short-term debt – Equity) B. (Long-term debt – Equity)
C. (Long-term debt ➗ Equity) D.( Short-term debt ➗ Equity)
19- Times Interest Earned equals:
A. (Earnings before Tax ➗ interest expense)
B. (Earnings after Tax ➗ interest expense)
C. (365 ➗ interest expense) D. (COGS ➗ interest expense)

1 .FalseBB
(Ratio analysis) 2.True 3. False (income &balance) 4. False (interpretation)
5. True 6. True 7. True 8. True
9. False (Short term) 10. False (divide) 11. False (inventory) 12. True
13. True 14. True 15.False (internal control) 16. False (more)
17. False (Activity) 18. True 19. True 20. True
21. True 22. False (firms inventory) 23.False(inventory days hand) 24.False(average collection
25.False365÷A/Pturnover 26. True 27. False (people’s money) 28 False (greater)
29. False (total assets) 30. True
1. (C) 2. (B) 3. (A) 4. (B) 5.(D)
6. (C) 7. (A) 8. (B) 9. (A) 10. (B)
11. (B) 12. (B) 13. (A) 14. (B) 15. (A)
16. (D) 17. (D) 18. (C) 19. (A)