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Page 1

Chapter 28 - Financial Analysis

28-1

Chapter 28

Financial Analysis



Multiple Choice Questions


1. The following groups are stakeholders of a public company:
I) Shareholders
II) The government
III) Suppliers
IV) Employees
V) Bondholders
VI) Management
A. I and II only
B. I, II, and III only
C. I, II, III, and IV only
D. I, II, III, IV, V, and VI



2. In the U.S.A. and the U.K. laws and accounting procedures are designed, generally, to
benefit the:
A. Shareholders
B. Managers
C. Creditors
D. Employees



3. German laws and accounting procedures are designed, generally, to protect interests of the:
A. Shareholders
B. Managers
C. Creditors
D. Employees

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Chapter 28 - Financial Analysis

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4. Assets are listed on the balance sheet in order of:
I) Decreasing liquidity
II) Decreasing size
III) Increasing size
IV) Relative life
A. I only
B. III and IV only
C. II only
D. IV only



5. The following are known as current assets:
I) Cash
II) Marketable securities
III) Receivables
IV) Inventories
V) Payables
A. I, II and III only
B. I, II, III and IV only
C. II, III, IV and V only
D. III, IV and V only



6. The difference between Total Assets of a firm and its Total Liabilities is called.
A. Net working capital
B. Net current assets
C. Net worth
D. None of the above



7. Inventory consists of:
A. finished goods
B. raw material and finished goods
C. raw material, work in process, and finished goods
D. none of the above

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Chapter 28 - Financial Analysis

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4. Assets are listed on the balance sheet in order of:
I) Decreasing liquidity
II) Decreasing size
III) Increasing size
IV) Relative life
A. I only
B. III and IV only
C. II only
D. IV only



Type: Easy



5. The following are known as current assets:
I) Cash
II) Marketable securities
III) Receivables
IV) Inventories
V) Payables
A. I, II and III only
B. I, II, III and IV only
C. II, III, IV and V only
D. III, IV and V only



Type: Easy



6. The difference between Total Assets of a firm and its Total Liabilities is called.
A. Net working capital
B. Net current assets
C. Net worth
D. None of the above



Type: Easy



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Chapter 28 - Financial Analysis

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7. Inventory consists of:
A. finished goods
B. raw material and finished goods
C. raw material, work in process, and finished goods
D. none of the above



Type: Easy



8. The difference between Current Assets of a firm and its Current Liabilities is called.
A. Net worth
B. Net working capital
C. Gross working capital
D. None of the above



Type: Easy



9. Net working capital (NWC) is calculated as:
A. Total assets-total liabilities
B. Current assets + current liabilities
C. Current assets-current liabilities
D. None of the above



Type: Medium



10. Earnings before interest and taxes is calculated as:
A. Total revenues-costs
B. Total revenues-costs-depreciation
C. Total revenues-costs-depreciation-taxes
D. None of the above



Type: Easy



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Chapter 28 - Financial Analysis

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52. What are the three basic financial statements?

The three basic financial statements are the balance sheet, the income statement, and the
sources and uses of funds.



Type: Easy



53. How are "uses and sources" of funds are calculated?

Sources and uses of funds are calculated as follows: Total uses of funds = Investment in net
working capital + investment in fixed assets + dividends paid to shareholders Total sources of
funds = operating cash flow + new issues of long-term debt + new issues of equity



Type: Medium



54. What are the common ratios used to measure liquidity of a firm?

The ratios commonly used to measure liquidity are the current ratio, quick ratio, and cash
ratio.



Type: Medium



55. Briefly explain the different categories of financial ratios.

There are five categories of financial ratios. They are: leverage ratios, liquidity ratios,
efficiency ratios, profitability ratios, and market value ratios.



Type: Easy

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Chapter 28 - Financial Analysis

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56. What are the primary reasons for a company to use debt in its capital structure?

Companies use debt for two main reasons: (a) debt is less expensive due to the tax-
deductibility of interest charges, and (b) the use of debt does not dilute shareholders' equity
position.



Type: Difficult



57. Discuss the DuPont system.

The DuPont system is a quick way of looking at the performance of a firm or a division. ROA
and ROE can be thought of as comprising of several ratios and hence provide some useful
information about the interaction of these ratios.



Type: Medium



58. Why is liquidity relevant?

Firms have a need to convert assets into cash quickly. This is necessary to meet short term
obligations. Without liquidity, even the most short term loans could force a company into
bankruptcy.



Type: Medium

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