Question

1. Which of the following is not a true statement about effective ratio analysis?

		Ratios should NOT be used to compare across time or across firms. Ratios should be analyzed in isolation.
		Ratios are used by Managers to help evaluate the future as well as an attempt to gauge how to correct current deficiencies.
		Ratios are used by Bankers to evaluate the ability of the firm to maintain certain levels of debt and interest.
		Ratios are used by the owners to develop incentive programs that encourage management to impact specific ratios.
		All of the answers provided are accurate reasons to compute a ratio

2. The following would indicate an increase in financial leverage

		An increase in debt
		An increase in the debt ratio
		An increase in the Equity Multiplier (ratio)
		A decrease in assets; while liabilities remain constant
		All of the above

3. In the case, what are the firm’s relative strengths and weakness according to the DuPont Equation?

		Relative strengths are its profitability and leverage (financial risk); weaknesses are associated with its asset utilization
		Relative strengths are its profitability and asset utilization; weaknesses include its reliance on leverage (financial risk)
		Relative strengths are its profit margin and total asset turnover; Weaknesses are its decreasing debt level.
		Relative strengths are its return on equity and decreasing debt levels; Weaknesses are its profit margin.
		None of the above are accurate.

4. In the case it appears that inventory is accumulating, how should inventory be adjusted?

		Inventory should be decreased to free up cash to buy other assets or pay off liabilities.
		Inventory should be increased so that additional goods are available for sale.
		Inventory should remain the same.
		Inventory should be first increased and then decreased to meet demand.
		None of the above.

Answer 1

1. Option a is correct option because infact ratio analysis is used to compare past data and also to compare with other companies.

2. Option e all of the above are correct. Increasing debt ratio, debt and equity multiplier increases leverage.

3. Option b Relative strengths are its profitability and asset utilization; weaknesses include its reliance on leverage (financial risk)
(To understand better need to know the case though.

4. Option a Inventory should be decreased to free up cash to buy other assets or pay off liabilities.

Please Discuss in case of Doubt

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