Ch19 – Analysis and interpretation | Complete Test Bank – 10th - Test Bank | Financial Accounting 10e by John Hoggett by John Hoggett. DOCX document preview.
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Testbank
to accompany
Financial accounting
10th edition
by
Hoggett et al.
© John Wiley & Sons Australia, Ltd 2018
Chapter 19: Analysis and interpretation of financial statements
Multiple-choice questions
1. Besides the information in annual reports, which of the following are sources of financial information about companies that are useful for analysing their performance and financial position?
- The Internet
- The Stock Exchange
- Financial newspapers and journals
- Stock brokers
- Information on competitors
a. I, II and III only
b. II, III, IV and V only
c. II, IV and V only
d. I, II, III, IV and IV
Correct answer: d
Learning objective 19.1 ~ obtain information about entities for the purpose of analysing their performance and financial position.
2. Which of the following are sources of financial information about companies?
I. Published financial statements (annual reports)
II. The Internet
III. The Stock Exchange
IV. Financial newspapers and journals
V. Financial advisory services
a. I, II, III, IV, V
b. I, III, IV, V
c. II, III, IV, V
d. I, II, III, IV
Correct answer: a
Learning objective 19.1 ~ obtain information about entities for the purpose of analysing their performance and financial position.
3. Financial stability refers to the ability of an entity to:
a. minimise expenses.
b. increase market share.
c. meet long-term obligations.
d. achieve a high rate of profit.
Correct answer: c
Learning objective 19.2 ~ identify the need for using various analytical techniques to assess an entity’s performance and financial position.
4. Richmond Co performed a trend analysis at the end of the financial period. Which of the following changes appears to be the most significant in requiring further investigation?
a. An increase in revenues of 18%.
b. An increase in total assets of 6%.
c. An increase in 14% for bad debts written off
d. An increase in accounts receivable of 4%.
Correct answer: c
Learning objective 19.2 ~ identify the need for using various analytical techniques to assess an entity’s performance and financial position.
5. analysis measures an entity’s financial structure and its ability to continue to operate into the future and meet its long-term cash obligations.
a. trend
b. liquidity
c. working capital
d. financial stability
Correct answer: d
Learning objective 19.2 ~ identify the need for using various analytical techniques to assess an entity’s performance and financial position.
6. To be useful for decision making, absolute dollar amounts in financial statements need to be compared with other information. Which of the following are possible comparisons?
- Prior year results
- Current year sales, total assets etc.
- Results of similar businesses or industry averages
a. I and II only
b. I, II and III
c. II and III only
d. None of the above
Correct answer: b
Learning objective 19.2 ~ identify the need for using various analytical techniques to assess an entity’s performance and financial position.
7. Which of the following are possible uses of financial analysis?
- By shareholders to assess future profitability and financial stability
- By management for planning and control
- By financial analysts to predict future share price
- By the government to estimate taxation payable
a. II, III and IV
b. III and IV
c. I, II and III only
d. I and IV
Correct answer: c
Learning objective 19.2 ~ identify the need for using various analytical techniques to assess an entity’s performance and financial position.
8. statements are those financial statements in which each item is stated as a percentage of a specific base item in the same statement.
a. base rate
b. comparative
c. general purpose
d. common size
Correct answer: d
Learning objective 19.3 ~ prepare horizontal, trend and vertical analyses of an entity’s financial statements and be able to interpret these analyses.
9. In a trend analysis of Lester Company, which of the following changes appear to be the most significant in requiring further investigation?
a. An increase in revenue of 12%.
b. An increase in total assets of 5%.
c. An increase of 15% in borrowing costs.
d. A decrease of 4% in motor vehicle expenses.
Correct answer: c
Learning objective 19.3 ~ prepare horizontal, trend and vertical analyses of an entity’s financial statements and be able to interpret these analyses.
10. Vertical analysis of a statement of financial position usually:
a. calculates each balance sheet item as a percentage of sales.
b. calculates each balance sheet item as a percentage of share capital.
c. calculates each balance sheet item as a percentage of the bank balance.
d. calculates each balance sheet item as a percentage of total assets (funds).
Correct answer: d
Learning objective 19.3 ~ prepare horizontal, trend and vertical analyses of an entity’s financial statements and be able to interpret these analyses.
11. Swift Removals has the following data available.
Sales $600 000
Selling expenses 180 000
Profit 90 000
Using vertical analysis, express selling expenses as a percentage of the base amount.
a. 15%
b. 30%
c. 40%
d. 45%
Correct answer: b
Feedback: 30% = Selling expenses/sales = $180 000/$600 000.
Learning objective 19.3 ~ prepare horizontal, trend and vertical analyses of an entity’s financial statements and be able to interpret these analyses.
12. Which of the following ratios measure the adequacy of profits?
- Profit compared to sales
- Profit compared to equity
- Profit compared to total assets
- Profit before interest and finance costs/ finance costs
a. II and IV
b. I and II only
c. I, III and IV
d. I, II and III only
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
13. Financial ratios are used for all the following purposes except:
a. by creditors to monitor liquidity.
b. by shareholders to assess profitability.
c. by taxation authorities to determine the amount of tax payable.
d. by management for planning and control.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
14. Profit before finance costs and taxation divided by average total assets is the formula for:
a. dividend yield.
b. profit margin.
c. earnings per share.
d. return on total assets.
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
15. If an entity is able to earn more on borrowings than the cost of those borrowings the return on equity will:
a. vary.
b. increase.
c. decrease.
d. be unchanged.
Correct answer: b
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
16. Profit before finance costs is used in calculating return on total assets because:
a. interest rates are hard to predict.
b. it is simpler to calculate than profit after deducting finance costs.
c. the efficient use of resources should be examined independently of the method of financing.
d. interest is a tax deduction for a company.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
17. Which of the following statements is incorrect?
a. Dividend yield measures the rate of return on the market price of a share.
b. Dividend yield is an important ratio for an investor who is acquiring shares mainly for income.
c. The dividend payout ratio measures the percentage of profit paid out in dividends to ordinary shareholders.
d. Dividend per share is the ratio to use when comparing income from shares with income from alternative investments.
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
18. The debt ratio measures:
a. the proportion of assets financed by borrowing.
b. profits earned in relation to debt.
c. the time taken to collect debts.
d. liquidity.
Correct answer: a
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
19. Amazing Lights Ltd has the following amounts on its statement of financial position at year-end.
Current assets $ 300 000
Long-term assets 900 000
Current liabilities 250 000
Long-term liabilities 450 000
Share capital 400 000
Retained earnings 100 000
The debt ratio at year-end is:
a. 41.67%
b. 58.33%
c. 50.00%
d. 37.50%
Correct answer: b
Feedback: 58.33% = total liabilities/total assets = $700 000/$1 200 000.
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
20. The following ratios are measures of aspects of a firm’s profitability, except for:
a. return on total assets.
b. earnings yield.
c. dividend yield.
d. current ratio.
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
21. The formula for the profit margin ratio is:
a. revenue divided by profit.
b. gross profit divided by net sales.
c. profit after tax divided by revenues.
d. profit after tax divided by total assets.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
22. A profit ratio for a retailer of 8.2% in 2019 compared to 7.6% in 2018 indicates:
a. a declining profit margin.
b. no change in the profit margin.
c. an improving profit margin.
d. impending bankruptcy.
Correct answer: a
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
23. Possible explanations for inadequate profitability include all of the following except for:
a. expenses are too high.
b. selling prices are too low.
c. borrowing costs too low.
d. excessive investment in assets in relation to revenues.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
24. is calculated as annual dividend per ordinary share divided by market price per ordinary share.
a. dividend yield.
b. dividend per share.
c. earnings per share.
d. dividend payout ratio.
Correct answer: a
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
25. In relation to the price-earnings ratio (P/E ratio), which statement is incorrect?
a. Higher P/E ratios tend to be associated with growth companies.
b. As expectations of future profits increase the P/E ratio tends to fall.
c. It measures how much investors are willing to pay for each dollar of earnings.
d. A P/E ratio of 5.2 means that the shares of the company are selling at 5.2 times current profits.
Correct answer: b
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
26. Ratios are normally divided into three general groups, which of these is not one of those groups?
a. Liability ratios
b. Liquidity ratios
c. Profitability ratios
d. Financial stability ratios
Correct answer: a
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
27. The current (working capital) ratio is calculated by dividing:
a. profit by current assets.
b. revenue by current assets.
c. current liabilities by current assets.
d. current assets by current liabilities.
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
28. Which of the following businesses is likely to have the highest inventory turnover ratio?
a. jeweller.
b. music shop.
c. fish and chip shop.
d. car dealership.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
29. Trends in ratios that measure the relationship between debt and equity provide information about which (if any) of the following?
- Long term stability
- Degree of risk in using debt financing
- Margin of safety to creditors in the event of liquidation
a. None.
b. I and II only
c. II and III only
d. I, II and III
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
30. Using borrowed funds in an attempt to earn a return greater than the cost of borrowing is referred to as:
a. equity funding.
b. capital budgeting.
c. gearing or leverage.
d. overdraft financing.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
31. Which statement concerning earnings per share is incorrect?
a. Earnings per share is regarded as one of the least important financial ratios.
b. It represents a conversion of the absolute dollar amount of profit to a per share basis.
c. If profits increase earnings per share could still decrease if share capital increases at a greater rate than profits.
d. In calculating earnings per ordinary share, preference dividends are deducted from profit.
Correct answer: a
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
32. Calculate the dividend yield for the year ending 30 June 2019 using the following information: interim dividend was 8c per ordinary share; the final dividend 12c per share; and the market price per share on 30 June 2019 was $6.00.
a. 2.18%.
b. 3.33%.
c. 33.33%.
d. 30.00%.
Correct answer: b
Feedback: 3.33% = (8c + 12c) /$6.00
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
33. The formula to calculate receivables (debtors) turnover in times per annum is:
a. 365 divided by net sales
b. Net sales revenue divided by total assets
c. Net sales revenue divided by average receivables balance
d. Average receivables balance divided by net sales revenue
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
34. Which of the following ratios measure the relationship between debt and equity?
- The debt ratio
- The current ratio
- The equity (proprietorship) ratio
- The leverage ratio (total assets/total equity)
a. I, II, III and IV
b. III and IV only
c. I and III only
d. I, III and IV only
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
35. Johnson Foods Company had a before-tax profit of $250 000 after deducting interest expenses of $18 000. Johnson Foods’ liabilities and equity total $1 875 000. Return on total assets, before finance costs and tax is:
a. 14.29%.
b. 13.33%.
c. 12.37%.
d. unable to be calculated from the information provided.
Correct answer: a
Feedback: ([$250 000 + $18 000]/$1 875 000) × 100/1
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
36. Profit less income tax, divided by revenue, is the formula for:
a. return on equity.
b. return on assets.
c. profit margin.
d. earnings per share.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
37. The profit margin ratio measures:
a. return to shareholders.
b. the rate of return on total assets.
c. the proportion of each sales dollar that represents profit.
d. the difference between the purchase price and the selling price of inventory.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
38. When calculating the rate of return on total assets the interest is added back to profit before tax:
a. because it must be paid regardless of profits.
b. because interest rates are variable over time.
c. to indicate to lenders that some risk is involved.
d. to reflect the fact that the efficient use of resources should be examined independently from the method of financing.
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
39. The following ratios are indicators of profitability except for:
a. capitalisation ratio.
b. return on equity.
c. earnings per share.
d. profit margin.
Correct answer: a
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
40. Using the following information, calculate the price-earnings ratio of the shares for the current year.
Per share
Carrying value on 31 December, current year $20
Quoted market value on 31 December, current year 25
Earnings per share for the current year 5
Dividend per share for the current year 2
a. 4 to 1.
b. 5 to 1.
c. 10 to 1.
d. 12.5 to 1.
Correct answer: b
Feedback: $25/$5
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
41. Which P/E ratios and earnings yields do not match?
a. P/E ratio 4; earnings yield 25%
b. P/E ratio 6; earnings yield 15 %
c. P/E ratio 8; earnings yield 12.5%
d. P/E ratio 10; earnings yield 10%
Correct answer: b
Feedback: The P/E ratio x the earnings yield equals 100, i.e. the PE ratio is the reciprocal of the earnings yield. If the P/E ratio is 6; the earnings yield is 16.67% not 15 %
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
42. The average market price of Lavendar Ltd’s ordinary shares is $5.40 and the earnings per ordinary share are 90c. The P/E ratio is:
a. 6.0
b. 4.86
c. 16.67
d. unable to be calculated from the information provided.
Correct answer: a
Feedback: ( 6.0= $5.40 / $0.90)
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
43. The calculation for dividend yield on ordinary shares is:
a. annual dividend divided by earnings.
b. market price divided by dividend per share.
c. dividend per share divided by market price per share.
d. annual dividend divided by number of ordinary shares.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
44. Which of the following ratios would be the most helpful to an investor who is investing in ordinary shares primarily for dividends rather than for appreciation in market price?
a. dividend yield.
b. current ratio.
c. rate of return on ordinary equity.
d. return on total assets.
Correct answer: a
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
45. The following information is included in the financial statements of Monty’s Mechanics:
Total assets $ 600 000
Profit 90 000
Current liabilities 320 000
If current assets = 40% of total assets the current ratio for Monty’s Mechanics is:
a. 0.53 to 1
b. 0.75 to 1
c. 1.33 to 1
d. 1.88 to 1
Correct answer: b
Feedback: ([$600 000 × 40%]/320 000)
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
46. Windbreaker Limited has a current ratio of 2.5:1. Which of the following actions will decrease this ratio?
a. Declaration of a dividend
b. Sale of a machine for cash
c. Issue of long-term debentures
d. Collection of an account receivable
Correct answer: a
Feedback: Current assets stay the same and current liabilities increase.
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
47. Which of the following statements concerning the current ratio is incorrect?
a. The current ratio can be manipulated at balance date, e.g. by using cash to pay off short-term debt.
b. A high current ratio may indicate excessive investment in working capital.
c. A low current ratio may indicate difficulty in meeting short-term commitments.
d. A current ratio of 1.5 to 1 should always be maintained.
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
48. The quick (acid test) ratio reflects:
a. the same information as the debt ratio.
b. the relationship of quick assets to fixed assets.
c. management's reaction time to avoid losses.
d. the belief that not all current assets can be liquidated immediately.
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
49. When calculating the quick (acid test) ratio, which of the following is normally deducted from current assets?
a. Current liabilities
b. Cash and prepayments
c. Inventory and prepaid expenses
d. Inventory and accounts receivable
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
50. Aster Limited has a current ratio of 1.75 to 1 and current liabilities of $20 000. If Aster Limited’s inventory is $8 000 the quick ratio is:
a. 1.75 to 1
b. 1.35 to 1
c. 1.4 to 1
d. 0.74 to 1
Correct answer: b
Feedback: Current assets are $20 000 × 1.75 = $35 000. Quick assets are $35 000 – $8 000 = $27 000, therefore the quick ratio is $27 000/$20 000 = 1.35 to 1.0
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
51. Buyer Co has ordered goods on credit from Seller Co. Before Seller ships the goods it would like to be sure that Buyer will be able to pay for them within the normal credit period. Assuming Seller has access to Buyer's financial statements, which of the following ratios will be of the most interest to Seller Co.?
a. Current ratio
b. Debt ratio
c. Price earnings ratio
d. Dividend yield ratio
Correct answer: a
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
52. Which of the following businesses would be expected to have the fastest inventory turnover?
a. Clothing retailer
b. Luxury car showroom
c. Fruit and vegetable store
d. Jewellery store selling custom-made jewellery
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
53. An increase in the inventory turnover ratio is normally considered to be favourable but could be unfavourable if it means:
a. liquidity is greater.
b. storage costs of inventory are lower.
c. inventory is less likely to become obsolete.
d. the firm is not carrying enough inventory to meet its customer’s needs.
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
54. At 31 December 2019, Friar Company’s financial statements include the following information:
Net sales for 2019 $210 000
Cost of sales for 2019 150 000
Beginning inventory 23 000
Ending inventory 29 000
The average number of days taken to turn over inventory for 2019 is:
a. 55 days.
b. 63 days.
c. 70 days.
d. 126 days.
Correct answer: b
Feedback: Inventory turnover = $150 000 / [($23 000 + $29 000)/2] = 5.77 times. Turnover ratio = 365 days / 5.77 times = 63 days.
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
55. Financial stability refers to the ability of an entity to:
a. pay its rent.
b. earn a high rate of profit.
c. meet its long-term obligations.
d. pay its current obligations on time.
Correct answer: c
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
56. The proportion of borrowed funds compared to equity is a measure of:
a. borrowings
b. leverage
c. equity
d. liquidity
Correct answer: b
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
57. Which of the following statements relating to the debt ratio of a company is incorrect?
a. It is an indicator of a company's long-term solvency.
b. It is a measure of the extent of a company's gearing.
c. It can be calculated by relating liabilities to total funds.
d. A higher level of debt is normally preferable from a creditor's point of view.
Correct answer: d
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
58. The statement of financial position for North Ltd has the following balances:
Current asset $160 000
Long-term assets 340 000
Current liabilities 55 000
Long-term liabilities 145 000
Share capital 200 000
Retained earnings 100 000
The equity ratio is:
a. 40%.
b. 60%.
c. 45%.
d. 55%.
Correct answer: b
Feedback: ($200 000 + $100 000)/($160 000 + $340 000)100
Learning objective 19.4 ~ conduct ratio analysis to assess an entity’s profitability, liquidity, and financial stability.
59. Cash flows from operating activities divided by (repayments of long-term borrowings + assets acquired + dividends paid) is the formula for:
a. borrowings ratio.
b. debt coverage ratio.
c. reinvestment ratio.
d. cash flow adequacy ratio.
Correct answer: d
Learning objective 19.5 ~ explain the relationships among ratios to assess the interaction between profitability, liquidity and financial stability.
60. Which statement concerning the cash flow adequacy ratio is incorrect?
a. A ratio of 100% or more over several years indicates an inadequate ability to generate sufficient operating cash to cover requirements.
b. The ratio assesses the entity’s ability to generate sufficient operating cash flow to cover its main cash requirements.
c. The main requirements for cash from operations is to pay debts, acquire assets and pay dividends.
d. A fall in the ratio indicates a lower ability to generate operating cash to meet requirements.
Correct answer: a
Learning objective 19.5 ~ explain the relationships among ratios to assess the interaction between profitability, liquidity and financial stability.
61. All of the following are limitations of financial ratio analysis except for:
a. suitable yardsticks may not be available with which to compare results.
b. year-end data is not necessarily typical of the position during the year.
c. excessive information is being disclosed in company annual reports.
d. it is the past performance that is being analysed.
Correct answer: c
Learning objective 19.6 ~ analyse and interpret the ratio information provided by a statement of cash flows.
62. Which of the following are limitations of financial analysis?
I The past is an imperfect guide to the future.
II Effects of inflation are not considered.
III Changes in accounting policies are not highlighted.
IV Use of different accounting methods across entities makes comparability difficult.
a. I, III and IV only
b. II, III and IV only
c. I and III only
d. I, II, III and IV
Correct answer: d
Learning objective 19.6 ~ analyse and interpret the ratio information provided by a statement of cash flows.
63. Which of these are limitations of financial analysis?
- Use of historical data
- Invalid comparisons
- Ratio results often contain errors in calculations
- Historical cost financial reports are not adjusted for inflation
- Non-quantitative factors are not considered
a. I, II, III and IV only
b. I, II, III and V only
c. I, II, IV and V only
d. I, II, III, IV and V
Correct answer: c
Learning objective 19.6 ~ analyse and interpret the ratio information provided by a statement of cash flows.
64. Which statement about capital market research and financial statement analysis is correct?
a. The evidence of share market research on the efficiency of the market is conclusive.
b. Little research has been carried out to determine the efficiency of share markets.
c. Financial analysis is of little use to investors if share markets are inefficient.
d. Analysts relying on financial statement analysis assume that share markets are inefficient.
Correct answer: d
Learning objective 19.7 ~ discuss the limitations of traditional financial statement analysis.
65. Which of the following statements is incorrect?
a. Fundamental analysis is engaged in by many analysts.
b. Fundamental analysis assumes that an analyst can study all the published information in relation to an entity and determine whether its shares are under/over-valued.
c. Fundamental analysis assumes that an analyst should concentrate on studying data about an entity from a primary source and give little weight to secondary sources of information.
d. Fundamental analysis assumes that an analyst can study all the published information in relation to an entity and determine whether its shares are correctly valued.
Correct answer: c
Learning objective 19.7 ~ discuss the limitations of traditional financial statement analysis.
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