D076 - FINANCE SKILLS FOR
MANAGERS UNIT 4 QUESTIONS &
ANSWERS
4 Reasons Ratios are Useful - ANSWER1 - Standardization
2 - Flexibility
3 - Focus
4 - Evaluation
Benchmarking - ANSWERThe process of completing a financial analysis and comparing
a firm's performance to that of other similar firms.
Trend Analysis - ANSWERComparing a firm's ratios across time
Cross-Sectional Analysis - ANSWERCompares a firm's financial ratios to other firms'
ratios or industry averages
Seasonal Firms - ANSWERFirms whose performance varies according to the season.
Which statement below is an example of how ratios are used in the field of finance?
- A firm's ratios are compared with those of a benchmark peer group to determine the
firm's relative strength and performance.
- Ratio analysis is performed based on a strict set of rules governed by generally
accepted accounting principles.
- A firm's ratios may vary year over year, so they are not helpful for evaluating whether
firm goals are met.
- Ratios are helpful only when comparing companies that are the same size and that
use the same operational style. - ANSWERA firm's ratios are compared with those of a
benchmark peer group to determine the firm's relative strength and performance.
Why are ratios considered flexible? - ANSWERBecause they are not regulated and can
be changed or invented according to a firm's needs
How might calculating financial ratios help shareholders? - ANSWERRatios can be
used to determine whether a firm is maximizing shareholder wealth.
The firm Betsy's Books conducts a financial analysis using ratios to know how it is
performing in comparison to other similar firms. What is this process called? -
ANSWERBenchmarking
5 Major Categories of Ratios - ANSWER1 - Liquidity
2- Activity
, 3 - Leverage
4 - Profitability
5 - Market
Liquidity Ratios - ANSWERmeasure a firm's ability to meet short-term obligations and
include the current ratio and quick ratio.
Activity Ratios - ANSWERAKA Efficiency ratios; measure how well the company uses
its assets to generate sales or cash -- the firm's operational efficiency and profitablilty.
Leverage Ratios - ANSWERA category of ratios that consider how a firm is financed,
aka financing ratios or solvency ratios.
Profitability Ratios - ANSWERA category of ratios that are commonly used to directly
judge how well management is doing as they strive to maximize owner wealth.
Market Ratios - ANSWERA category of ratios that are used to evaluate the current
share price of a public firm's stock.
Angel Investor - ANSWERA wealthy individual who invests their own money into a start-
up or growing companies.
What type of ratio is used to assess a firm's ability to meet short-term obligations
without raising external capital? - ANSWERLiquidity Ratios
What does the net margin measure? - ANSWERThe percent of revenue that is retained
as profit for the firm.
DuPont Framework - ANSWERallows an investor to determine what financial activities
are contributing the changes in the return on equity.
Return on Equity - ANSWERa composition of the profitability, efficiency, and capital
structure of a firm.
Which of these measures is a component of return on equity?
- Operating margin
- Net margin
- Fixed asset turnover
- Current ratio - ANSWERNet Margin
How can the DuPont framework help a company assess its return on equity? -
ANSWERIt allows the company to determine how its abilities to generate profits,
manage assets, and use financing contribute to the return on equity.
MANAGERS UNIT 4 QUESTIONS &
ANSWERS
4 Reasons Ratios are Useful - ANSWER1 - Standardization
2 - Flexibility
3 - Focus
4 - Evaluation
Benchmarking - ANSWERThe process of completing a financial analysis and comparing
a firm's performance to that of other similar firms.
Trend Analysis - ANSWERComparing a firm's ratios across time
Cross-Sectional Analysis - ANSWERCompares a firm's financial ratios to other firms'
ratios or industry averages
Seasonal Firms - ANSWERFirms whose performance varies according to the season.
Which statement below is an example of how ratios are used in the field of finance?
- A firm's ratios are compared with those of a benchmark peer group to determine the
firm's relative strength and performance.
- Ratio analysis is performed based on a strict set of rules governed by generally
accepted accounting principles.
- A firm's ratios may vary year over year, so they are not helpful for evaluating whether
firm goals are met.
- Ratios are helpful only when comparing companies that are the same size and that
use the same operational style. - ANSWERA firm's ratios are compared with those of a
benchmark peer group to determine the firm's relative strength and performance.
Why are ratios considered flexible? - ANSWERBecause they are not regulated and can
be changed or invented according to a firm's needs
How might calculating financial ratios help shareholders? - ANSWERRatios can be
used to determine whether a firm is maximizing shareholder wealth.
The firm Betsy's Books conducts a financial analysis using ratios to know how it is
performing in comparison to other similar firms. What is this process called? -
ANSWERBenchmarking
5 Major Categories of Ratios - ANSWER1 - Liquidity
2- Activity
, 3 - Leverage
4 - Profitability
5 - Market
Liquidity Ratios - ANSWERmeasure a firm's ability to meet short-term obligations and
include the current ratio and quick ratio.
Activity Ratios - ANSWERAKA Efficiency ratios; measure how well the company uses
its assets to generate sales or cash -- the firm's operational efficiency and profitablilty.
Leverage Ratios - ANSWERA category of ratios that consider how a firm is financed,
aka financing ratios or solvency ratios.
Profitability Ratios - ANSWERA category of ratios that are commonly used to directly
judge how well management is doing as they strive to maximize owner wealth.
Market Ratios - ANSWERA category of ratios that are used to evaluate the current
share price of a public firm's stock.
Angel Investor - ANSWERA wealthy individual who invests their own money into a start-
up or growing companies.
What type of ratio is used to assess a firm's ability to meet short-term obligations
without raising external capital? - ANSWERLiquidity Ratios
What does the net margin measure? - ANSWERThe percent of revenue that is retained
as profit for the firm.
DuPont Framework - ANSWERallows an investor to determine what financial activities
are contributing the changes in the return on equity.
Return on Equity - ANSWERa composition of the profitability, efficiency, and capital
structure of a firm.
Which of these measures is a component of return on equity?
- Operating margin
- Net margin
- Fixed asset turnover
- Current ratio - ANSWERNet Margin
How can the DuPont framework help a company assess its return on equity? -
ANSWERIt allows the company to determine how its abilities to generate profits,
manage assets, and use financing contribute to the return on equity.
