©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
Fina 470 Final Discussion Q's Post-Ch.7
(3) Practice Questions and Answers
How is return on invested capital used as an internal management tool? - Ans:✔✔-these returns are
made up of the results achieved by individual product lines and projects, and well managed companies
exercise rigorous control over the returns achieved by each of its profit centers, and it rewards the
managers on the basis of such results. When evaluating new investments in assets or projects, mgmt will
compute the estimated returns it expects to achieve and use these estimates as a basis for its decision
Why is return on invested capital one of the most relevant measures of company performance? How do
we use this measure in our analysis of financial statements? - Ans:✔✔-profit generation is the first and
foremost purpose of a company. the effectiveness of operating performance determines the ability of
the company to survive financially, to attract suppliers of funds, and to reward them adequately. Return
on invested capital is the prime measure of company performance. analysts use it as an indicator of
managerial effectiveness and/or a measure of the company's ability to earn a satisfactory return on
investment
Why is interest expense ignored when computing return on net operating assets (RNOA)? - Ans:✔✔-the
exclusion of interest from income deductions is due to its being regarded as a payment for the use of
Page 1/6
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
money from the suppliers of debt capital. If the investment base is defined as Net operating assets, than
Net Operating Profit After Tax (NOPAT) is used
Why is liquidity important in analysis of financial statements? Explain its importance from the view of
more than one type of user - Ans:✔✔-liquidity is an indicator of an entity's ability to meet its current
obligations. an entity in a weak short-term liquidity position will have difficulty in meeting short-term
obligations. Viewpoints:
1. Equity Investor - in this case, the company is likely unable to avail itself of favorable discounts and to
take advantage of profitable business opportunities, and could even mean loss of control an eventual
partial/total loss of capital investment
2. Creditors - in this case, delay in collection of interest and principle due would be expected and there is
a possibility of the partial or total loss of the amounts due to them
What is window-dressing of current assets and liabilities? How can we recognize whether financial
statements are window-dressed? - Ans:✔✔-"window-dressing" refers the the adjustment of year-end
account balances of current assets and liabilities to show a more favorable current ration than is
otherwise warranted.
The analyst should go beyond year-end reported amounts and try to obtain as many interim readings of
the current ratio as possible.
Page 2/6
FIRST PUBLISH OCTOBER 2024
Fina 470 Final Discussion Q's Post-Ch.7
(3) Practice Questions and Answers
How is return on invested capital used as an internal management tool? - Ans:✔✔-these returns are
made up of the results achieved by individual product lines and projects, and well managed companies
exercise rigorous control over the returns achieved by each of its profit centers, and it rewards the
managers on the basis of such results. When evaluating new investments in assets or projects, mgmt will
compute the estimated returns it expects to achieve and use these estimates as a basis for its decision
Why is return on invested capital one of the most relevant measures of company performance? How do
we use this measure in our analysis of financial statements? - Ans:✔✔-profit generation is the first and
foremost purpose of a company. the effectiveness of operating performance determines the ability of
the company to survive financially, to attract suppliers of funds, and to reward them adequately. Return
on invested capital is the prime measure of company performance. analysts use it as an indicator of
managerial effectiveness and/or a measure of the company's ability to earn a satisfactory return on
investment
Why is interest expense ignored when computing return on net operating assets (RNOA)? - Ans:✔✔-the
exclusion of interest from income deductions is due to its being regarded as a payment for the use of
Page 1/6
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
money from the suppliers of debt capital. If the investment base is defined as Net operating assets, than
Net Operating Profit After Tax (NOPAT) is used
Why is liquidity important in analysis of financial statements? Explain its importance from the view of
more than one type of user - Ans:✔✔-liquidity is an indicator of an entity's ability to meet its current
obligations. an entity in a weak short-term liquidity position will have difficulty in meeting short-term
obligations. Viewpoints:
1. Equity Investor - in this case, the company is likely unable to avail itself of favorable discounts and to
take advantage of profitable business opportunities, and could even mean loss of control an eventual
partial/total loss of capital investment
2. Creditors - in this case, delay in collection of interest and principle due would be expected and there is
a possibility of the partial or total loss of the amounts due to them
What is window-dressing of current assets and liabilities? How can we recognize whether financial
statements are window-dressed? - Ans:✔✔-"window-dressing" refers the the adjustment of year-end
account balances of current assets and liabilities to show a more favorable current ration than is
otherwise warranted.
The analyst should go beyond year-end reported amounts and try to obtain as many interim readings of
the current ratio as possible.
Page 2/6
