Finance 420 Exam 2 with correct |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
answers
Benchmark (noun) - correct answer✔✔A standard by which various options may be measured
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or judged.
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What are the three reasons financial statements are important? - correct answer✔✔1) They
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provide a common basis for evaluation.
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2) They highlight areas that require further investigation and analysis.
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3) They work in conjunction with qualitative information about the company and good
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judgement.
Benchmark (business verb) - correct answer✔✔Studying competing options or standards in
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order to improve the performance of one's firm.
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Internal Uses - correct answer✔✔➢ Performance evaluation - comparison and compensation
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between divisions (e.g., pay managers more in better performing divisions).
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➢ Future planning - guide in estimating future cash flows.
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External Uses - correct answer✔✔Creditors, suppliers, customers, stockholders, etc.
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Time Trend Analysis - correct answer✔✔- How the firm's performance is changing through
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time
,- Longitudinal or Vertical analysis
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(2 main Categories of Ratio Comparison)
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Peer Group Analysis - correct answer✔✔- Compare to similar companies or within industries
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at the same time
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- Cross-Sectional or Horizontal analysis
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(2 main categories of Ratio Comparisons)
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Short Term Liquidity Ratios - correct answer✔✔- Ability of the firm to meet short-term
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
demands for cash. |||\\\ |||\\\ |||\\\
- Short-term solvency
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(Five Main Categories of Financial Ratios)
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Liquidity - correct answer✔✔The measure of cash generation given
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1) relative ease and speed of conversion to cash with
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2) no loss in intrinsic value. Both conditions must be met to be considered liquid.
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(Used to explain Short-Term Liquidity Ratios)
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Long-Term Solvency Ratios - correct answer✔✔- Ability of the firm to generate sufficient
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liquidity over time to meet debt service obligations (interest payments, etc.).
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
, - Financial Leverage
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(Five Main Categories of Financial Ratios)
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Asset Management Ratios - correct answer✔✔- Measures how efficiently or intensely a firm
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uses its assets to generate sales
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- Asset utilization
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(Five Main Categories of Financial Ratios)
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Profitability Ratios - correct answer✔✔Measures how efficiently or intensely a firm uses its|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
assets to generate net income. |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
(Five Main Categories of Financial Ratios)
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Market Value Ratios - correct answer✔✔- Measures the overall impression shareholders hold
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
of the firm.
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- I.e. value shareholders assign the firm compared to sales, earnings, book value, etc.
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
(Five Main Categories of Financial Ratios)
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Quick Ratio ("acid test" ratio) - correct answer✔✔Measure of a firm's ability to meet short
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
term obligations with its most liquid assets.
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Higher Ratio = More Liquidity |||\\\ |||\\\ |||\\\ |||\\\
answers
Benchmark (noun) - correct answer✔✔A standard by which various options may be measured
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
or judged.
|||\\\
What are the three reasons financial statements are important? - correct answer✔✔1) They
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
provide a common basis for evaluation.
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
2) They highlight areas that require further investigation and analysis.
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
3) They work in conjunction with qualitative information about the company and good
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
judgement.
Benchmark (business verb) - correct answer✔✔Studying competing options or standards in
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
order to improve the performance of one's firm.
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Internal Uses - correct answer✔✔➢ Performance evaluation - comparison and compensation
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
between divisions (e.g., pay managers more in better performing divisions).
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
➢ Future planning - guide in estimating future cash flows.
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
External Uses - correct answer✔✔Creditors, suppliers, customers, stockholders, etc.
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Time Trend Analysis - correct answer✔✔- How the firm's performance is changing through
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
time
,- Longitudinal or Vertical analysis
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
(2 main Categories of Ratio Comparison)
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Peer Group Analysis - correct answer✔✔- Compare to similar companies or within industries
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
at the same time
|||\\\ |||\\\ |||\\\ |||\\\
- Cross-Sectional or Horizontal analysis
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
(2 main categories of Ratio Comparisons)
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Short Term Liquidity Ratios - correct answer✔✔- Ability of the firm to meet short-term
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
demands for cash. |||\\\ |||\\\ |||\\\
- Short-term solvency
|||\\\ |||\\\ |||\\\
(Five Main Categories of Financial Ratios)
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Liquidity - correct answer✔✔The measure of cash generation given
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
1) relative ease and speed of conversion to cash with
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
2) no loss in intrinsic value. Both conditions must be met to be considered liquid.
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
(Used to explain Short-Term Liquidity Ratios)
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Long-Term Solvency Ratios - correct answer✔✔- Ability of the firm to generate sufficient
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
liquidity over time to meet debt service obligations (interest payments, etc.).
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
, - Financial Leverage
|||\\\ |||\\\ |||\\\
(Five Main Categories of Financial Ratios)
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Asset Management Ratios - correct answer✔✔- Measures how efficiently or intensely a firm
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
uses its assets to generate sales
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
- Asset utilization
|||\\\ |||\\\ |||\\\
(Five Main Categories of Financial Ratios)
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Profitability Ratios - correct answer✔✔Measures how efficiently or intensely a firm uses its|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
assets to generate net income. |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
(Five Main Categories of Financial Ratios)
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Market Value Ratios - correct answer✔✔- Measures the overall impression shareholders hold
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
of the firm.
|||\\\ |||\\\ |||\\\
- I.e. value shareholders assign the firm compared to sales, earnings, book value, etc.
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
(Five Main Categories of Financial Ratios)
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Quick Ratio ("acid test" ratio) - correct answer✔✔Measure of a firm's ability to meet short
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
term obligations with its most liquid assets.
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
Higher Ratio = More Liquidity |||\\\ |||\\\ |||\\\ |||\\\
