Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Textbook Question
Chapter 7, Problem 6Q
Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry?
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What are the Limitations of Financial Ratios in Business Decisions?
Which is not a potential problem of utilizing ratio analysis?
A. trends and industry averages are historical in nature.
B. financial data may be distorted due to price-level changes.
C. firms within an industry may not use similar accounting methods.
D. all of the above
E. answer not given
Explain the Limitations of Financial Ratios in Business Decisions?
Chapter 7 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 7 - Define each of the following terms:
Liquidity...Ch. 7 - Financial ratio analysis is conducted by managers,...Ch. 7 - Prob. 3QCh. 7 - Profit margins and turnover ratios vary from one...Ch. 7 - How might (a) seasonal factors and (b) different...Ch. 7 - Why is it sometimes misleading to compare a...Ch. 7 - Greene Sisters has a DSO of 20 days. The companys...Ch. 7 - Vigo Vacations has $200 million in total assets,...Ch. 7 - Winston Watch’s stock price is $75 per share....Ch. 7 - Reno Revolvere has an EPS of $1.50, a cash flow...
Ch. 7 - Needham Pharmaceuticals has a profit margin of 3%...Ch. 7 - Prob. 6PCh. 7 - Ace Industries has current assets equal to 3...Ch. 7 - The Morrit Corporation has $600,000 of debt...Ch. 7 - The Kretovich Company had a quick ratio of 1.4, a...Ch. 7 - Data for Lozano Chip Company and its industry...Ch. 7 - Prob. 14PCh. 7 - Why are ratios useful? What three groups use ratio...Ch. 7 - Prob. 2MCCh. 7 - Calculate the 2019 inventory turnover, days sales...Ch. 7 - Calculate the 2019 debt ratio,...Ch. 7 - Prob. 5MCCh. 7 - Prob. 8MCCh. 7 - Prob. 9MCCh. 7 - What are some qualitative factors that analysts...
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- What is the basic purpose for examining trends in a company’s financial ratios and other data? What other kinds of comparisons might an analyst make?arrow_forwardWhat is the value of common-sizing analysis? Why would a company do such an analysis on another company’s financial statements?arrow_forwardWhat are the limitations to using financial ratio analysis [such as profitability ratios, liquidity ratios, gearing ratios, and investment ratios] computed from the financial statements of a company. What other alternatives could have been used to decide on the performance and investment-worthiness of a company.arrow_forward
- What is the main purpose of common-size financial statements? a)To facilitate comparisons over time b)To facilitate comparison between different-sized firms c) To facilitate comparison between firms of different structure d) To remove the bias introduced by increasing revenuearrow_forwardWhen you are interpreting financial ratios, it is useful to compare a company's ratios to some form of standard. Group of answer choices True Falsearrow_forwardNo single ratio can predict the success or Failure of a company. What different types of Ratios are necessary for financial analysis? How is the Return on Assets (ROA) Ratio Calculated?arrow_forward
- What is the overall purpose of financial ratios? What is their use relative to the economy, the firm’s industry, the firm’s main competitors, and the firm’s past relative ratios.arrow_forwardTo evaluate a company’s performance, investors need a benchmark to which they can compare its financial ratios. What are some of the problems associated with these comparisons?arrow_forwardWhich of the following is not one of the typical uses of financial ratios? a. Comparisons to a company’s historic values b. Comparison to benchmarksc. Comparison to competitors’ values d. Comparison to zero with positive values indicating desirable ratios and negative values indicating undesirable ratios.arrow_forward
- 20. Which of the following factor does not affect a company's financial ratios? Select one: a. Aggressive revenue recognition practices. b. Accounting for similar economic fundamentals in a similar fashion c. The timing of asset purchases. d. The presence of nonrecurring items among the firms being analysed.arrow_forwardAny difference in the financial statements for financial firms compared to non financial firms?arrow_forwardWhat is the usefulness of using Ratio analysis in financial reporting? What is industry average? How it benefits?arrow_forward
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