Discuss the limitations of ratio analysis and the cautions which must be taken when reviewing a cross-sectional and time-series analysis
What will be an ideal response?
In summarizing a large number of ratios, all aspects of a firm's activities can be assessed. However, limitations of ratio analysis must be recognized. A comparison of current and past ratios may reveal mismanagement. But, the ratio does not give definitive cause to the problem. Additional investigation is necessary to confirm the possible problem. The analyst must be cautious of the following points: (1 ) a single ratio does not provide sufficient information to judge the overall performance of the firm, (2 ) the dates of the financial statements should be the same, (3 ) audited statements should be used, (4 ) similar accounting treatment of comparative data is essential, and (5 ) inflation and differing asset ages can distort ratio comparisons.
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Which of the following statements is true of the debt to equity ratio?
A) The higher the debt to equity ratio, the lower the company's financial risk. B) The higher the debt to equity ratio, the greater the company's financial risk. C) If the debt to equity ratio is greater than 1, the company is financing more assets with equity than with debt. D) If the debt to equity ratio is less than 1, the company is financing more assets with debt than with equity.
In a perpetual inventory system, the Merchandise Inventory account must be closed at the end of the accounting period.
Answer the following statement true (T) or false (F)
A satisfaction of a mortgage is also called a(n) ________.
A. accommodation B. reconveyance C. consignment D. foreclosure
Rent-all Trucks & Trailers, Inc. (RT&T), and United Delivery Service enter into a contract for a lease of trucks. RT&T is a merchant who deals in goods of the kind leased. Under the UCC, an implied warranty of merchantability arises
A. automatically in lease contracts. B. only if the lessee asks for it. C. only if the lessor does not expressly disclaim it. D. only in conjunction with sales contracts, not lease contracts.