Financial Reporting And Analysis - Financial Reporting And Analysis Section 2

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21. The use of financial ratio analysis is most likely limited in which of the following situations?

  • Option : A
  • Explanation : Financial ratio analysis is limited by the use of alternative accounting methods. Accounting methods play an important role in the interpretation of financial ratios. The lack of consistency across companies makes comparability difficult to analyze and limits the usefulness of ratio analysis.
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22. Thiago Silva, an equity research analyst, wants to analyze a company from different perspectives through financial ratios. He will least likely be able to determine:

  • Option : A
  • Explanation : Financial ratios alone are not sufficient to determine the creditworthiness of a company. Other factors must also be considered, such as examining the entire operation of the company, meeting with management, touring company facilities, and so forth.
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23. Which of the following is most likely true about ratios?

  • Option : C
  • Explanation : Statement A is incorrect because ratios explain what happened, but do not explain why it happened. Statement B is incorrect because ratios allow comparison of different sized companies.
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24. Which of the following is least likely a limitation of ratio analysis?

  • Option : C
  • Explanation : The microeconomic relationships within a company are the insights that the ratio analysis provides. Hence, this is not a limitation.
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25. Sam Robson wants to compare a specific metric for company J with the same metric for company K. Which of the following kinds of analyses is Robson most likely to conduct?

  • Option : A
  • Explanation : The cross-sectional analysis allows for comparing a specific metric for a company with the same metric for another company.
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