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Things Held Constant Quiz

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm's performance over time.

If the current ratio of Firm A is greater than the current ratio of Firm B, we cannot be sure that the quick ratio of Firm A is greater than that of Firm B. However, if the quick ratio of Firm A exceeds that of Firm B, we can be assured that Firm A's current ratio also exceeds B's current ratio.

The inventory turnover and current ratios are related. The combination of a high current ratio and a low inventory turnover ratio relative to the industry norm might indicate that the firm is maintaining too high an inventory level or that part of the inventory is obsolete or damaged.

We can use the fixed assets turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fixed assets to total assets.

Suppose two firms have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate. However, one firm has a higher debt ratio. If BEP is greater than the interest rate on debt, the firm with the higher debt ratio will also have a higher rate of return on common equity.

If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will decrease.

Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)

Which of the following statements is most correct?

Which of the following actions can a firm take to increase its current ratio?

Tagged as: things held constant, things held constant, current ratio, things held constant, things held constant, current ratio, ratio
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