6.Which of the following statements about financial statement analysis is most correct?

a.The current ratio is the best available measure of liquidity.

b.Du Pont analysis is based on the fact that return on equity (ROE) can be expressed as the sum of four other ratios.

c.It is relatively easy to interpret a ratio in the absence of comparative data.

d.There are no limitations to financial statement analysis, so analysts can always be confident of their conclusions.

e.None of the above statements are correct.

7.The days cash on hand ratio and current ratio both are rough measures of liquidity. The best way to assess the liquidity of an organization is to construct a cash budget.

True

False

8.Which of the following statements about debt management ratios is false?

a.There are two types of debt management ratios: capitalization ratios and coverage ratios.

b.Capitalization ratios use balance sheet data to measure the relative amount of debt financing used.

c.Coverage ratios use income statement data to measure the extent to which earnings (or cash flow) cover interest (or fixed financial) obligations.

d.The debt ratio is a capitalization ratio while the debt-to-equity ratio is a coverage ratio.

e.The debt ratio is defined as total debt divided by total assets.

9.Which of the following statements is not a limitation of ratio analysis?

a.There are an insufficient number of ratios available.

b.Seasonal factors can distort ratios.

c.Different organizations can use different, but allowed under GAAP, accounting conventions.

d.It often is hard to tell whether a given ratio is good or bad.

e.Inflation effects can distort ratios.

10.If a bank pays quarterly compounding on its savings accounts, the ending amount after one year on a $1,000 deposit will be less than if the bank paid annual compounding.

a.True

b.False