True or False 16) An income statement reports a firm's cumulative revenues and expenses from the inception of the firm through the income statement date. 17) Owners equity increases each period by the amount of the corporation's positive net cash flow. 18) If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity. 19) Common-sized income statements are used to compare companies that have the same amount of revenues. 20) Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm's financial performance across time and with competitors. 21) When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry it is called trend analysis. 22) Ratio analysis enhances our understanding of three basic attributes of performance: liquidity, profitability, and the ability to create shareholder value. 23) Theoretically, market values of assets are better for evaluating the creation of shareholder wealth than accounting numbers, but accounting numbers are used because they are more readily available. 24) Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading. 25) Financial ratios are useful for evaluating performance but should not be used for making financial projections. 26) Financial ratios are useful for measuring performance because maximizing the return on equity for common shareholders is the primary goal of financial managers. Keywords: Ratio Analysis, Goal of the Firm, ROE AACSB: Reflective thinking skills 27) If company A has a lower average collection period than company B, then company A will have a higher accounts receivable turnover. 28) Net income is the best measure to use for evaluating a firm's profits on assets because it includes the effect of financing as well as the effect of operations. 29) Operating profits or EBIT is used to measure a firm's profits on assets because it does not include the firm's cost of debt financing. Keywords: Operating Profits, Asset Management AACSB: Reflective thinking skills 30) Operating return on assets (OROA) is equal to operating profit margin times total asset turnover. 31) Lower asset turnover ratios are generally indicative of more efficient asset management. 32) A high debt ratio can be favorable because higher leverage may result in a higher return on equity.