Ch.3 Concept Review

What are generally used as comparison norms when analyzing financial ratios?

D) Both answers A and B are correct

The examination of ratios over time is called

trend analysis

Debt management ratios:

measure the amount of debt the firm uses

Land Land Land, Inc. has a current ratio of 2.0. The average current ratio for the firm's industry is

1.5. Based on this information you know that:

LLL is more liquid than the average firm in the industry

Land Land Land, Inc. has a total asset turnover ratio of 2.0. The average total asset turnover ratio

for the firm's industry is 2.5. Based on this information you know that

LLL less efficiently utilizes its assets than the average firm in the industry

Land Land Land, Inc. has a return on common equity of 20%. The average return on common

equity for the firm's industry is 25%. Based on this information you know that

LL generates less income for shareholders than the average firm in the industry

Wetsdale Financial Company and Commerce Financial Company have the same total assets, the

same total assets turnover, and the same return on equity. However, Wetsdale has a higher return

on assets than Commerce. Which of the following can explain these ratios?

Wetsdale has a higher profit margin and a lower debt ratio than Commerce

If sales, assets, and common equity remain constant, but the profit margin on sales goes up, which

of the following should also be true?

The return on total assets will go up

Which of the following is most correct:

A firm with financial leverage has a larger equity multiplier than an otherwise identical firm with no

debt in its capital structure.

Which of the following statements is most correct?

All are correct