Question

1. Which of the following regarding financial statement analysis is false?

a) According to the DuPont identity, Return on Equity is affected by operating efficiency (or profitability), asset use efficiency, and financial leverage.

b) We can calculate the market value based measures of firm performance using only financial statements prepared according to GAAP.

c) Asset management ratios measure the intensity and efficiency of asset use.

d) For common size statements, we divide balance sheet items by total assets and income statement items by sales.

e) An increase in a firm's net fixed assets is considered to be a use of cash.

2. Which of the following statements is false?

a) While marginal and average tax rates often differ, it is the average tax rate that is relevant for most financial decisions.

b) The book value of an asset on the balance sheet can be very different from its market value.

c) Net income as calculated from the income statement is not the net cash flow of the firm.

d) Non-cash items are expenses charged against revenues that do not directly affect cash flow.

e) The income statement shows that revenues minus expenses equal net income.

3. Which of the following is a false statement?

a) Accounting income is rarely equal to firm cash flow.

b) Current assets are more liquid than intangible assets.

c) The statement of cash flows separates cash flows into three categories: operating activities, investing activities, and financing activities.

d) The balance sheet tells investors exactly what the firm's market value is.

e) Assets are usually recorded on the balance sheet at their acquisition value.

Answer 1

1.

False Statement - b) We can calculate the market value based measures of firm performance using only financial statements prepared according to GAAP.

Under US GAAP, most assets are to be recorded on the balance sheet at their historical cost even if they have significantly increased in value over time thus we can't calculate market based measure of firm performance using only financial statements.

2.

False Statement - a) While marginal and average tax rates often differ, it is the average tax rate that is relevant for most financial decisions.

Marginal cost is cost for one additional unit of output and thus it is relevant for most financial decisions in marginal costing approach.

3.

False Statement - d) The balance sheet tells investors exactly what the firm's market value is.

Balance sheet shows the acquired cost value of assets not the current market value of assets.

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.