Skip to main content

Chapter 35 – Exercises & Cases

Multiple Choice Questions​

  1. Current ratio measures: a) Profitability b) Liquidity c) Efficiency d) Solvency Answer: b) Current ratio measures liquidity (ability to pay short-term obligations).

  2. A current ratio of 1.5 indicates: a) Cannot pay short-term obligations b) Can pay short-term obligations c) Too much cash d) Insufficient assets Answer: b) A current ratio of 1.5 indicates ability to pay short-term obligations (good liquidity).

  3. Gross profit margin measures: a) Overall profitability b) Profitability after direct costs c) Asset efficiency d) Liquidity Answer: b) Gross profit margin measures profitability after direct costs.

  4. Return on Assets (ROA) measures: a) Return to owners b) Efficiency of asset use c) Liquidity d) Solvency Answer: b) ROA measures efficiency of asset use.

  5. Break-even point is: a) Maximum sales b) Minimum sales to cover all costs c) Optimal sales d) Average sales Answer: b) Break-even point is minimum sales needed to cover all costs.

  6. Margin of safety measures: a) How much sales can increase b) How much sales can decline before losses c) Profit margin d) Cash flow Answer: b) Margin of safety measures how much sales can decline before losses occur.

  7. Favorable variance means: a) Actual worse than budget b) Actual better than budget c) Actual equal to budget d) No variance Answer: b) Favorable variance means actual better than budget.

  8. KPIs should be: a) As many as possible b) 5-10 key indicators c) Only financial d) Only operational Answer: b) KPIs should be 5-10 key indicators (focused set).

  9. Operating cash flow should be: a) Negative b) Positive for healthy business c) Zero d) Doesn't matter Answer: b) Operating cash flow should be positive for healthy business.

  10. Financial analysis helps: a) Only understand past performance b) Only plan for future c) Understand past, evaluate present, plan for future d) Only make pricing decisions Answer: c) Financial analysis helps understand past, evaluate present, and plan for future.

Questions​

  1. Explain the different categories of financial ratios. What does each category measure?

  2. How do you use industry benchmarks? What are the limitations of benchmarks?

  3. Why is cash flow analysis important? How does it differ from profitability analysis?

  4. Explain break-even analysis. How is it used in business decision making?

  5. What is variance analysis? How does it help improve business performance?

  6. What are KPIs? How do you select appropriate KPIs for your business?

  7. How can financial analysis support business decisions? Give examples.

  8. Compare and contrast liquidity, solvency, profitability, and efficiency ratios.

  9. Explain the relationship between break-even analysis and pricing decisions.

  10. How should businesses use financial analysis for planning and control?

Note: Complete solutions are available in the solutions manual.

End of Chapter 35 Exercises