105. Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a) Having too little inventory can hurt a company's profitability because of lost sales.
_____ b) Having too much inventory can hurt a company's profitability because of excess costs.
_____ c) Generally, a lower inventory turnover indicates that merchandise is being handled more efficiently.
_____ d) Average days to sell inventory is the number of times, on average, that inventory is replaced during the year.
_____ e) Values for the inventory turnover ratio vary widely among different industries.
a) T b) T c) F d) F e) T
a) This is true. If a company runs out of inventory, it will lose current and possibly future sales.
b) This is true. If a company has excess inventory, it can hurt profitability because it costs money to store and keep track of inventory.
c) This is false. Generally, a higher turnover indicates that merchandise is being handled more efficiently. A lower inventory turnover indicates that merchandise is being handled less efficiently.
d) This is false. Average days to sell inventory is the number of days, on average, that it takes a company to sell inventory.
e) This is true. Inventory turnover can vary widely between industries. Inventory turnover for grocery stores and many retail outlets is high and much lower for appliance and jewelry stores.
106. Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a) Solvency ratios measure a company's short-term debt paying ability and its financial structure.
_____ b) A company with a high debt to assets ratio probably would be considered to have a high level of financial risk.
_____ c) The debt to equity ratio and debt to assets ratio are two ways to measure the same relationship.
_____ d) From the point of view of stockholders, a decline in the debt to equity ratio is always good news.
_____ e) The lower the debt to equity ratio, the higher a company's financial leverage.
a) F b) T c) T d) F e) F
a) This is false. Solvency ratios are used to analyze a company’s long-term, not short-term, debt-paying ability and its financing structure.
b) This is true. The debt to assets ratio measures the percentage of a company’s assets that are financed by debt. The higher the debt relative to assets, the higher the risk.
c) This is true. The debt to assets ratio measures the percentage of a company’s assets that are financed by debt and the debt to equity ratio compares creditor financing to owner financing. It is expressed as the dollar amount of liabilities for each dollar of stockholders’ equity.
d) This is false. Not always. In general, a lower level of liabilities provides greater security because the likelihood of bankruptcy is reduced. However, if the company is financially strong it could incur more liabilities and benefit from financial leverage.
e) This is false. The debt to equity ratio compares creditor financing to owner financing. It is expressed as the dollar amount of liabilities for each dollar of stockholders’ equity.