Question

Which of the following statements is incorrect?

a) Buildings can be converted into cash very quickly only if large price concessions are given and therefore we can say that buildings are less liquid assets.
b) EBIT does not really reflect the cash that is available to pay the firm's interest expense because a noncash expense, depreciation, has been subtracted in the calculation of EBIT.
c) All the answers are correct except one.
d) Financial ratios are an analyst's microscope allowing them to get a better view of the firm's financial health than just looking at the raw financial statements.
e) Creditors are not particularly concerned with a firm's ability to pay its bills becaúse if the firm goes banktrupt, the creditors can recover all their money.

Answer 1

The incorrect statement is that creditors are not concerned with a firm's ability to pay its bills because they can recover all their money if the firm goes bankrupt, which is not true as creditors risk not recovering the full amount owed in a bankruptcy situation.

Step-by-step explanation:

The statement which is incorrect is: e) Creditors are not particularly concerned with a firm's ability to pay its bills because if the firm goes bankrupt, the creditors can recover all their money. This statement is not true because in the event of bankruptcy, creditors may not be able to recover the full amount owed to them, as the liquidated assets may not cover all debts. Creditors are very concerned about a firm's liquidity and ability to pay its bills on time for this reason.

Financial ratios are indeed valuable tools for analysts to understand a company’s financial health. EBIT (Earnings Before Interest and Taxes) gives an insight into a firm’s profitability but does not account for cash flow since noncash expenses like depreciation are deducted. And liquidity refers to the ease with which assets can be converted into cash without significant loss of value; buildings, being less liquid assets, typically require more time and may necessitate price concessions to convert quickly into cash.