Question

Which of the following statements is correct?

a) Financial statements are an analyst's microscope allowing them to get a better view of health of the industry and the economy than just looking at the raw-financial ratios.
b) Current assets usually have a lower expected return than do fixed assets, so the shareholders would like to see that only the minimum amount of the company's capital is invested in current assets.
c) Total Asset Turnover = Earnings Before Interest and Taxes / Total Assets.
d) The average collection period, also known as day's sales outstanding, or - DṢO, tells us how many days, on average, it takes a firm to pay for its purchases of inputs or raw material on credit.
e) All the answers are correct.

Answer 1

Statement a) is correct, highlighting the analytical value of financial statements. Incorrect options include the definition of Total Asset Turnover and the average collection period. The value of loans in the secondary market varies with borrower reliability, profit declarations, and shifts in economic interest rates.

Step-by-step explanation:

The correct statement is option a) Financial statements are an analyst’s microscope allowing them to get a better view of health of the industry and the economy than just looking at the raw-financial ratios. The other options have inaccuracies in them. For clarification, Total Asset Turnover is calculated as Net Sales divided by Total Assets, which corrects option c). The average collection period (DSO) refers to the average number of days a company takes to collect revenue after a sale has been made, not to pay for its purchases, which is a mistake in option d). Regarding option b), while it's true that companies should manage current assets efficiently, it's not always the case that current assets have a lower expected return than fixed assets, as current assets include items such as cash, which has a lower risk compared to many fixed assets.

The money listed as assets on a bank balance sheet may not actually be in the bank because banks operate on a fractional reserve system, meaning that they lend out most of the deposits they receive, keeping only a small fraction as reserves. The value of a loan in the secondary market can fluctuate based on factors such as the borrower’s payment history, profit levels, and changes in the overall economy’s interest rates.