When a firm's ratios vary from the average ratios of similar firms in the industry, this...
Question:
When a firm's ratios vary from the average ratios of similar firms in the industry, this indicates that the small business is in financial jeopardy.
a. True
b. False
Industry average ratio:
Industry average ratio is the mean value of the ratios of some companies in a particular industry. It is calculated by the collection of several financial reports of companies and by conducting financial survey. It is found out to compare the financial ratio of a company to its industry's average ratio.
Answer and Explanation:
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View this answerThe correct answer is false.
If the firm's ratio is less when compared to the ratio of the industry, it implies that it is performing less when...
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Standards for Comparison in Financial Statement Analysis
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Chapter 13 / Lesson 2
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Ratio analysis is a process used to analyze an organization's financial statements to assess its financial status. Learn about the standards for comparison in financial statement analysis. Review the definition of ratio analysis, and explore the different comparisons used to understand the baseline, including prior period, competitor, and industry average.
Related to this Question
- Ratios are only useful for large firms where their ratios may be compared with industry averages. Indicate whether the statement is true or false.
- The higher the current ratio, the stronger the small firm's financial position. Indicate whether the statement is true or false.
- Financial ratios are a common tool used by over 50% of small business owners in the daily management of their businesses. a. True b. False
- The quick ratio is the most commonly used measure for a small firm's short-term solvency. a. True b. False
- Small businesses with high leverage ratios are less vulnerable to economic downturns, but they have a lower potential for large profits. Indicate whether the statement is true or false.
- A total assets turnover ratio below the industry average may indicate that the small firm is not generating an adequate sales volume for its asset size. Indicate whether the statement is true or false.
- Activity ratios are ratios with some measure of profit in the numerator and some measure of firm size or assets in the denominator. Indicate whether the statement is true or false.
- Explain whether the following statement is true or false. Ideally, a small firm's cash balance should be two times its average weekly sales.
- Economic measures of competitive advantage compare a firm's level of return to its costs of capital instead of to the average level of return to the industry. Indicate whether the statement is true or false.
- Commercial banks are primarily lenders of short-term capital to small businesses. Indicate whether the statement is true or false.
- When denied bank loans, small business owners often look to commercial finance companies for the same types of loan. Indicate whether the statement is true or false.
- The quick ratio is sometimes called the working capital ratio. Indicate whether the statement is true or false.
- The majority of venture capital firms that provide capital to small businesses strive to not be involved in running the business. Indicate whether the statement is true or false.
- One "break" small business gets over large companies is a significantly lower rate of substance abuse due to the "family-like" atmosphere that tends to prevail in small companies. a. True b. False
- According to the Small Business Administration, the majority of businesses are small. Indicate whether this statement is true or false.
- State true or false and justify your answer: The various types of businesses attracting small businesses are generally grouped into service industries, distribution industries, and financial industries.
- "A ratio analysis assumes that the ratio between the number of employees needed and certain business metrics is highly variable." Indicate whether the statement is true or false.
- State true or false and justify your answer: Small firms have traditionally added more than their proportional share of new jobs to the economy.
- Small businesses create more jobs than either medium or large businesses. Indicate whether the statement is true or false.
- Generally, the higher the small firm's average collection period ratio, the lower the chance of bad debt losses. a. True b. False
- The market approach to valuing a company relies primarily on the price/earnings ratio of the company in comparison to the average P/E of similar companies. Indicate whether the statement is true or false.
- A firm that earns below average accounting performance generally experiences a competitive disadvantage. True or false
- A small company needs fixed capital to expand and grow the business. a. True b. False
- When the assets of two similar-sized firms are combined, this is known as a merger. True or false
- Growth capital, unlike working capital, is not related to the seasonal fluctuations of a small business. a. True b. False
- Leverage ratios measure a firm's ability to meet maturing short-term obligations. True or false
- Profit sharing is best used in small to medium-sized firms, while gainsharing works in any size company. Indicate whether this statement is true or false.
- True or False. The Small Business Administration (SBA) may consider a business with many employees to be small as long as it has low annual revenues.
- When a firm has high levels of production, it is often able to purchase and use specialized manufacturing tools that cannot be kept in operation in small firms. Indicate whether the statement is true or false.
- Firms that may appear to be unrelated diversified firms, but that are, in fact, related diversified firms without any shared activities are referred to as seemingly related firms. Indicate whether the statement is true or false
- Leverage ratios are a gauge of the depth of a company's debt. a. True b. False
- An emerging industry is an industry in which a large number of small or medium-sized firms operate and no small set of firms has a dominant market share or creates dominant technologies. Indicate whether the statement is true or false
- Companies with dominant market share are less susceptible to the forces of change than smaller businesses. Indicate whether the statement is true or false.
- When there are many businesses and they are largely unrelated, the firm is referred to as a conglomerate. Indicate whether the statement is true or false
- The quick ratio is similar to the current ratio in that it is also a measure used to evaluate whether a company can pay its current liabilities. a. True b. False
- The small firm's net sales to total assets ratio measures how many dollars in sales the business makes for every dollar of working capital. a. True b. False
- When industry profits fall below normal levels, competition usually decreases. Indicate whether the statement is true or false.
- Performing financial ratio analyses enables a business owner to identify problems early before they become crises. Indicate whether the statement is true or false.
- Key liquidity ratios include the current ratio, quick ratio, and cash ratio. Indicate whether the statement is true or false.
- A quick ratio greater than 1:1 indicates that a small firm is overly dependent on inventory and on future sales to satisfy short-term debt. a. True b. False
- The inventory investment is usually the largest single investment for a small firm. Indicate whether the statement is true or false.
- The average inventory turnover ratio tells the owner how fast merchandise is moving through the business. Indicate whether the statement is true or false.
- A lockbox arrangement is very inexpensive to operate and is economical even for small businesses with a low volume of payments on account. Indicate whether the statement is true or false.
- In a factoring arrangement, the risk of uncollected accounts receivable falls on the small business owner. a. True b. False
- Concentration ratios teach us that industry dynamics are predominantly similar across various sectors of the same industry. A. True B. False
- Firms in the same industry seldom organize themselves in similar ways. Indicate whether the statement is true or false
- Equity theory argues that you compare your ratio of outcomes and inputs to the ratio of some comparison other. Indicate whether this statement is true or false.
- State true or false and justify your answer: A small-business investment company (SBIC) is a government agency that provides venture capital to small enterprises.
- The concentration ratio represents the combined revenues of the largest industry participants as a ratio of total industry sales. A. True B. False
- The balance of power between a firm and its customers affects its ability to compete effectively and earn above-average returns. True or false.
- The current ratio can sometimes be misleading, because it does not show the quality of a company's current assets. Indicate whether the statement is true or false.
- There is little or no presence of small firms that are global very early in their business lives. A. True B. False
- True or false? The current ratio can reveal problems in a company if it is less than 1.
- The company's average collection period ratio indicates the length of time the firm's cash is tied up in credit sales. a. True b. False
- Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm. Indicate whether the statement is true or false
- Public enterprises generally cannot diversify into unrelated businesses or merge with other firms. Indicate whether the statement is true or false
- When a firm can amortize R&D costs across many markets, it can, in effect, lower its average cost per sale. Indicate whether the statement is true or false
- There is a direct 1:1 relationship between a company's expected average inventory turnover ratio and the amount of cash required to launch it. Indicate whether the statement is true or false.
- An adequate profit in a small business must include a reasonable return on the owner's total investment in the business. a. True b. False
- Both small businesses and entrepreneurial ventures play an important role in the global economy. True or false
- Typically, factoring is less expensive than bank and commercial finance company loans. Indicate whether the statement is true or false.
- True or False: A conglomerate is a business that is so diversified it does not fit into one specific industry category.
- True or false? Financial accounting is designed to measure directly the value of a business enterprise.
- Approximately 6% of the average price tag in a small business is there due to shoplifting losses. Indicate whether the statement is true or false.
- Firms in the same industry will have the same inventory turns. (a) True (b) False.
- Under the capitalized earnings approach to business valuation, firms with lower risk factors are more valuable than those with higher risk factors. Indicate whether the statement is true or false.
- Factoring is a financial transaction whereby a business sells its accounts receivable to a third party at a discount in exchange for cash. Indicate whether the statement is true or false.
- The Static Trade off theory of capital structure implies that firms with higher business risk should have lower leverage. True or false?
- Typically, slow payers represent great risk to many small businesses. Indicate whether the statement is true or false.
- A geographic roll-up occurs when a firm acquires firms that are in the same industry segment but in many different geographic areas. A. True B. False
- Typically, a small firm should prepare a monthly cash budget for at least one year into the future. a. True b. False
- A firm's accounting profit is always equal to or greater than its economic profit. a. True b. False
- True or False: If all firms in an industry have identical variable costs, but each pays a different one time fee to enter the market, all firms will produce identical quantities of output.
- As the inventory turnover increases, the average sales period decreases. True False A high price-earnings ratio means that investors are willing to pay a premium for the company's stock. True False
- Most small businesses prefer to express their break-even point in dollars rather than units produced or sold, unless they are retailing. Indicate whether the statement is true or false.
- Less developed countries that depend on short-term capital inflows to finance business expansion may find that their economic growth rates will suffer badly if those same capital flows are suddenly reversed. a. True b. False
- Appropriately compensating employees is difficult for small businesses because of the lack of access to salary surveys. Indicate whether this statement is true or false.
- Financial benchmarking involves direct interaction between the initiator firm and the target firms. Indicate whether the statement is true or false
- For a small business, cash planning is relatively simple since cash and profits are the same. a. True b. False
- An important question for the small business owner to ask before entering global markets is, "If we go global, can we get back out?" Indicate whether the statement is true or false.
- The net profit on sales ratio measures the owner's rate of return on the investment in the business. Indicate whether the statement is true or false.
- True or False: Normal profit is the average profit of a specific industry.
- Research shows that joint ventures between firms in the same industry may have collusive implications and that these kinds of joint ventures are relatively common. Indicate whether the statement is true or false
- A small business owner should avoid borrowing money when he/she sees a downturn in business or to refinance existing debt. Indicate whether the statement is true or false.
- The net profit on sales ratio (also called the profit margin on sales) measures the firm's profit per dollar of sales. a. True b. False
- Calculating ratios is not enough to insure proper financial control. a. True b. False
- Small businesses need not worry about public relations since their impact on the local community is small. Indicate whether the statement is true or false.
- "C" items typically comprise a minor proportion of the small firm's inventory value. Indicate whether the statement is true or false.
- Goals indicate how the small firm's resources will be allocated to specific ventures or activities. a. True b. False
- Large corporations are more likely than small businesses to use a market-based approach to setting pay rates because it is easier for a large firm to conduct formal job evaluations. Indicate whether this statement is true or false.
- Strictness is a common error that occurs when employees are incorrectly rated near the average or middle of the scale. Indicate whether this statement is true or false.
- The "competitor analysis" section of the business plan is optional since few lenders and investors are concerned about a small company's rivals in the marketplace. a. True b. False
- Approximately one-third of people working in the U.S. are employed by small firms. Indicate whether this statement is true or false.
- Liquidity ratios measure the financing supplied by the firm's owners against that provided by its creditors. a. True b. False
- Financial ratios are rarely used as criteria to evaluate strategies. Indicate whether the statement is true or false
- "It is possible for a small business to win a lawsuit but still go out of business due to the costs of the suit." - Indicate whether the statement is true or false.
- A business owner who buys a company whose financial statements show a pattern of short-term profitability is guaranteed of getting a good deal. a. True b. False
- Answer true or false: Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.
- An annual report provides information about a company's financial condition. a. True. b. False.
- Two firms of the same size may have significantly different operating costs because one has progressed farther down the learning curve. A. True B. False
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