Multiple Choice: Ratio Analysis Select the correct answer for each of the following:

I, Ratio analysis is helpful in analyzing a company’s balance sheet because:

a. The absolute balance sheet amounts are not always accurate.

b. It facilitates comparisons between companies of different size.

c. The way in which individual companies value their assets and liabilities becomes less important with ratios.

d. Ratio analysis compensates for differences between companies in the way they classify their assets and liabilities for reporting purposes.

2. The current ratio is computed by:

a. Dividing total current assets by total current liabilities.

b. Dividing current assets by total assets.

c. Dividing working capital by current assets.

d. Dividing working capital by current liabilities.

3. The liquidity of a company is reflected in its:

a. Current ratio.

b. Net income.

c. Total assets.

d. All of the above.

4, Which of the following is a misclassification that would increase the current ratio?

a. Current maturities of long-term debt are classified as current liabilities.

b. Prepaid expenses are included in accounts receivable.

c. Unearned revenues are not recognized as liabilities.

d. A six-month note payable to the bank is included in trade accounts payable.