While cash flow is more often used in financial analysis, which of the following
ID: 2713713 • Letter: W
Question
While cash flow is more often used in financial analysis, which of the following is not a reason to require firms to still report accounting profit?
A. We need to keep accountants employed
B. accounting profit proxies economic profit
C. accounting profit will generally have less erratic swings from year to year
D. accounting profits reflect the prospect of the business as a ‘going concern’
Which of the following is not true about ratio analysis?
A. Ratio analysis tells us how to fix our organization.
B. Ratio analysis can show us how our organization changes over time.
C. Ratio analysis uses accounting data, not cash flow, so it is not useful.
D. Ratio analysis can show us how our organization compares to other organizations
Which of the following will increase the present value of an annuity?
A. The interest rate decreases.
B. The number of periods decreases.
C. The amortization schedule decreases.
D. The effective rate is calculated over fewer years.
Under which conditions will an investor demand a larger return (yield) on a bond?
A. The bond issue is upgraded from A to AA.
B. The bond issue is downgraded from A to BBB.
C. Interest rates decrease due to a decline in inflation.
D. None of these conditions will cause an increase in the bond's yield.
Explanation / Answer
1) A, all other reasons are genuine reasons for accounting standards to be kept in place
2) C , ratio analysis uses accounting data but is still useful, as depicted by other options in the question
3) A, PV of annuity is inversely proportional to interest rate
40 B A decrease in credit rating means increase in default risk causing additional yield demanded for by the investors as compensation for increased risk of investment
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