Question 1: Which of the following statements regarding the use of traditional ratios to analyze a firm’s financial condition is least accurate? A) Many of the financial ratios can be used to assess the future financial position of the company. B) Financial ratios are based on the historical accounting data of the firm. C) Financial ratios do not reveal any information regarding the future capital requirements of the firm. The correct answer was A. Traditional financial ratios have limited use in that they are not forward looking. --------------------- Question 2: What would most likely be the result if Butler were to provide Adams with additional 1999 data? It would: A) provide a stronger basis for a decision concerning the firm’s rating. B) distort the financial trend for Butler, Inc. C) provide no additional value for the analyst. The correct answer was A. Additional historical trend information can increase Mr. Adams’ confidence in his projections for the firm’s credit rating. -------- My question: These seem to be in conflict, as Q1 says that ratios are useless for forward analysis but Q2 says that they can be helpful. Schweser text says “A major limitation of ratio analysis is that it is not forward looking because it does not consider factors that can affect future cash flows.” So based on that, I’m inclined to think that Question 1 makes the most sense and in Question 2, A is simply the best answer, since although ratios may not be THAT helpful, they can certainly help a little and this is a better answer than saying that they can distort (B) or provide no help at all ©.
the two questions are They are testing for different time periods and for different purposes. First one is whether the traditional ratios are important for future analysis. 2nd one is for a credit rating purpose - which is a CURRENT analysis. Past data would help set a trend for the Current period.
thanks as always cpk