Which one of the following statements concerning financial statement analysis is

Question

Which one of the following statements concerning financial statement analysis is correct? a. The purchase of inventory using short-term credit will increase the current ratio. b. The firm with the highest price-earnings ratio will produce the highest earnings per share for the following year. c. The Du Pont identity provides a measure of a firm's operating efficiency, asset use efficiency, and financial leverage. d. A decrease in the accounts receivable turnover rate is an indication that a firm is collecting its receivables faster

Explanation / Answer

The correct answer is Option C - The Du Pont identity provides a measure of a firm's operating efficiency, asset use efficiency, and financial leverage.

Option A is incorrect as it will decrease the current ratio and not increase as both current asset and current liabilities will increase with same amount thereby decreasing current ratio.

Option B is incorreact as highest P/E ratio implies price of stock as compared to earnings is higher. It does not imply highest earnings.

Option D is incorreact as A decrease in the accounts receivable turnover rate is an indication that a firm is collecting its receivables slower. More amount is remaining invested in accounts receivable.

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