Which of the following components would be best for you to include in your finan

Question

Which of the following components would be best for you to include in your financial statement analysis?

A. A comparison of the firm's performance with other firms in the same industry based on their financial ratios

B. financial statments based solely on information givvenn to analysts and brokerage firms

There are several groups of ratios most decision makers and analysts use to examine different aspects of a companys performance. Based on the descriptions of ratios listed, identify the relevant category of ratios.

-Ratios that help determine whether a company can access its cash and pay its short-term obligations are called ______ratios.

-Ratios that help determine the efficiency with which a company mananges its day-to-day task and assets are called ____ ratios.

-Ratios that help assess a companys ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called _____ ratios.

-______ ratios help measure a companys ability to generate income and profits based on its invested capital.

-_______ ratios examine the market value of a companys share price, its profits and cash dividends , and the book value of its firm’s assets and relate them to other data items to determine how the firm is perceived in the stock market.

Which of the following statments represents a WEAKNESS or LIMITATION of ratio analysis? check ALL that apply.

-ratio analysis is conducted using benchmakring techniques

-a frims ratio can lead to conflicting conclusions- same ratios may be "good" some may be "bad"

-inflation can distort balance sheet data.

Explanation / Answer

1) Which of the following components would be best for you to include in your financial statement analysis?

Ans: the correct option is A) since a comparison with firms in the same industry would be a lot more meaningful since it can tell us where the firm stands relative to its peers and the problematic areas where the firm needs focus

2)

a) Ratios that help determine whether a company can access its cash and pay its short-term obligations are called Liquidity ratios.

b) Ratios that help determine the efficiency with which a company mananges its day-to-day task and assets are called Activity/ Turnover ratios.

c) Ratios that help assess a companys ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called Leverage ratios

d) .Profitability ratios help measure a companys ability to generate income and profits based on its invested capital.

e) Valuation ratios examine the market value of a companys share price, its profits and cash dividends , and the book value of its firm’s assets and relate them to other data items to determine how the firm is perceived in the stock market.

Limitations of ratio analysis:

1) a firms ratio can lead to conflicting conclusions- same ratios may be "good" some may be "bad" since there are different ratios to measure the a single aspect

2) inflation can distort balance sheet data. since the balance sheet values are historical

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