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C214- Chpt 4 Ratio

C214- Chpt 4 Ratio Analysis

QuestionAnswer
Ratio analysis is such a popular tool for three reasons: 1. Standardization 2. Flexibility 3. Focus
Ratio analysis = using relationships between numbers in financial statements to understand a company better.
Standardization makes companies comparable/ makes comparisons fair
Flexibility no strict rules OR you choose what matters
Focus points you where to investigate/ tells you where to dig deeper
The 4 Main Categories of Ratios (1) liquidity, (2) asset use efficiency, (3) financing, (4) profitability.
The ratios used in financial analysis are defined by GAAP. false
There are no rules for ratios. You can make your own to meet your needs
Which of the following statements is NOT correct with respect to using ratios to analyze a firm or firms? A change in ratios reveals the economic character of the firm.
Using ratios to assess cost structure and creating new ratios to assess cost structure are examples of “focus” and “flexibility” in ratio analysis.
Using ratios to assess three companies is an example of “standardization.”
The incorrect statement is that ratios (and even changes in ratios) reveal economic character.
Ratios do NOT answer questions; rather, they indicate where the analyst should dig deeper to understand differences or changes.
Ratios help identify the areas of a firm that need investigation. True
Ratios tell you what questions to ask about the company.
Liquidity ratios speak to a firm’s ability to meet short-term obligations
You cannot gauge liquidity by any one ratio. You must take an integrated view of all all ratios
Liquidity ratios = Can the company pay its short-term bills (within 1 year). Because they want to know: “Will I get my money back soon?”
inventory is hard to turn into cash quickly
Quick ratio stricter test (excludes inventory)
Current ratio general ability to pay short-term debt
Always analyze liquidity using multiple ratios together
Liquidity ratios speak to a firm’s ability to meet short-term obligations
Efficiency ratios measure how effectively a company/management team uses assets to generate sales or profits
The most commonly used efficiency ratios are 1. Total Asset Turnover (TAT) 2. Fixed Asset Turnover (FAT)
Created by: mnapole
 

 



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