analysis of financial statements 4

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Self-Test Questions

  • What insights does the Statement of Cash Flows provide regarding financial analysis?
  • Why are financial ratios used? List the five major categories of ratios presented in the chapter.
  • Identify and write out the equations for six profitability ratios. What do each of these ratios specifically measure?
  • Why is the basic earnings power ratio (BEP) useful?
  • Why does the use of debt lower ROA?
  • Identify and write out the equations for four ratios that are used to measure how effectively a firm is managing its assets. What do each of these ratios specifically measure?
  • What problem might arise when comparing different firms’ fixed assets turnover ratios?
  • Identify and write out the equations for two ratios that are used to analyze a firm’s liquidity position. What do each of these ratios specifically measure?
  • What are the characteristics of a liquid asset? Which current asset is typically the least liquid? Why?
  • How does the use of financial leverage affect current stockholders’ control position?
  • Identify and write out the equations for seven ratios that are used to measure the extent to which a firm uses financial leverage. What do each of these ratios specifically measure?
  • Identify and write out the equations for four market value ratios. What do each of these ratios specifically measure?
  • If one firm’s P/E ratio is lower than that of another, what are some factors that might explain the difference?
  • Explain why book values often deviate from market values.
  • What is a trend analysis, and what important information does it provide?
  • What is common size analysis and percentage change analysis?
  • What is comparative analysis and benchmarking?
  • List at least three potential problems with ratio analysis.
  • Different groups conduct financial ratio analysis. These groups could include managers, equity investors, long-term and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?

Book: Financial Management: Theory and Practice

16th Edition

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