Finance 3101 Ch 4 Verified Answers
Balance sheet show what a company owns and what it owes at a fixed point in time
Income statement describes how the assets and liabilities were used in the stated accounting period.
Why are ratios useful? • Ratios standardize numbers and facilitate compari...
Finance 3101 Ch 4 Verified Answers
Balance sheet ✅show what a company owns and what it owes at a fixed point in time
Income statement ✅describes how the assets and liabilities were used in the stated accounting period.
Why are ratios useful? ✅• Ratios standardize numbers and facilitate comparisons.
• Ratios are used to highlight weaknesses and strengths.
• Ratio comparisons should be made with competitors and through time.
o Industry analysis
o Benchmark (peer) analysis
o Trend analysis
Liquidity ✅Can we make required payments? Examples are Current Ratio (current assets/current
liability) & Quick Ratio. (optional)
Asset management ✅Right amount of assets vs. sales?
Debt management ✅Right mix of debt and equity?
Profitability ✅Do sales prices exceed unit costs, and are sales high enough as reflected in PM (profit
margin), ROE, and ROA?
Market Value ✅Do investors like what they see as reflected in P/E and M/B ratios?
Asset Management Ratio: Total Assets Turnover (TATO) ✅It calculates net sales as a percentage of
assets to show how many sales are generated from each dollar of company assets. For instance, a ratio
of .5 means that each dollar of assets generates 50 cents of sales.
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