Concept explainers
(a)
Classification of Financial ratios: Financial ratios that exhibit the relationship among various financial data of the financial statements of a business, are broadly classified into three categories;
- Profitability Ratios
- Liquidity Ratios
- Solvency Ratios
Profitability Ratio: Profitability ratio exhibits how the business is able to earn income for a specific period of time.
Solvency Ratio: Solvency ratio exhibits how the business is able to sustain over a long period of time.
To Ascertain: If G is correct in her judgment about the analysis of the financial statement of a company.
(b)
To Ascertain: Whether the short-term creditors, long-term creditors and the stockholders of a company are interested in the same characteristics of a company.
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Financial Accounting: Tools for Business Decision Making, 8th Edition
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- Advantages and disadvantages of using financial statements as a tool to analyse the financial performance of a company.arrow_forward1. What is an investor’s objective in financial statement analysis? a. To determine if the firm is risky b. To determine the stability of earnings. c. To determine changes necessary to improve future performance d. To determine whether or not an investment is warranted by estimating a company’s future earnings stream  2. The current ratio isa. calculated by dividing current liabilities by current assets. b. used to evaluate a company's liquidity and short-term debt paying ability c. used to evaluate a company's solvency and long-term debt paying ability. d. calculated by subtracting current liabilities from current assets.arrow_forwardIs accrual accounting more closely related to a company’s goal of profitability or liquidity?arrow_forward
- How does the accrual basis of accounting provide different results when compared with the cash basis? Which provides a better picture of a company’s performance? Why?arrow_forwardHow does the balance sheet help users? O a. It depicts the true value of an entity. O b. It shows the financial performance of an entity over a specific accounting period. O c. It assesses an entity's liquidity, solvency, financial flexibility, and operating capability. O d. It measures the nonfinancial performance of an entity. РОСОРНONЕ SHOT ON POCOPHONE F1arrow_forwardn analyzing a company’s financial statements, which financial statement would a potential investor primarily use to assess the company’s liquidity and financial flexibility?  a. Income statement b. Statement of retained earnings c. Statement of cash flows d. Statement of financial positionarrow_forward
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