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?
In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Statement of cash flows includes cash flows from operating, financing and investing activities. Financing activities include the inflow of cash from investors, such as banks and shareholders and the outflow of cash to shareholders as dividends as the company generates income.