Analysis of Financial Statements

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?

Sample Answer

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.

Benjamin Franklin's Autobiography and the Declaration of Independence both offer numerous regular Enlightenment thoughts that were incorporated and that have become a mainstay of American culture. In Benjamin Franklin's Autobiography, Franklin is viewed as a Renaissance man who has aced numerous characteristics and his readiness to gain proficiency with various subjects, for example, history, reasoning and science have helped him spread Enlightenment thoughts to a wide crowd. His insight helped him set up the Library Company of Philadelphia which helped numerous Americans become taught. Franklin stated, "These Libraries have improv'd the general Conversation of the Americans, made the regular Tradesmen and Farmers as wise as most Gentlemen from different Countries, and maybe have contributed in some degree to the Stand so commonly made all through the Colonies in Defense of their Privileges," (Franklin "From The Autobiography" pg. 292). Franklin depicts the "New World" as a position of chance to work and develop as a person. He reviewed his initial life as "having emerg'd from the Poverty and Obscurity where I was brought up, to a State of Affluence and some Degree of Reputation in the World, and having gone so far thro' Life with a significant Share of Felicity, the leading Means I utilized, which, with the Blessing of God," (Franklin "From The Autobiography" pg. 248). He implies that on the off chance that you buckle down, commit yourself and trust God you'll make something out of yourself. Religion was another huge factor that enlivened Enlightenment contemplations throughout Franklin's life. His view on religion was liberal as he was a non-devotee, however he despite everything put stock in shrewdness and God, in which he needed individuals to have strict opportunity as he makes reference to, "This Respect to all, with an Opinion that the most noticeably awful had some great Effects, induc'd me to keep away from all Discourse that may will in general diminish the great Opinion another might have of his own Religion; [… ] new Places of love were persistently needed, and [… ] my Mite for such reason, whatever may be the Sect, was never won't," (Franklin "From The Autobiography" pg. 299). Franklin had a solid conviction that all individuals have normal rights, for example, life, freedom and the quest for bliss. He likewise searched out the Enlightenment Idea to look for a decent, glad and a gainful life.

In the Declaration of Independence, Thomas Jefferson makes reference to the significance of these Enlightenment thoughts that the thirteen settlements battled for against England. Written in the Declaration of Independence, Jefferson spreads out the most significant Enlightenment thought regarding regular rights in which he remarks that "all men are made equivalent; that they are blessed by their Creator with intrinsic and natural rights; among these are life, freedom, and the quest for satisfaction," (Jefferson "From The Autobiography of Thomas Jefferson" pg. 340). Another Enlightenment thought that Jefferson expounds on is the possibility that individuals should have certain unalienable rights that the legislature ought to never disregard and remove, and that "to verify these rights, governments are established among men, getting their fair powers from the assent of the administered," (Jefferson "From The Autobiography of Thomas Jefferson" pg. 340). These thoughts are as yet pertinent in the present society since they were made into laws that our administration and country set as a rule to follow. It caused it feasible for individuals to have strict opportunity in which the congregation and government were isolated. The administration is precluded from making any laws that meddle with the foundation of any religion, strict convictions and practices. These laws let individuals have regular rights, for example, life, freedom and the quest for bliss which would not exist without the Enlightenment standards that have been a significant piece of America's establishment.