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Chapter Analysis
Intermediate46 pages • EnglishQuick Summary
The chapter on Accounting Ratios discusses the importance, types, and limitations of ratio analysis as a tool for financial statement analysis. It provides insight into the profitability, liquidity, solvency, and efficiency of a business. The chapter categorizes ratios into liquidity, solvency, activity, and profitability ratios, each serving a specific purpose in financial analysis.
Key Topics
- •Ratio Analysis
- •Liquidity Ratios
- •Solvency Ratios
- •Activity Ratios
- •Profitability Ratios
- •Limitations of Ratio Analysis
- •Financial Statement Analysis
- •Types of Ratios
Learning Objectives
- ✓Explain the meaning, objectives, and limitations of accounting ratios.
- ✓Identify the various types of ratios commonly used.
- ✓Calculate various ratios to assess solvency, liquidity, efficiency, and profitability of the firm.
- ✓Interpret the various ratios calculated for intra-firm and inter-firm comparisons.
- ✓Understand the significance of financial analysis in decision making.
Questions in Chapter
What do you mean by Ratio Analysis?
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What are various types of ratios?
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What relationships will be established to study: a. Inventory turnover b. Trade receivables turnover c. Trade payables turnover d. Working capital turnover
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The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. What are the ratios used for this purpose?
Page 234
The average age of inventory is viewed as the average length of time inventory is held by the firm for which explain with reasons.
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What are liquidity ratios? Discuss the importance of current and liquid ratio.
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How would you study the Solvency position of the firm?
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What are various profitability ratios? How are these worked out?
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Additional Practice Questions
Explain the significance of Inventory Turnover Ratio in a business.
mediumAnswer: The Inventory Turnover Ratio measures how quickly a company sells through its inventory in a given period. A higher ratio indicates efficient management of inventory, as it implies fast movement and less holding cost.
Discuss the role of liquidity ratios in financial analysis.
mediumAnswer: Liquidity ratios play a crucial role in determining a business's ability to cover short-term obligations. These include the current ratio and quick ratio, assessing the adequacy of current assets to meet current liabilities.
What is the difference between gross profit ratio and net profit ratio?
easyAnswer: Gross profit ratio indicates the percentage of revenue exceeding the cost of goods sold (COGS), while net profit ratio represents the percentage of profit remaining after all expenses are deducted from revenues.
Why might a high current ratio not always indicate a favorable financial condition?
mediumAnswer: A high current ratio might suggest excess inventory or stagnant current assets, indicating inefficient resource use rather than financial health.
How do solvency ratios help in assessing the long-term financial stability of a company?
hardAnswer: Solvency ratios like the debt equity ratio and interest coverage ratio provide insights into a company's ability to meet long-term obligations, indicating financial stability and risk levels to creditors.