Introduction to Ratio Analysis

Question 1

When a ratio requires using a Balance Sheet value together with an Income Statement value, how should the Balance Sheet value be determined?

Answer 1

When a Balance Sheet value is used together with an Income Statement value in a ratio, the Balance Sheet value must be an average balance for the period covered by the Income Statement, not the year-end (or other point-in-time) balance

Question 2

Describe the benefits provided by ratio analysis.

Answer 2

Provides measures and enables comparisons of a firms operating and financial activities and position:
1. For a single firm over time
2. Across firms
Facilitates identifying operating and financial strengths and weaknesses of a firm

Question 3

Define “ratio analysis” (for financial management).

Answer 3

The development of quantitative relationships between various elements of a firm’s financial, operating and other information.