Lecture 2

Question 1

Ratios: Profitability

Answer 1

Indicates how much wealth the business creates

Question 2

Ratios: Efficiency

Answer 2

Assesses how successfully resources such as inventory, trade receivables, trade payables are managed

Question 3

Ratios: Liquidity

Answer 3

Assesses availability of sufficient cash and cash equivalent resources to meet maturing obligations

Question 4

Ratios: Financial gearing

Answer 4

Assesses the proportion of debt financing to equity financing. Gearing level has significance on the level of risk associated with the business

Question 5

Ratios: Investment

Answer 5

Assesses the returns and performance of debt financing of shares in a particular business from the viewpoint of investors who are not involved in managing the business

Question 6

Limitations of ratio analysis

Answer 6

Accounting conventions
Creative accounting
Inflation
Restricted vision of ratios
The basis for comparison

Question 7

What is the Altman Z score model used for

Answer 7

Used to predict financial failure