Ratio Analysis

Question 1

Why may a profitable business be short on cash?

Answer 1

Outflows that do not affect income statement (dividends)
Increasing levels of inventory
Offering longer credit terms to customers

Question 2

Why may a unprofitable business experience increased levels of cash?

Answer 2

Decreasing levels of inventory.
Offering shorter credit terms to customers.
Sales of non-current assets.

Question 3

Limitations of financial statements

Answer 3

Only historical data of past, may not indicate what’s happening currently
Income statement is in summary format
Value of assets may be inaccurate

Question 4

Limitation of efficiency ratios

Answer 4

Based on assets/liabilities whose values at end of year may not be typical of the whole year