11. Is it appropriate to insist that a financial ratio, such as the current ratio, exceed...

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11. Is it appropriate to insist that a financial ratio, such as the current ratio, exceed a certain absolute standard (e.g., 2:1)? Why? 12. Which firm is more profitable – Firm A with a total asset turnover of 10.0 and a net profit margin of 2 percent, or Firm B with a total asset turnover of 2.0 and a net profit margin of 10 percent? Provide examples of both types of firm. 13. Why do short-term creditors, such as banks, emphasize balance sheet analysis when con- sidering loan requests? Should they also analyze projected income statements? Why? 14. How can index analysis be used to reinforce the insight gained from a trend analysis of financial ratios? Questions 1. What is the purpose of a balance sheet? An income statement? 2. Why is the analysis of trends in financial ratios important? 3. Auxier Manufacturing Company has a current ratio of 4 to 1 but is unable to pay its bills. Why? Can a firm generate a 25 percent return on assets and still be technically insolvent (unable to pay its bills)? Explain. 5. The traditional definitions of collection period and inventory turnover are criticized because in both cases balance sheet figures that are a result of approximately the last month of sales are related to annual sales (in the former case) or annual cost of goods sold (in the latter case). Why do these definitions present problems? Suggest a solution. 6. Explain why a long-term creditor should be interested in liquidity ratios. 7. Which financial ratios would you be most likely to consult if you were the following? Why? a. A banker considering the financing of seasonal inventory b. A wealthy equity investor c. The manager of a pension fund considering the purchase of a firm's bonds d. The president of a consumer products firm 8. In trying to judge whether a company has too much debt, what financial ratios would you use and for what purpose? 9. Why might it be possible for a company to make large operating profits, yet still be unable to meet debt payments when due? What financial ratios might be employed to detect such a condition? 10. Does increasing a firm's inventory turnover ratio increase its profitability? Why should this ratio be computed using cost of goods sold (rather than sales, as is done by some compilers of financial statistics)? 11. Is it appropriate to insist that a financial ratio, such as the current ratio, exceed a certain absolute standard (e.g., 2:1)? Why? 12. Which firm is more profitable – Firm A with a total asset turnover of 10.0 and a net profit margin of 2 percent, or Firm B with a total asset turnover of 2.0 and a net profit margin of 10 percent? Provide examples of both types of firm. 13. Why do short-term creditors, such as banks, emphasize balance sheet analysis when con- sidering loan requests? Should they also analyze projected income statements? Why? 14. How can index analysis be used to reinforce the insight gained from a trend analysis of financial ratios? Questions 1. What is the purpose of a balance sheet? An income statement? 2. Why is the analysis of trends in financial ratios important? 3. Auxier Manufacturing Company has a current ratio of 4 to 1 but is unable to pay its bills. Why? Can a firm generate a 25 percent return on assets and still be technically insolvent (unable to pay its bills)? Explain. 5. The traditional definitions of collection period and inventory turnover are criticized because in both cases balance sheet figures that are a result of approximately the last month of sales are related to annual sales (in the former case) or annual cost of goods sold (in the latter case). Why do these definitions present problems? Suggest a solution. 6. Explain why a long-term creditor should be interested in liquidity ratios. 7. Which financial ratios would you be most likely to consult if you were the following? Why? a. A banker considering the financing of seasonal inventory b. A wealthy equity investor c. The manager of a pension fund considering the purchase of a firm's bonds d. The president of a consumer products firm 8. In trying to judge whether a company has too much debt, what financial ratios would you use and for what purpose? 9. Why might it be possible for a company to make large operating profits, yet still be unable to meet debt payments when due? What financial ratios might be employed to detect such a condition? 10. Does increasing a firm's inventory turnover ratio increase its profitability? Why should this ratio be computed using cost of goods sold (rather than sales, as is done by some compilers of financial statistics)?

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11 It is important to insist that financial ratios such as current ratio exceed 21 because if it doesnt then business can face liquidity problems for example if the inventory is not sold on time of if ... View the full answer