A. In learning about ratios, we could simply study the different types or categories of ratios, or we could use ratios to answer some important questions about a firm's operations. We prefer the latter approach and have chosen the following four questions as a map in using financial ratios: 1. How liquid is the firm? 2. Is management generating adequate operating profits on the firm's assets? 3. How is the firm financing its assets? 4. Are the owners (stockholders) receiving an adequate return on their investment? Let's look at each of these questions in turn. In doing so, we will use the McDonald's Corporation to illustrate the use of ratios in answering these questions. For ease of reference, we have again shown McDonald's financial statements in followings Tables. McDonald's Corporation 2018 Income Statement ($ Millions) Sales $11,508 Cost of goods sold 6,537 Gross profits $ 4,971 Marketing expenses and general and administrative expenses $ 1,832 Depreciation expense 345 Total operating expenses $ 2,177 Operating profits $ 2,794 Interest expenses 387 Earnings before taxes $ 2,407 Income taxes 765 Net income before preferred stock dividends $ 1,642 Preferred stock dividends 25 Net income available to common stockholders $ 1,617

McDonald's Corporation December 31, 2018 Balance Sheet ($ Millions)Assets Cash $ 341 Accounts receivables 484 Inventories 71 Prepaid expenses 247 Total current assets $ 1,143 Gross fixed assets $20,088 Accumulated depreciation 5,127 Net fixed assets $14,961 Investments 702 Other assets 1,436 Total assets $18,242 Liabilities and Equity Liabilities (debt): Short-term notes payable $ 1,629 Accounts payable 651 Taxes payable 53 Accrued expenses 652 Total current liabilities $ 2,985 Long-term debt 6,325 Total liabilities $ 9,310 Equity: Preferred stock $ 80 Common stock: Par value and paid in capital $ 708 Retained earnings 11,927 Treasury stock (3,783) Total common equity $ 8,852 Total equity $ 8,932 Total liabilities (debt) and equity $18,242

Calculate and interpret the financial ratios for 2018 corresponding to the industry norms provided as follows: INDUSTRY NORMS Current ratio 0.70 Inventory turnover 35 times Total asset turnover 1.9 Operating profit margin 6.1% Operating income return on investment 11.6% Debt ratio 69% Fixed asset turnover 3.2 Return on equity 12.78%