E01-Budget E02-CVPA E03_FSA Eye Openers - Financial Statements Analysis 1. What is the purpose of financial statement analysis? 2. Why should the user of a financial statement read the CPA report? 3 What is meant by "quality of earnings"? 4 What is the purpose of preparing common-size financial statements? 5. What use do creditors make of the current ratio? Why do analysts need to compute both a current ratio and an acid test ratio? 7. What factors should be considered in evaluating the average collection period for a business? 8. Evaluate the comment, " The higher the inventory turnover ratio the better". 9. Why are creditors interested in shareholders' equity ratio? Profitability? 10. What are several weaknesses of financial statement analysis? 11. What is the difference between horizontal, vertical analysis and trend analysis of financial statements? 12 What is the advantage of using comparative statements for financial analysis rather than statements for a single date or period? 13. How would the current and quick ratios of a service business compare? 14. Favorable business conditions may bring about certain seemingly unfavorable ratios, and unfavorable business operations may result in apparently favorable ratios. For example, Company X increased its' sales and net income substantially for the current year, yet the current ratio at the end of the year is lower than the beginning of the year. Discuss some possible causes of the apparent weakening of the current position, while sales and net income have increased substantially