Part $3$: Financial Performance Measures

Even though Mr$.$ Suncat of Suncat Cake Shop is getting a little overwhelmed with all of the information that you

have provided to him, he has one last topic that he would like to discuss with you....how to analyze financial

statements and how to use financial ratios to help him make informed business decisions.

a$.$ What is the purpose of financial statement analysis? Who would be interested in analyzing financial

statements and why?

b$.$ Explain horizontal analysis.

c$.$ Explain vertical analysis.

d$.$ Using the following data from the comparative income statement that Mr$.$ Suncat has provided to you:

Prepare a horizontal analysis using $2021$ as the base year, using the following chart:

Prepare a vertical analysis for both years, using the following chart.

e$.$ In reviewing the results of the horizontal and vertical analysis, what trends do you see?

f$.$ What is the purpose of financial ratios? Define and explain the purpose of each of the four main

categories of ratios and list two ratios for each category. g$.$ As mentioned earlier, Mr$.$ Suncat is especially interested in the current ratio. Explain how the current ratio is calculated and what it means. Do you want a high current ratio $($a current ratio greater than $1)$ or a low current ratio $($a current ratio less than $1)?$ What does it mean if the company$$s current ratio is $1?$

h$.$ Using the following data from a partial balance sheet that Mr$.$ Suncat has provided to you, calculate the following ratios, being sure to show all calculations and clearly labeling your answers:

$$ Calculate working capital

$$ Calculate current ratio

$$ Calculate quick ratio

Cash $$10,324$

Short$-$term investments $2,800$

Accounts receivable $16,179$

Inventories $11,846$

Other current assets $4,171$

Total current assets $$45,320$

Total current liabilities

$$38,751$

i$.$ In reviewing the results of the above financial ratios, do you have any concerns? Why or why not?