1. Ratio Analysis (Formula Approach)Step 1: Quick Take: Ratio AnalysisRatio analysis is an important way of evaluating financial statements. Using ratios, instead of simply raw financial data, can help to make bettercomparisons of the strength of companies.There are many different kinds of ratios, which can be grouped into five general categories:1. Liquidity ratios: These ratios are used to analyze whether or not a firm is able to pay its short-term debts (typically maturing withinthe next year). Good liquidity ratios are needed to continue operations of the firm.2. Asset management ratios: These ratios are used to analyze the efficiency of asset use by a firm. Reasonable asset managementratios are required to sustain acceptable levels of net income.3. Debt management ratios: These ratios analyze how a firm has financed its assets, as well as whether or not the firm can repay itslong-term debt.4. Profitability ratios: These ratios analyze how profitable a firm is. These ratios take both asset and debt management ratios intoaccount to analyze overall return on equity.5. Market value ratios: These ratios analyze investor confidence in the firm, both now and into the future.Suppose one firm has acquired far too much inventory and capital equipment, leading to large excess capacity.Which of the following categories of ratios would likely be most appropriate for comparing these companies in this scenario?Asset management ratiosMarket value ratiosDebt management ratiosLiquidity ratios Suppose that you are given the following data for Niles Company :Note: The data and calculations are based on a 365-day year.Cash and equivalentsFixed assetsSalesNet incomeCurrent liabilitiesCurrent ratioDSOROE$225,000$650,000$2,500,000$112,500$240,0002.518.2512.00%

Lets understand the basics. Management calculate various ratios to calculate the result of the…

Answered: Asset management ratios Market value…

Business

Accounting

Asset management ratios Market value ratios Debt management ratios Liquidity ratios

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter10: Long-term Liabilities

Section: Chapter Questions

Problem 10.2DC

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One of the most important applications of ratio analysis is to compare a company’s performance with that of other players in the industry or to compare its own performance over a period of time. Such analyses are referred to as a comparative analysis and trend analysis, respectively. A) A common size analysis requires the representation of financial statement data relative to a single financial statement item (or base account or value). What is the most commonly used base item for a common size balance sheet? Net income Earnings before interest and taxes Total assets Net sales Suppose you are conducting an analysis of the financial performance of Blue Hamster Manufacturing Inc. over the past three years. The company did not issue new shares during these three years and has faced some operational difficulties. The company has thus pilot tested some new forecasting strategies for better operations management. You have collected the company’s relevant…