Chapter 3, Problem 3.27P

a)

Summary Introduction

To determine: Proportional change for ratio

Introduction:

Financial ratio analysis: It is a tool of financial analysis that represents the relationship between two or more items of the financial statement. It can be divided into following areas.

Liquidity Ratios: The liquidity ratios gives the idea of whether the company can pay back its liabilities or short term obligations, which has less than one year maturity.

Activity ratio: An activity ratio assesses the efficiency of a firm in converting various accounts into cash or sales.

Debt ratio: Debt ratio measures the degree of indebtedness that is the firm’s amount of debt financing and its ability to meet fixed charges.

Profitability ratio: The profitability ratio focuses on the ability of the firm to make a profit on sales, assets or equity and shows the total effect of other ratios on the operating results.

b)

Summary Introduction

To determine:

Classifying favourable and unfavourable ratios.

c)

Summary Introduction

To determine:

Classifying favourable and unfavourable ratios.

Introduction:

Return on Assets (ROA): It is a profitability ratio that shows profit earning capability on per dollar of assets. It shows the percentage of net income on total assets. Higher the returns on assets better the profitability. Total assets include fixed as well as current assets.

Debt ratio: Debt ratio measures the degree of indebtedness that is the firm’s amount of debt financing and its ability to meet fixed charges.

Return on Equity (ROE): It is a profitability ratio that shows profit earning capability on per dollar invested by shareholders. It shows the percentage of net income on total amount invested by shareholders.