Essay on Financial Ratios and Gross Profit

Words: 5484
Pages: 22

1. What is the purpose of financial statement analysis? It show trends and relationships. These also help predict the future, show weaknesses, strengths. The ratios usually are compared to other companies within the industry and industry average to see where the company stands.

2. If a company had sales of $2,587,643 in 1998 and sales of $3,213,456 in 2003, by what percentage did sales change during this time period?

(3213456-2587643) /2587643 = 24.18%
a. If the company had a goal of increasing sales by 25% over a five-year period, did it meet its objectives? Almost met its objective but short by 0.82%
b. If the company had set a goal of increasing
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The growing inventory is carried at the posted price, but there really is no way that the firm could liquidate that inventory in order to meet current obligations. Thus, including inventories in current assets will tend to understate the precarious financial position of firms suffering inventory buildup during downturns.
Might we then conclude that the quick ratio is always to be preferred? Probably not. If we ignore inventories, firms with readily marketable inventories, appropriately valued, will be undeservedly penalized. Clearly, some judicious further investigation of the marketability of the inventories would be helpful.
Low values for the current or quick ratios suggest that a firm may have difficulty meeting current obligations. Low values, however, are not always fatal. If an organization has good long-term prospects, it may be able to enter the capital market and borrow against those prospects to meet current obligations. The nature of the business itself might also allow it to operate with a current ratio less than one. For example, in an operation like McDonald's, inventory turns over much more rapidly than the accounts payable become due. This timing difference can also allow a firm to operate with a low current ratio. Finally, to the extent that the current and quick ratios are helpful indexes of a firm's financial health, they act strictly as signals of trouble at extreme rates. Some liquidity is useful for an organization, but a very high