1)Explain the weaknesses of ratio analysis. 2) Define the main categories of rat

Question

1)Explain the weaknesses of ratio analysis.

2)Define the main categories of ratios used in analysis and provide one example of each (with the equation).

3)Contrast sources and uses of cash referencing using at least two examples of assets and liabilities (four total). Provide examples of how cash is used or provided depending on whether it is categorized as an asset or liability.

4)Tribke Enterprises collected the following data from its financial reports for 2012:
Stock price                                               $18.37
Inventory balance                                    $300,000
Expenses (excluding COGS)                   $1,120,000
Shares outstanding    290,000
Average issue price of shares $5.00
Gross margin % 40%
Interest rate                                              8%
TIE ratio    8
Inventory turnover                                    12 x
Current ratio                                             1.5
Quick ratio                                                .75
Fixed asset turnover                                1.5

Complete the following abbreviated financial statements, and calculate per share ratios indicated. (Hint: Start by subtracting the formula for the quick ratio from that for the current ratio and equating that to the numerical difference.)

Set up an income statement that includes revenue, COGS, GM, EBIT, EBT, and EAT. Set up a balance sheet that includes Current assets, Fixed assets, Total assets, current liabilities, long-term debt, Equity (paid in capital*, and retained earnings), total equity, and total liabilities & equity.

Explanation / Answer

1.

Weaknesses

Not all financial ratios can be compared. There are several points that analyst must take into account. When two companies' financial data is compared, the ratios must reflect comparable price levels and these values must be evaluated using same accounting methods and valuation bases. Also, such comparisons should be limited to companies engaged in similar business activities. If the financial policies differ, this must be recognized while evaluating of comparative reports. For example one company leases its properties while the other purchases such items; one company finances its business using long-term borrowing while the other provide its fund by shareholders and reserves. In these cases, ratios can not be compared.

Comparing ratios with past data of the same company (trend analysis) can indicate the performance over years and highlight points that need for action, however it will not be enough to tell much about the company

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