19.1. Objectives of Financial Statement Analysis

Try these first

1. 1.

   Define profitability in financial analysis.

   Hint

   Think about how much a company makes after its costs.

2. 2.

   What does liquidity measure?

   Hint

   Consider what a company needs to pay its immediate bills.

3. 3.

   What is the primary purpose of financial statement analysis?

   • To evaluate financial health
   • To manipulate figures
   • To increase debt

   Hint

   Think about who uses this analysis.

4. 4.

   True or False: Solvency refers to a company’s capacity to meet short-term obligations.

   • True
   • False

   Hint

   Recall the definitions of solvency and liquidity.

5. 5.

   A company has a Gross Profit of $200,000 and Net Sales of$500,000. Calculate the Gross Profit Ratio and interpret the result.

   Hint

   Use the formula carefully and remember to multiply by 100 for a percentage.

6. 6.

   Analyze a business that has total debt of $500,000 and shareholders' equity of$250,000. Calculate the Debt-to-Equity Ratio and discuss the implications.

   Hint

   Think about what a high ratio indicates regarding a company's reliance on debt.