A company reports accounting data in its financial statements. This data is used for financial analyses that provide insights into a company's strengths, weaknesses, performance in specific areas, and trends in performance. These analyses are often used to compare a company's performance to that of Most decision makers and analysts use five groups of ratios to examine the different aspects of a company's performance. Indicate whether each of the following statements regarding financial ratios are true or false?
Statement True False
1. A company exhibiting a high liquidity ratio means it is likely to have enough resources to pay off its short-term obligations
2. Asset management ratios provide insights into management's efficiency in using a firm's working capital and long-term assets.
3. Debt management or financial leverage ratios help analysts determine whether a company has sufficient cash to repay its short- term debt obligations.
4. One possible explanation for an increase in a firm's profitability ratios over a certain time span is that the company's income has increased
5. Market-value ratios help analysts figure out what investors and the markets think about the firm's growth prospects or current and future operational performance
Ratio analysis is an important component of evaluating company performance. It can provide great insights into how a company matches up against itself over time and against other players within the industry However, like many tools and techniques, ratio analysis has a few limitations and weaknesses Which of the following statements represent a weakness or limitation of ratio analysis?
a. A firm may operate in multiple industries.
b. A firm's financial statements show only one period of financial data.
c. Different firms may use different accounting practices.