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FINANCIAL STATEMENT ANALYSIS – part 2

FINANCIAL STATEMENT ANALYSIS – part 2. Ratios. Uses and Limitations of Financial Ratios. Ratio Categories. Liquidity Ratio assess the ability of a company to meet its short term liabilities Solvency Ratio Measure the ability of a company to meet its long-term liabilities

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FINANCIAL STATEMENT ANALYSIS – part 2

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  1. FINANCIAL STATEMENT ANALYSIS – part 2

  2. Ratios

  3. Uses and Limitations of Financial Ratios

  4. Ratio Categories • Liquidity Ratio • assess the ability of a company to meet its short term liabilities • Solvency Ratio • Measure the ability of a company to meet its long-term liabilities • Profitability Ratio • Assess management’s effectiveness in achieving profitability • Activity Ratio • Reflects management’s ability in using the assets • Operating Ratio • To analyze the operations of a company

  5. Liquidity Ratio

  6. Solvency Ratio

  7. Profitability Ratio

  8. Activity Ratio

  9. Operating Ratio

  10. Operating Ratio

  11. A company owns two restaurants with 100 seats in the same town. Operating results for the first three months of the current year for restaurant A and B are as follows: The owners of the two restaurants are concerned that Restaurant B reports higher sales revenue yet produces a lower operating income than Restaurant Analyze this information by using appropriate tool and comment on the results (what appears to require the attention of the owners?)

  12. ANSWER: The difference in Operating Income seems to be the supplies expense. B has 4.51% higher than A. Since both restaurants A&B are in the same town and have the same size , the difference in supplies expense should be evaluated further. The variance might be due to the difference in menu, service style, or supplies.

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