1. Ratio analysis

A company reports accounting data in its financial statements. This data is used for financial analyses that provide insights into a companys strengths, weaknesses, performance in specific areas, and trends in performance. These analyses are often used to compare a companys performance to that of its competitors or to its past or expected future performance. Such insight helps managers and analysts improve their decision making.

Consider the following scenario:

You work for a brokerage firm. Your boss asked you to analyze Blue Parrot Manufacturings performance for the past three years and to write a report that includes a benchmarking of the companys performance.

Which of the following components would be best for you to include in your financial statement analysis?

1- A comparison of the firms performance with other firms in the same industry based on their financial ratios

2- Financial statements based solely on information given to analysts and brokerage firms

There are several groups of ratios most decision makers and analysts use to examine different aspects of a companys performance. Based on the descriptions of ratios listed, identify the relevant category of ratios.

	Ratios that help determine whether a company can access its cash and pay its short-term obligations are called ratios.
	Ratios that help determine the efficiency with which a company manages its day-to-day tasks and assets are called ratios.
	Ratios that help assess a companys ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called ratios.
	ratios help measure a companys ability to generate income and profits based on its invested capital.
	ratios examine the market value of a companys share price, its profits and cash dividends, and the book value of the firms assets and relate them to other data items to determine how the firm is perceived in the stock market.

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? Check all that apply.

1- A firm may operate in multiple industries.

2- Different firms may use different accounting practices.

3- A firms financial statements show only one period of financial data.