1 With ratio analysis, when an item on the statement of cash flows is compared to a balance sheet item:

the balance sheet item should first be calculated as an average amount for the year.

the ending balance of the balance sheet item should be used.

the beginning balance of the balance sheet item should be used.

a meaningful comparison of items between these statements cannot be made.

2 A problem with many of the financial ratio calculations is that:

asset, liability and equity numbers obtained from the balance sheet reflect a point in time and may not be representative of the financial position at other times of the year.

numbers in the financial statements may be aggregated with inadequate disclosure in the notes.

entities being compared may use different accounting policy choices and estimations.

all of these options describes a problem with the calculation of financial ratios.

3

Baxter Trading Pty Ltd has the following balance sheet figures. The debt ratio is:

Current assets	$300 000
Current liabilities	200 000
Non-current assets	800 000
Non-current liabilities	350 000

50%.

43.75%.

66.67%.

31.82%.