4.3 Interpretation of Financial Statements

• The Inventory Turnover measures how often inventory is sold and replaced
• What does the Receivables Turnover measure?

  Collection of receivables
• Arrange the following trends in financial ratios from most positive to most negative:

  1️⃣ Increasing ratio

  2️⃣ Fluctuating ratio

  3️⃣ Decreasing ratio
• Financial statement interpretation uses ratio analysis to assess financial health and performance
• Which financial statement compares revenue, expenses, and profit over different periods?

  Income Statement
• A decreasing Debt-to-Equity Ratio suggests improved solvency.
• What does the income statement compare?

  Revenue, expenses, and profit
• The cash flow statement tracks cash inflows and outflows
• What caused equity to increase by $100,000?

  Increased net income
• A decrease in the Debt-to-Equity Ratio from 1.0 to 0.9 indicates improved solvency.
• Match the limitation with its impact:

  Qualitative Factors ↔️ Incomplete picture of company's strength

  Time Lags ↔️ Misses current dynamics

  Accounting Methods ↔️ Limits comparability

  Industry Conditions ↔️ Reduces relevance
• The primary purpose of financial statements is to offer transparency
• What does the income statement show over a period?

  Revenue, expenses, and profit
• Liquidity ratios measure a company's ability to meet short-term debts.
• The current ratio and quick ratio are examples of liquidity ratios.
• What do profitability ratios measure?

  Ability to generate earnings
• What is the primary purpose of financial statements?

  Transparency to stakeholders
• Match the financial statement component with its purpose:

  Income Statement ↔️ Shows revenue, expenses, and profit

  Balance Sheet ↔️ Presents assets, liabilities, and equity

  Cash Flow Statement ↔️ Tracks cash inflows and outflows
• Into which three main categories do financial ratios fall?

  Liquidity, profitability, solvency
• Match the ratio category with its purpose:

  Liquidity ↔️ Ability to meet short-term obligations

  Profitability ↔️ Ability to generate profits

  Solvency ↔️ Ability to meet long-term debts
• What do profitability ratios measure?

  Ability to generate earnings
• The Gross Profit Margin is calculated as Gross Profit divided by Revenue
• The Net Profit Margin measures overall profitability after all expenses.
• What is the primary purpose of financial statements?

  Transparency to stakeholders
• Match the financial statement component with its purpose:

  Income Statement ↔️ Shows revenue, expenses, and profit

  Balance Sheet ↔️ Presents assets, liabilities, and equity

  Cash Flow Statement ↔️ Tracks cash inflows and outflows
• Into which three categories are financial ratios classified?

  Liquidity, profitability, solvency
• The Current Ratio is calculated as Current Assets divided by Current Liabilities
• The Debt-to-Equity Ratio measures a company's ability to meet long-term debts.
• What are the two primary profitability ratios?

  Gross and Net Profit Margin
• What do profitability ratios assess?

  Ability to generate earnings
• The Gross Profit Margin measures efficiency in producing and selling goods or services
• What does the Net Profit Margin measure?

  Overall profitability after expenses
• A Gross Profit Margin of 50% means a company earns half of its revenue as gross profit.
• Profitability ratios help stakeholders understand a company's financial performance and efficiency
• What do liquidity ratios assess?

  Ability to cover obligations
• The Current Ratio measures a company's ability to cover its short-term debts
• Solvency ratios measure a company's ability to meet its long-term debts and obligations.
• What does the Debt-to-Equity Ratio indicate?

  Proportion of debt and equity
• The Inventory Turnover measures how often inventory is sold and replaced
• Which financial statement tracks cash inflows and outflows?

  Cash Flow Statement