Financial Decision Making

You have been given the financial statements and asked to analyze the financial performance of your division. Other managers have suggested you use financial ratios in your analysis. What are financial ratios? Which ratios might you use in your analysis? List them and explain what information they provide. How would you use them to make managerial decisions?

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... assets expected to be converted to cash in the near future. Quick or acid test ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities. This measurement is based on the fact that inventories are typically the least liquid of a firm's current assets, hence they are the assets on which losses are most likely to occur in the event of liquidation.

Asset management ratios measure how effectively a firm or division is managing its assets. These ratios provide an idea of whether the amount of each type of asset seems reasonable, too high, or too low in view of current and projected sales. If a firm has too many assets, its cost of capital will be too high and its profits will be depressed. On the other hand, if assets are too low, profitable sales will be lost. Asset management ratios include inventory turnover ratio, days sales outstanding, and total assets turnover ratio. Inventory turnover ratio is calculated by dividing sales by inventories. It shows how many times the item is "turned over" ...