Jerson P.

Cabato

BSBA-2B

1. The purpose of a balance sheet shows company's condition. The balance sheet provides
information of the assets, liabilities, and or owner's equity to an investor creditor. Income
statement gives information to any creditors or investors on how one's firm make a profit over
its expenses. In other word, Income statement shows financial performance of a firm.

2. It is very important to follow and analyze the trend of financial ratios for as to give the
creditors a significant information of the enterprise on how they make a change day by day on
their cash management and so on. It gives information to any creditors for them to be able to
make possible and reasonable judgment.

3. There is a possibility that a one company cannot pay its bills even if it has a sufficient cash to
pay its bills. For instance, Auxier Manufacturing Company has a current ratio of 4:1 it doesn't
mean it can pay its bills specifically the long-term bills. The ratio says 4:1 that a company has 4
times currnt assets over its single current liabilities. The company is more liquid to easily paid
short term debt but on the other side, it can't survive in the long run because it can't pay its
long-term obligations that would maybe matures within 10 years and so on.

4. No, as Return on assets ratio tells the creditors how a company can manage its assets to
produce profits during a period. This means that as the company make larger profits by their
assets it can still pay its current maturing bills when due.

5. The definition of collection period and inventory turnover present a problem in way that
there could be seasonal activity of turning invemtory into account receivables through
company's sales. In this case the higher the inventory turnover, the less the turnover of
inventory into receivables in days.

6. The higher the liquidity ratio of a company, the more favorable to any creditors and or long-
term creditors. Long-term creditors are more interested in liquidity ratio in a way that they can
notice how a company's cash are being managed to meet its current maturing obligations. It is
more favorable to them to get interested in liquidity ratios compared to any other ratios
because it is useful in obtaining an indication of a company's ability to meet current liabilities
and or if the company is more liquid.

7. I choose profitability ratio in a sense that profit earning may be judged on the volume of profit
margin of any acitvity. In other word, it is used to measure the overall efficiency or performance
of a business. The higher the profit, the lower the activity of having debt.

8. Income statement shows the performance of a business if it make a profit or a loss. It is

possible for a company to still be unable to meet its maturing debt payments when due even if
it made a large operating profits because it is not always that a company is more liquid in a time
of maturing obligations and sometimes cash is unconsiderably managed by the company itself.

9. Increasing firm's inventory turnover increase profitability of a firm. It will increase in way of
turning inventory into receivables through sales because a firm has a significant amount of
money tied up on its inventory. Inventory turnover ratio is computed using cost of goods sold
because it is known as the average of days required to sell a product. In other word, the
company will have to sell its inventory within a period of time to get sales.

10. No, it is inappropriate to insist that a financial ratio exceeds a certain absolute standard
because as the thumb rule says that 1:1 or 2:1 is considered to be satisfactory then it would be
an advantage to any company if the company's ratio exceeds the absolute standard. In other
word, the company has a high probability of paying its maturing obligation when due.