Question

You have recently been asked to leave your current job with a large company so you can run your family business. Many members of your family will rely on that business to pay their bills for the next few years. The company has grown over the past decade and has taken on a significant amount of short-term debt. Your banker paid you a visit to discuss her calculations of various ratios for your business. The banker’s primary concern is whether you’ll have the ability to stay current with short-term debt payments, so she’s most likely to focus on your

a. liquidity ratios.

b. COGS ratios.

c. leverage ratios.

d. profitability ratios. You are considering purchasing a small business. In order to analyze whether or not the asking price is a good deal or not, you request the company’s financial information. In response, the current business owner gives you her income statement. The information you can learn from the income statement is: a. revenues, expenditures, and net profit or loss. b. amount owed to lenders. c. the financing and investing activities during an accounting period. d. cash inflows and cash outflows.

Answer 1

1. Answer: a. liquidity ratios

Rationale: Liquidity ratio determines if a company can repay short term debts by measuring the current ratio, quick ratio, cash ratio where the company's current assets and liabilities are analyzed.

COGS ratio is used to see how much the revenue the company has made after selling the products, hence, it is not what the banker will focus on.

Leverage ratio is to analyze the loans that are used as capital in an organization, therefore, it is not the right answer.

Profitability ratio determines the profit earned by the company in relation to the revenue it generates, therefore it is not what the banker will asses.

2. a. revenues, expenditures, and net profit or loss.

Rationale: The income statement shows what a company has spent(expenditure) on in a year and how much revenue(income) it has earned, the profits and losses can also be determined.

The amount that has to be paid to lenders can be seen in the balance sheet and not the income statement.

the financing and investing activities are not mentioned in the income statement but in the cashflow statement which also shows the cash inflows and cash outflows.