Question

Identify the six issues regarding ratios (hint cautions)

Explain the difference between cash flow from operating activities, investment activities, and financing activities.

Identify the variables used in calculating both the present and future value of a single dollar amount and an annuity.

Answer 1

Question 1: Six issues are:

1. They look at past data and do not tell us about the potential future,

2. The ratios have to be analyzed year on year through an entire cycle of economy for each business and not just one year

3. Getting the correct industry norm ratio to compare is difficult

4. Seasonality of business may cause ratios to be distorted

5. The various divisions within a company may make it difficult to calculate the ratio for the business as a whole.

6. Sometimes businesses have different accounting principal which may create confusion among numbers.

Question 2: Cash flow from operating activities involves cash flow from the product or service the company provides. It encompasses the cash inflows from revenue and cash outflows for costs such as production costs.

The cash flow from investment activities involve the cash flow from the various investments that the business may make like cash inflow from sale of shares and cash outflow for purchase of debt instruments.

Cash flow from financing activities involves cash flow that the company makes to investors like dividend payments.

Question 3: Variable are: Interest rate, number of years of investment, the present value (if calculating the future value) and the future value (if calculating the present value) and the annuity payment.