Review Questions for Chapter 2.5

This blog post provides a summary of the review questions for Chapter 2.5 of the book “Financial Statement Analysis” by Penman. The questions cover the topics of ratio analysis, liquidity, profitability, analysis of financial statements, comparative financial statements, common size financial statements, and trend percentages.

Questions

1. What is ratio analysis? Explain its objectives and limitations.
2. Explain the important ratios to measure the Liquidity and profitability of a company.
3. Explain the significance and method of calculation of following ratios: (i) Liquid ratio (ii) Debt- Equity ratio (iii) Debtors turnover ratio
4. What do you mean by analysis of financial statements? What are the tools for analysis of financial statements? Explain any two of them.
5. What do you mean by comparative financial statements? How are these prepared? Explain their utility.
6. What do you mean by common size financial statements? How are these prepared? Explain their utility.
7. What do you mean by Trend Percentages? How are these prepared? What are its advantages and limitations?

Answers

The answers to the review questions are as follows:

1. Ratio analysis is a technique for evaluating the financial health of a company by using financial ratios.