Financial Ratios. Ratio analysis is employed to gain insight into the financial character of a firm. The calculation of ratios can often lead to a better understanding of a firm’s financial position...

Financial Ratios. Ratio analysis is employed to gain insight into the financial character of a firm. The calculation of ratios can often lead to a better understanding of a firm’s financial position and performance. A specific ratio or a number of selected ratios can be calculated and used to measure or evaluate a specific financial or operating characteristic of a firm. (a) Identify and explain what financial characteristic of a firm would be measured by an analysis in which the following four ratios were calculated: (1) current ratio; (2) acid-test ratio; (3) accounts receivable turnover ratio; and (4) inventory turnover ratio. (b) Do the ratios in part (a) provide adequate information to measure this characteristic or are additional data needed? If so, provide two examples of other data that would be required. (c) Identify and explain what specific characteristic regarding a firm’s operations would be measured by an analysis in which the following three ratios were calculated: (1) gross profit margin; (2) operating income margin; and (3) net income to sales (profit margin). (d ) Do these ratios provide adequate information to measure this characteristic or are additional data needed? If so, provide two examples of other data that would be required.