DISCUSSION 1 Financial Ratios Ashford University Discussion Referencing this week’s readings and lecture, what are the limitations of financial ratios? Classify your answer into at least the following categories: liquidity ratios, activity ratios, leverage ratios, and profitability ratios. Week Six Lecture   Analyzing Financial Reports After review of financial statements, managers can use basic financial ratio analysis tools to establish trends within the financial results of a company through comparing the result of different periods in the accounting period. Different stakeholders will need various financial ratios in different ways (Dobosz, 2013). Executives and managers, creditors, vendors and suppliers, financial analysts, financial reporters, and competitors all need financial ratios for varying purposes. Despite their usefulness, financial ratios are limited in their purpose by various factors such as structure of a company, inflation, seasonality, and accounting methods. There are various types of financial ratios, namely liquidity ratios, activity ratios, leverage ratios, and profitability ratios, all of which serve different purposes. Liquidity ratios are critical for companies to measure the quality of current assets. They help determine whether a company is liquid enough to cover up its current liabilities. Liquidity ratios include current ratio, the current cash debt coverage ratio, and acid test ratio. Activity ratios, on the other hand, establish how a company makes use of its resources through comparison of certain activities. They are also known as turnover ratios and help determine a company’s effectiveness in managing its liabilities and assets. Activity ratios include accounts receivable turnover ratio, inventory turnover ratio, total asset turnover ratio, and accounts payable turnover ratio (Dobosz, 2013). Leverage ratios establish the level of debt owed to creditors by a company and whether such a company is in a position to pay its long-term liabilities. The term leverage refers to the extent at which an organization borrows money. Leverage ratios include debt to equity ratio, the debt to capital ratio, the interest coverage ratio, cash flow coverage ratio, and the cash debt coverage ratio. Lastly, the profitability ratios are used by a company to establish whether it is operating at a profitable level and measure the success of the company in the industry. Profitability ratios include price/earnings ratio, cash flow margin, the net profit ratio, the dividend yield ratio, return on equity ratio, and return on asset ratio. In order for the ratios to be useful to managers and the whole of the company, they have to be compared to other similar companies in the industry. This is the only way the ratios can be useful in helping managers make decisions that boost a company’s success and competitiveness in its scope of operation. Internal reporting, which does not have to meet the GAAP standards, helps managers make soun.

1. DISCUSSION 1
Financial Ratios
Ashford University Discussion
Referencing this week’s readings and lecture, what are the
limitations of financial ratios? Classify your answer into at least
the following categories: liquidity ratios, activity ratios,
leverage ratios, and profitability ratios.
Week Six Lecture
Analyzing Financial Reports
After review of financial statements, managers can use basic
financial ratio analysis tools to establish trends within the
financial results of a company through comparing the result of
different periods in the accounting period. Different
stakeholders will need various financial ratios in different ways
(Dobosz, 2013). Executives and managers, creditors, vendors
and suppliers, financial analysts, financial reporters, and
competitors all need financial ratios for varying purposes.
Despite their usefulness, financial ratios are limited in their
purpose by various factors such as structure of a company,
inflation, seasonality, and accounting methods. There are
various types of financial ratios, namely liquidity ratios,
activity ratios, leverage ratios, and profitability ratios, all of
which serve different purposes.
Liquidity ratios are critical for companies to measure the
quality of current assets. They help determine whether a
company is liquid enough to cover up its current liabilities.
Liquidity ratios include current ratio, the current cash debt
coverage ratio, and acid test ratio. Activity ratios, on the other
hand, establish how a company makes use of its resources
through comparison of certain activities. They are also known
as turnover ratios and help determine a company’s effectiveness
in managing its liabilities and assets. Activity ratios include
accounts receivable turnover ratio, inventory turnover ratio,

2. total asset turnover ratio, and accounts payable turnover ratio
(Dobosz, 2013). Leverage ratios establish the level of debt owed
to creditors by a company and whether such a company is in a
position to pay its long-term liabilities. The term leverage refers
to the extent at which an organization borrows money. Leverage
ratios include debt to equity ratio, the debt to capital ratio, the
interest coverage ratio, cash flow coverage ratio, and the cash
debt coverage ratio. Lastly, the profitability ratios are used by a
company to establish whether it is operating at a profitable level
and measure the success of the company in the industry.
Profitability ratios include price/earnings ratio, cash flow
margin, the net profit ratio, the dividend yield ratio, return on
equity ratio, and return on asset ratio.
In order for the ratios to be useful to managers and the whole
of the company, they have to be compared to other similar
companies in the industry. This is the only way the ratios can be
useful in helping managers make decisions that boost a
company’s success and competitiveness in its scope of
operation. Internal reporting, which does not have to meet the
GAAP standards, helps managers make sound decisions to
improve a company’s performance. Budgets versus actual
reports and aging schedules for accounts receivable help us
understand how internal reports can be used in making decisions
which shape the future of an organization.
Forbes School of Business Faculty
Reference:
Dobosz, J. (2013). Ten ratios to make you money in stocks.
Forbes
. Retrieved from
http://www.forbes.com/sites/johndobosz/2013/09/25/10-ratios-
to-make-you-money-in-stocks/
DISCUSSION 2
Financial Analysis
Ashford University Discussion

3. R.E.C. Inc.’s staff of accountants finished preparing the
financial statements for 2010 and will meet next week with the
company’s CEO as well as the Director of Investor Relations
and representatives from the marketing and art departments to
design the current year’s annual report. Write a paragraph in
which you present the main idea(s) you think the company
should present to shareholders in the annual report. Why do you
think those ideas should be included?