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Intermediate Accounting For Dummies by Maire Loughran

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Chapter 22

Ten Ratios for Financial Statement Analysis

In This Chapter

arrow Understanding why financial statement ratios are important

arrow Measuring ready cash on hand

arrow Gauging efficiency of operations

arrow Finding out about profitability analysis

arrow Checking out ratio limitations

Why, you may be wondering, is GAAP so nit-picky? Because proper classification of accounting transactions is key for user analysis, which is the topic of this chapter. Here we take a look at key ratios that users of the financial statements perform to gauge the effectiveness and efficiency of a company’s management.

The four major ratio measurements are liquidity, activity, profitability, and coverage. But you may be asking, isn’t an investor interested only in how profitable a company is? Not necessarily. Liquidity, which is how well a company can cover its short-term debt; activity, which shows how well a company uses its assets to generate sales; and coverage, which measures the degree of protection for long-term debt, ...

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