Select the correct statements about financial ratios and income-statement ratios used in corporate analysis of construction firms.
-
AThe financial ratio summarises some aspect of the firm's financial condition at the time of preparing a balance sheet.
-
BBoth the numerator and denominator of financial ratios come directly from the balance sheet.
-
CIncome statement ratios compare one 'flow' item from the income statement to another flow item from the income statement.
-
DIncome statement ratios compare a flow item from the income statement to another flow item form the income statement
-
EAll of these
Answer
Correct Answer: All of these
Explanation
Introduction / Context:Financial ratios condense complex statements into interpretable metrics for liquidity, solvency, profitability, and efficiency. Balance-sheet ratios capture a point-in-time financial position, while income-statement ratios relate period flows like revenue and expenses. This question checks awareness of these categories and their construction.
Given Data / Assumptions:
- Balance sheet presents stocks (assets, liabilities, equity) at a date.
- Income statement presents flows (revenue, costs) over a period.
- Ratios may mix or isolate sources depending on the analytic purpose.
Concept / Approach:
Balance-sheet-only ratios (e.g., current ratio) use two stock figures. Income-statement ratios (e.g., gross margin, operating margin) relate two flow measures. Cross-statement ratios (e.g., asset turnover) are also common but not the focus here; the listed statements are valid within their stated contexts.
Step-by-Step Solution:
Recognize stock vs. flow distinction.Confirm that specific ratios can be built entirely from balance-sheet figures.Confirm that income-statement ratios compare flow to flow.Thus, the inclusive answer is correct.Verification / Alternative check:
Corporate analysis handbooks classify ratios accordingly; auditors and sureties review both sets for contractors.
Why Other Options Are Wrong:
- Choosing any single statement misses the broader classification.
Common Pitfalls:
- Mixing stock and flow without interpreting the meaning (e.g., days sales outstanding).
- Ignoring seasonality when comparing ratios across firms.
Final Answer:
All of these