Question

. Information found on the company's income statement and balance sheet is extracted from these documents and examined more closely through the use of

Answer 1

Answer: Ratio Analysis

Explanation;

Ratio analysis is a very important method of financial analysis that enables one to make inferences and see relationships from the data presented by a company in it's financial statements.

Most ratios are divided into 5 different types being;

• Profitability
• Liquidity
• Activity
• Debt, and
• Market

An example of a Liquidity ratio would be the Current Ration which divides Current Assets by Current Liabilities to see if the company has enough liquidity to pay off current liabilities.

Answer 2

Answer:

Ratio analysis

Explanation:

Financial statements are used to show the assets, liabilities, revenues, expenses, and owners equity of a business entity within a given time frame.

Income statement is revenue less expense within a given period. While the balance sheet shows the financial position of a business at a particular point, that is its assets, liabilities, and owner equity.

Information form financial statements are analysed by the use of ratio analysis to gain a better understanding of financial condition of an organisation.

Ratio analysis compares the magnitude of line items within financial statements to determine liquidity, profitability, solvency and operational efficiency of a business.

For example current ratio shows how well a business can use its current assets to settle its current liability, this is a liquidity ratio.