Financial Condition Analysis

Chapter 17

ANSWERS TO END-OF-CHAPTER QUESTIONS
17.1 a. Financial statement analysis, which focuses on the data contained in a business’s financial statements, is designed to assess the financial condition of the business. Operating indicator analysis, which focuses on operating (as opposed to financial) variables, attempts to identify the underlying operating parameters that contributed to the assessed financial condition. b. Of course, it is extremely important to understand a business’s financial condition, because any future plans must be supported financially. However, it is equally important, especially for managers, to understand what operational actions are required to ensure that the business maintains the financial condition needed to accomplish its mission.

17.2

Analyses that examine historical data provide managers and investors with an appreciation of the business’s current condition, which is important. However, the future is more important than the past, and the most important use of a historical analysis is as a springboard for preparing for the future. When plans are being made, pro forma (forecasted) financial statements are prepared and analyzed, so that managers can gain insights regarding the impact of alternative strategies on the business’s financial and operating condition.

17.3

The inventory turnover ratio indicates how well a business is utilizing its inventories. It tells managers how many dollars of sales (revenues) are generated by each dollar of inventories. Inventories are a primary input into the medical device production process, whereas inventories (although important) are not as critical to the inpatient healthcare business. Thus, the inventory turnover ratio is a more important financial performance measure for a medical device company than for a hospital management company.

17.4 a.