• Classify the following changes in each of the accounts as either an outflow or an inflow of cash. (1 Mark – 0.2 each)
• Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed here:
  • What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? (Select all the answers that apply.) (0.25 Marks)

• Is a decrease in land and buildings an inflow or an outflow of cash?
• Is an increase in accounts payable an inflow or an outflow of cash?
• Is a decrease in vehicles an inflow or an outflow of cash?
• Is an increase in accounts receivable an inflow or an outflow of cash?
• Is the payment of dividends an inflow or an outflow of cash?

	Island	Burger	Fink	Roland
Ratio	Electric Utility	Heaven	Software	Motors
Current ratio	1.06	1.35	6.79	4.55
Quick ratio	0.92	0.87	5.23	3.73
Debt ratio	0.69	0.45	0.04	0.34
Net profit margin	6.25%	14.33%	28.46%	8.43%

 

Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out.

• The four companies are in very different industries.
• The operating characteristics of firms across different industries vary significantly resulting in very different ratio values.
• Financial ratios from software companies are never very reliable.
• Caution must be exercised when comparing older to newer firms, e.g., utility company vs. software company.