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3-3. The above changes explain that company was not able to successfully manage their inventories. Due to the increase in inventory both current assets and current ratio increased where as total assets turnover decreased. Since inventory does not included on quick ratio and fixed assets turnover, these ratios remain constant. Company’s sales have remained constant but inventory has increased. This situation shows that company is losing their money.

3-5. Limitations of Comparative ratio analysis

Comparison with industry averages is difficult when firms operate many different divisions. Average performance is not necessarily good. Inflation distorts firms' balance sheets. Seasonal factors can distort ratios."Window dressing" techniques can make statements and ratios look better than they actually are. Different operating and accounting practices distort comparisons. Difficult to tell if a ratio is good or bad. Difficult to determine whether a firm's ratios are, on balance, good or bad.

3-6. Within the same industry some of the firm may operate in their growth stage of business life cycle and some may operate in maturity and introduction stage. The size of the firm may also vary from company to company within the same industry. Some firm may diversified their product all around the globes and some may operate locally. All these differentiations affect the company’s financial performance. A growing company may have negative cash flow and negative return because of huge investment in fixed assets but a matured company may have positive cash flow. In the above example even though growing company looks weaker it will grow in the future and earned highest return but currently when investor compare these two they will definitely make wrong decision. Therefore comparing financial ratios without considering other forces within the same industry is some time misleading.

Problems:

3-1. Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000....