Ratio Analysis Is One Tool Management May Use to Examine

question 35

Essay

Ratio analysis is one tool management may use to examine a firm's profitability and risk.Another tool often used by management are pro forma financial statements.
Required:
a. Describe the purpose of pro forma financial statements.
b. Describe how pro forma financial statements may be constructed.

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Definitions:

Price Floor

A minimum price set by the government or a governing body below which a product cannot be sold legally.

Producer Surplus

The difference between the amount producers are willing to sell a good for and the amount they actually receive.

Price Ceiling

A government-imposed limit on how high a price is charged for a product, service, or commodity, intended to protect consumers from high prices.

Persistent Shortage

A situation where the demand for a good or service consistently exceeds its supply, over a significant period of time.