...CHAPTER 3 – ANALYZING FINANCIAL STATEMENTS Questions LG1-LG5 1. Classify each of the following ratios according to a ratio category (liquidity ratio, asset management ratio, debt management ratio, profitability ratio, or market value ratio). a. Current ratio – liquidity ratio b. Inventory turnover ratio – asset management ratio c. Return on assets – profitability ratio d. Accounts payable period – asset management ratio e. Times interest earned – debt management ratio f. Capital intensity ratio – asset management ratio g. Equity multiplier – debt management ratio h. Basic earnings power ratio – profitability ratio LG1 2. For each of the actions listed below, determine what would happen to the current ratio. Assume nothing else on the balance sheet changes and that net working capital is positive. a. Accounts receivable are paid in cash – Current ratio does not change b. Notes payable are paid off with cash – Current ratio increases c. Inventory is sold on account – Current ratio does not change d. Inventory is purchased on account– Current ratio decreases e. Accrued wages and taxes increase – Current ratio decrease f. Long-term debt is paid with cash – Current ratio decreases g. Cash from a short-term bank loan is received – Current ratio decreases LG1-LG5 3. Explain the meaning and significance of the following ratios a. Quick ratio - Inventories are generally the least liquid of a firm’s current assets. Further, inventory is the current...
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...Liquidity Ratios • Measures the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. • Ratios include the current ratio, the acid-test ratio, receivables turnover, and inventory turnover. Liquidity ratio = current asset___ current liabilities = 360042949 266476991 = 1.35 Asid test ratio = cash + short - long term investment + receivable (net) Current liabilities = 238446962+26656729+76692918____________________ 266476991 = 1.28 Receivable turnover = __Net credit sales____ Average net receivable = 574273012 (238446962+138220476)/2 = 3.049 : 1 365 days / 3.049 times = 119.71 days This means that receivables are collected on average every 217 days Inventory turnover = cost of goods sold Average inventory = 461246689 (18246340+2574857)/2 = 44.31 Profitability Ratios • Measures the income or operating success of a company for a given period of time. • Income, or lack of it, affects the company’s ability to obtain debt and equity financing...
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...Accounting Project FAC210 / Dr.Doaa Abdu * Liquidity Ratios: 1. Current Ratio =Current AssetsCurrent Liabilites = 13029/27947 = 0.47 (2009) = 14219/28616 = 0.50 (2010) Comment: Current Ratio shows the company's ability to pay its short term obligations by its current assets. The ratio is better when higher and it improved from 2009 to 2010 2. Quick Ratio =Current Assets-InventoryCurrent Liabilites = (13029-412)/27947 = 0.45 (2009) = (14219-433)/28616 = 0.48 (2010) Comment: Quick Ratio shows the company's ability to pay its short term obligations by its easy to convert to cash assets, which the inventory isn't. The ratio is better when higher and it improved from 2009 to 2010 * Activity Ratios 1. Inventory Turnover =Cost of goods soldInventory = 25842/412 = 63 times (2009) = 29439/433 = 68 times (2010) Comment: A ratio showing how many times a company's inventory is sold and replaced over a period. The higher the better and it improved from 2009 to 2010 2. Average Collection Period =Accounts RecievableSales per day = 7662/ (41017/365) = 68 days (2009) = 8784/ (44472/365) = 72 days (2010) Comment: This is a ratio that shows how much time it is taking the company to collect its payments owed from customers. The lower the better which means that it deteriorated from 2009 to 2010 3. Asset Turnover =SalesTotal Assets = 41017/152699 = 0.27 (2009) = 44472/156985 = 0.28 (2010) Comment:...
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...Task 11 (D2) Accounting ratios and monitoring business performance Ratio analysis can be used as a management tool to monitor and improve the performance of HSBC as well as being used by those outside of the organisation such as bank regulators, potential shareholders and suppliers to look at the performance of HSBC and compare it with other similar organisations. Information used for comparison must be accurate - otherwise the results will be misleading. There are four main methods of ratio analysis - liquidity, solvency, efficiency and profitability. If ratios of companies are to be compared it is important that the companies are in the same industry. It would be appropriate to compare HSBC ratios with other the ratios of other banks but not for example a construction company. Liquidity ratios These ratios should be used on a daily basis by management to monitor performance and manage cash flow risks. There are three types of liquidity ratio: * Current ratio - current assets divided by current liabilities. This assesses whether you have sufficient assets to cover your liabilities. A ratio of two for example shows you have twice as many current assets as current liabilities. * Quick or acid-test ratio - current assets (excluding inventory) divided by current liabilities. A ratio of one shows liquidity levels are high - an indication of solid financial health. * Defensive interval - liquid assets divided by daily operating expenses. This measures how long...
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...D2: Evaluate the adequacy of accounting ratios as a means of monitoring the state of a business in a selected organisation, using examples. 1.0 Terms of reference In this report, I will be evaluating the adequacy of accounting ratios, so that the owner can keep an eye on what condition is their business in. This will able the business to see whatever they are making profit or making loss. The business which I will particular focus at will be ISIS. Also, this report will include the advantage and disadvantage of using a profit & loss and balance sheet; I will outline the purpose of accounting ratios, plus take in account of the advantages and the limitations of each ratio, I will be also judge on how well the business is doing, and finally, I will conclude this report and give out my recommendation. 2.0 Advantages & limitations of using a P&L and Balance sheet for ISIS 3.1 Profit and loss account A profit and loss account gives us an overview on how well or bad the business has done with their finance, it will also include a record of their profit and loss. To make it even clear, it is a financial statement that summarises the revenue, cost and expenses of the business during the financial year. If the business has made profits, they will remain the same on their trading performance or if they eager to make more profit, they have to try to figure out something new to bring the business to another level. However, if the business has a made...
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...Summary Comparing different companies under different rules, or comparing one company in different time period can be complicating and often misleading when differences in accounting methods are not captured. In this essay, I will start the analysis by examining each firm’s change in accounting methods compared to their previous year. Then I will move on to comparing the three companies’ ratios to conduct analysis of each company based on the DuPont Method. In addition, I will also look at how changes in accounting methods affected Seven and I holdings’ results in 2013 when compared to 2012. Finally, I will conclude my analysis on how comparable it was under different accounting methods based on above analysis. _____ Three Companies Chosen for Analysis For this ratio analysis assignment, I chose three companies from the UK, US and Japan: Walmart Country: US Industry: Supermarket Retail Accounting Standard: GAAP TESCO Country: UK Industry: Supermarket Retail Accounting Standard: IFRS Seven and I Holdings Country: Japan Industry: Supermarket Retail Accounting Standard: Japan Standard _____ Change/Amendments in Accounting Methods Walmart Even though there is a mention about recent accounting pronouncements and future adoption of those policies, there is and will be no effect in the firm’s net income, financial position or cash flows. Sainsbury Although there were two amendments effective from this annual reports, the firm has concluded...
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...1.0 INTRODUCTION 1 1.2 OVERVIEW OF INDUSTRY 2 2.0 COMPANY PROFILE 14 2.1 WHAT IS IMPRESSIVE ABOUT BBGL 15 3. ACCOUNTING POLICIES 17 4.0 FINANCIAL ANALYSIS 20 4.1 RATIO ANALYSIS 20 4.2 COMMON SIZE ANALYSIS 24 4.3 TREND ANALYSIS 25 5.0 EVALUATION AND CONCLUSION 27 6.0 WORKINGS 28 7.0 REFERENCES 34 1.0 INTRODUCTION With encouragements from the Ghana Stock Exchange for companies to be listed, it is very expedient that companies who show interest in being listed provide a profitable and an efficient view of the company to prospective investors. This is achieved in its financial statements. The decision to invest or not to invest in a company depends on the effectiveness and efficiency of the firm under consideration. Using various financial statement analysis tools, the potential investor may be able to make a decision to invest. The decision to invest does not only affect the investor but the firm as a whole. The firm will be able to raise enough capital to finance its operations. For firms whose capital requirements do not meet the requirement set by the bank of Ghana in February 2008 with deadline being December 2012, this is an avenue where such firms can fulfil this new requirement. With the current developments in the banking industry, banks of which Barclays bank is of no exception, should work at not only being profitable but also given investors value for their money. 1.2 OVERVIEW OF INDUSTRY In anticipation of the expected economic growth mainly...
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...D2 evaluate the adequacy of accounting ratios as a means of monitoring the state of the business in a selected organisation, using examples: The importance of ratios in any business is very important because it gives the business a better understanding of the financial data. By using ratios the business is able to compare data from the current year with the previous years. From this the business will know and be able to identify if they are making more profit or a loss or if they just broke even. There are four types of ratios that a business has to calculate. These are things like investment ratio, financial ratio, profitability ratio and utilization ratio. From the results shown you can see if the business profits are increasing which is a positive thing and shows the company is on a rise and they are making money, this is a steady rise in the company’s money. If the results show a decrease it means that the company is making a loss. another one you can evaluate is the net profit margin as this is helpful as it shows how profitable the company has been throughout the years and whether it is increasing in profit or not. Current ratio is the most effective because it shows you whether you can have enough money to pay back your debts. The ratio shows that they have more liabilities it means they would struggle to pay off their debts. A figure below one means that the business does not have enough current assets to pay off its debts, a figure between 1 and 1.5 means that...
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...the ratios in all business in the world are very vital to the business as it helps the business understand how they are perfoming and understnad their financial data. By using ratios the business is able to compare data from the current year with the previous years. for this businees,we will be able to know if they are making more profit or a loss or if they just broke even. There are four types of ratios that a business has to calculate. These are things like investment ratio, financial ratio, profitability ratio and utilization ratio. From the results shown you can see if the business profits are increasing which is a positive thing and shows the company is on a rise and they are making money, this is a steady rise in the company’s money. If the results show a decrease it means that the company is making a loss. another one you can evaluate is the net profit margin as this is helpful as it shows how profitable the company has been throughout the years and whether it is increasing in profit or not. Current ratio is the most effective because it shows you whether you can have enough money to pay back your debts. The ratio shows that they have more liabilities it means they would struggle to pay off their debts. A figure below one means that the business does not have enough current assets to pay off its debts, a figure between 1 and 1.5 means that they have just enough assets at the moment to pay off their debts and a figure that is above 1.5 means that the business has...
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...Accounting Horizons Vol. 27, No. 2 2013 pp. 301–318 American Accounting Association DOI: 10.2308/acch-50434 Capital Structure, Earnings Management, and Sarbanes-Oxley: Evidence from Canadian and U.S. Firms Kelly E. Carter SYNOPSIS: I examine Sarbanes-Oxley’s (SOX) effect on capital structure. I find that SOX is associated with higher long-term debt ratios, as firms listed in the U.S. raise their long-term debt ratios by 2 to 3 percentage points. This finding is consistent with the idea that, although the reduction in information asymmetry associated with SOX could prompt managers to increase equity financing, debt is still safer and less costly than equity in the SOX era. Further analysis shows that the increase in debt occurs in the two quarters prior to SOX, suggesting that firms anticipate a higher cost of debt after SOX and acquire debt while it is relatively cheap. Also, firms that heavily (lightly) manage earnings prior to SOX use less (more) debt after SOX. This result is consistent with the view that firms that aggressively manage earnings before SOX reveal intrinsically weaker earnings after SOX, casting doubt on those firms’ ability to repay debt and relegating those firms to issue equity for financing purposes. Keywords: capital structure; earnings management; debt ratio; Sarbanes-Oxley. JEL Classifications: G32; G38. Data Availability: Data available upon request. Kelly E. Carter is an Assistant Professor at Morgan State University. I...
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...A Term Paper On Performance Evaluation through Deposit Mobilization Of Private Sector Banks in Bangladesh – A Critical Analysis on Mutual Trust Bank Ltd.. A Term Paper On Performance Evolution through Deposit Mobilization Bangladesh Of Private Sector Banks in – A Critical Analysis on Mutual Trust Bank Ltd. Under the Guidance of Supervision of Mohammed Didarul Alam Associate professor Department of Accounting Govt. City College, Chittagong. Submitted By MEHRAJ UDDIN Roll: 9799577 Reg: 1794467 BBA (Hon’s.) Second Year Department of Accounting Govt. City College, Chittagong. Letter of Transmittal Date: Mohammed Didarul Alam Associate professor Department of Accounting Govt. City College, Chittagong. Subject: Submission of Term Paper . Sir, It is a great pleasure and privilege to present the term paper “Performance Evolution of Private Sector Banks in Bangladesh through Deposit Mobilization - A Critical Analysis on Mutual Trust Bank Ltd.” which was assigned to me as a partial requirement for the competition of BBA (Hon’s.). Throughout the study I tried with the best of my capacity to accommodate as mush information and relevant issues as possible and tried to follow the instructions as you have suggested. I tried...
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...University of Phoenix Financial Analysis: The Big Picture When looking at the big picture in referring to financial analysis, there are four tools to consider, sustainable income, comparative analysis, ratio analysis and quality of earnings. While each of these tools is equally important I will provide an overview of two of these concepts to consider while deciding on a company’s financial health. Sustainable income is a level of income which is a realistic expectation of income to achieve in the future. Of course it would be very easy to call a company’s net income a realistic expectation until you consider items that can and will drastically change a company’s bottom line. Irregular items, changes in accounting principles and comprehensive income are all factors when considering a sustainable income. Irregular items are further broken down into discontinued operations and extraordinary items. Discontinued operations refer directly to the closing or disposal of a significant portion or component of a company. Extraordinary items cover extreme and rare acts such as volcano eruptions and hostile government takeovers. A change in accounting principles would take into account a company choosing to go with a more up to date or efficient form of accounting related to its business. If this happens, the changes must be made retroactive to cover the previous period. The last item which can affect a sustainable income is comprehensive income. This is income that is...
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...Reflection ACC/561 May 21, 2015 Rick Freeman Week 2 Learning Team Reflection The week two learning team reflection is a discussion focused on the differences and usages for comparative and ratio analysis. The use of multiple sets of data for comparison to detect trends is comparative analysis. Comparative analysis demonstrates trends within an organization. With continued use, Comparative analysis can identify diminishing trends through the use of quarterly data analysis. Ratio analysis also helps to establish trends, and make financial comparisons that assist management in making healthy financial decisions. Also, ratio analysis identifies strengths and weaknesses within an organization that allows management to make strategic decisions that benefit the success of the operation. According to Wiley (2013), “Information from financial statements can be gathered by examining relationships between items on the statements and identifying trends in these relationships” (Chapter 13). The relationships are numerically expressed in percentages or ratios, then trends can be recognized with a comparative analysis. With comparative analysis, the exact same data is provided for two or more different periods so similar data can be compared. Ratio analysis only provides a glimpse, due to the analysis being for a single given period. With comparative analysis a company can determine whether a trend is diminishing or growing from year to year and by what proportion...
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...Overhead Ratio: An overhead ratio will show the cost of the office overhead. It is calculated by taking the total expenses, subtracting physician expenses, and then dividing by adjusting receipts. It is very important to monitor these figure every month and every year to year. This will help to make it easier to see any trends in the cost of an overhead. Cost Ratio: To calculate the cost of any performing procedure or service in the office, by dividing the total expense for the month by the number of procedures performed in the month. Revenue Ratio: Revenue Ratio is to calculate the revenue ratio, is divide the total revenue by the number of procedues that are performed in any given period. Profit Ratio: Profit ratio is the amount of the...
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...CBoP was merged with Lord Krishna Bank. * 2008 HDFC Bank acquired Centurion Bank of Punjab. The swap ratio is expected to be around 1:25-30,” said a banking source. The merger will make HDFC Bank the country’s seventh largest bank after Bank of India (BoI) and ahead of IDBI Bank, from the current 10th position. The merger talks between the two banks began in January 2008 after the principal shareholders of CBoP – Bank Muscat with 14.02 per cent stake, Sabre Capital with 3.48 per cent stake and Kephinance Investment (Mauritius) with 6.13 per cent — decided to exit. 1) HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab (CBoP) for Rs 9,510 crore. BENEFITS FROM THIS DEAL * The HDFC Bank, which currently spans India with its chain of 746 branches, will add to itself 394 branches of the CBoP to itself, to make its network bigger and stronger. The merger talks between the two banks began in January 2008, after the principal shareholders of CBoP – Bank Muscat with 14.02 per cent stake, Sabre Capital with 3.48 per cent stake and the Kephinance Investment (Mauritius) with 6.13 per cent stake decided to move away from this partnership. * The HDFC Bank is further expected to pay Rs 100 billion to Rs 120 billion in shares for acquiring the CBoP. In what claims to be the largest ever private bank merger, the share swap ratio stands at 1:29, that is every shareholder of CBoP will get one share of HDFC Bank for...
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