The ratios help identify positive and negative trends that are financial. Ratios also allow a business to compare theirs to others, and can be used for financial research as well. It can also be used for comparing assets and liabilities. This helps to identify whether the business is losing cash or not. Ratios can tell if the business is using its assets appropriately, and if liabilities of the company are well-managed.
As a business owner I would use accrual method only because it recognizes Receivables and payable. When using the cash basis a company can appear that it is earning profit when in fact it is loosing funds. Cash basis does not acknowledge money that is owed which make is very difficult to keep accurate records. The IRS generally requires companies to use the cash accrual basis of accounting on their tax return. The Internal revenue service does allow the cash method of accounting if certain criteria are met because tax laws change frequently it is essential to contact a CPA if a business owner decides to use cash basis of accounting.
Financial statement analysis is the process of examining relationships among financial statement elements and making comparisons with relevant information. There are a variety of tools used to evaluate the significance of financial statement data. Three of the commonly used tools are the ratio analysis, horizontal analysis, and vertical analysis. Ratio analysis is a method of analyzing data to determine the overall financial strength of a business. These ratios are most useful when compared to other ratios such as the comparable ratios of similar businesses or the historical trend of a single business over several business cycles.
By using the information, manager can use cost of capital for restructure the market price and earning per share in order to bring advantage for company. By extension, it can help determine the decision whether to cancel or invest in project. Moreover, the cost of capital can help investors to determine the performance of the top management. With the intention of compare the ability of financial managers based on evaluation between the
If without the planning of a budget, the company may easily over spending on the cost. In addition, it helps to understand whether the business is in a healthy finance position by comparing with the actual figures with the projected figures. (John Tennent page179) mentioned that for a business planning on budgeting is a process used by management to create the blueprint for achieving that success. Financial planning is the most fundamental task for a business to determining on it strategic goals, objectives and achievement. The Financial plan needs to include the timeframes as well in order to achieve the goal within the budget set.
This method converts net income to net cash from operating activities. When using the indirect method a company must convert net income to net cash by gathering net income and adding or subtracting adjustments, this would give the company the Net cash, without having to go thru detail transactions. . Even though the indirect method may be easier for a company to manage their cash flow, I believe that this method may bring more work in case of an audit. (Weygandt, Kimmel, & Kieso, 2010. p 618).
The reason is the information support by independent documentary evidence. Historical cost accounting figures are based on actual acquisition prices, not merely possible of market values that can be revised to affect the ratio analysis which improve the performance of financial results. That is, historical costs accounting provides an objective view of an entity’s performance. Thus it consider verifiable and reduces the risk of manipulation of figures by management. In contrast, if there is not active market, market value accounting requires the use of estimation subject to uncertain assumptions, personal judgment, and subjective information about future values, such as discount rates and allowance for doubtful accounts.
Discuss the advantages and the limitations of “ratio analysis” There are several advantages and limitations of accounting ratios, I will address some of the key ones in this section Advantages * Accounting ratios can be used by investors to make decisions on whether or not to invest in a company or sell existing shares. * Accounting ratios can be used by management to give an indication of a company’s financial health i.e. is the company profitable? Can they meet creditor obligations? Are stock levels being efficiently managed?
Financial Ratio Analysis Financial ratios are extremely useful indicators of a firm’s performance and financial situation. (Financial Ratios, 2007) They are often used to help analyze trends within and industry and to help compare a firm amongst others. Ratios are highly important profit tools that help to implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. (Bernstein & Wild, 2000) Ratios are often able to help predict performance as well as provide indications of many potential problems. There are several issues to consider when comparing the financial ratios of a public company to the industry averages.
As CEO, Keith is determined to figure out why OSI stock is not performing as expected. His research leads him to a newer trend in company analysis called economic value added. EVA is a residual income approach that was modified and trademarked by a firm called Stern and Stewart. It is defined as after-tax profit that exceeds the required minimum return on capital. Computed by deducting the cost of capital from the after-tax profit, it is said to be the best measure of the true profitability of an enterprise because it is tied to cash flow and not earnings per share.