European Journal of Operational Research
Added on 20220824
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Running Head: FINANCIAL STATEMENT ANALYSIS
FINACIAL STATEMENT ANALYSIS
Name of the Student
Name of the University
Author Note
FINACIAL STATEMENT ANALYSIS
Name of the Student
Name of the University
Author Note
1
FINANCIAL STATEMENT ANALYSIS
Answer to question 1
(a) Short term lenders will be interest in liquidity ratio like current ratio & quick ratio.
because they will be more interested in extending the shortterm credit of the firm.
(b) Longterm lenders will be more interest in solvency ratios like debt ratio, debt to
equity and interest earned ratio. They will be interested while providing funds
with higher ratio in longterm & charge of a higher rate of interest on borrowing
(Liang et al., 2016).
(c) Stockholders They are interested in company’s profitability ratios like Return on
Equity & operating profit ratio. ROE is used to calculate the company’s ability for
generating income from shareholders investments.
Answer to question 2
(a) ROA In DuPont analysis, the ROA is the multiplication of company’s operating
profit margin with asset turnover ratio. Hence, is higher ROA is maintained, then it
increases the operating profit margin. This is done by efficient use of assets or
increase the revenue.
(b) Stockholders equity In DuPont analysis, the return on equity is the multiplication of
profit margin with the asset turnover and financial leverage. Therefore, the company
breaks down the return on equity to understand its ROE in every period of time.
Answer to question 3
If accounts turnover is decreasing, then average collection period is more and taking
longer period of time.
Answer to question 4
Fixed charge coverage ratio measures the ability to meet fixed obligation rather than
just interest payments by taking assumptions that failure will be risky for the firm.
FINANCIAL STATEMENT ANALYSIS
Answer to question 1
(a) Short term lenders will be interest in liquidity ratio like current ratio & quick ratio.
because they will be more interested in extending the shortterm credit of the firm.
(b) Longterm lenders will be more interest in solvency ratios like debt ratio, debt to
equity and interest earned ratio. They will be interested while providing funds
with higher ratio in longterm & charge of a higher rate of interest on borrowing
(Liang et al., 2016).
(c) Stockholders They are interested in company’s profitability ratios like Return on
Equity & operating profit ratio. ROE is used to calculate the company’s ability for
generating income from shareholders investments.
Answer to question 2
(a) ROA In DuPont analysis, the ROA is the multiplication of company’s operating
profit margin with asset turnover ratio. Hence, is higher ROA is maintained, then it
increases the operating profit margin. This is done by efficient use of assets or
increase the revenue.
(b) Stockholders equity In DuPont analysis, the return on equity is the multiplication of
profit margin with the asset turnover and financial leverage. Therefore, the company
breaks down the return on equity to understand its ROE in every period of time.
Answer to question 3
If accounts turnover is decreasing, then average collection period is more and taking
longer period of time.
Answer to question 4
Fixed charge coverage ratio measures the ability to meet fixed obligation rather than
just interest payments by taking assumptions that failure will be risky for the firm.
2
FINANCIAL STATEMENT ANALYSIS
Answer to question 5
Rule of thumb ratios are not valid for all corporations (Hosaka, 2019). This rule
doesnot provide any initial insight to the firms operations and analyst can provide
information.
Answer to question 6
Trend analysis helps to compare the present outcomes with past findings & evaluate
the patterns of industry change.
Answer to question 7
(a) Return on Investment is the ratio of net income with total assets. Inflation may
overstate the income and hence, total assets can be disturbed.
(b) Inventory turnover ratio is ratio of total sales with inventory. Inflation will overstate
the sales and then inventory will be affected.
(c) Fixed asset turnover ratio is ratio of sales with fixed assets. The replacement cost will
be effected and hence, fixed asset will be understated.
(d) Debt to asset ratio is ratio of total debt with total assets. Inflation will not affect that
much because, both are a type of historical cost.
Answer to question 8
In case of disinflation, the inflation earnings will be squeezed out from the income
statement (Arkan, 2016). This may happen for industries where price trends is continuously
changing.
Answer to question 9
Disinflation will lower the demand of return from the investors on the financial assets,
hence the future interest or future earnings will have a higher current evaluation.
FINANCIAL STATEMENT ANALYSIS
Answer to question 5
Rule of thumb ratios are not valid for all corporations (Hosaka, 2019). This rule
doesnot provide any initial insight to the firms operations and analyst can provide
information.
Answer to question 6
Trend analysis helps to compare the present outcomes with past findings & evaluate
the patterns of industry change.
Answer to question 7
(a) Return on Investment is the ratio of net income with total assets. Inflation may
overstate the income and hence, total assets can be disturbed.
(b) Inventory turnover ratio is ratio of total sales with inventory. Inflation will overstate
the sales and then inventory will be affected.
(c) Fixed asset turnover ratio is ratio of sales with fixed assets. The replacement cost will
be effected and hence, fixed asset will be understated.
(d) Debt to asset ratio is ratio of total debt with total assets. Inflation will not affect that
much because, both are a type of historical cost.
Answer to question 8
In case of disinflation, the inflation earnings will be squeezed out from the income
statement (Arkan, 2016). This may happen for industries where price trends is continuously
changing.
Answer to question 9
Disinflation will lower the demand of return from the investors on the financial assets,
hence the future interest or future earnings will have a higher current evaluation.
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