Accounting and Finance for Executives Assignment PDF
Added on 2021-06-18
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ACCOUNTING AND FINANCEFOR EXECUTIVES –UUAC5300 Assignment - 2
ContentsSolution – 1.1 (a).........................................................................................................................................2Solution – 1.1 (b).........................................................................................................................................3Solution – 1.1 (c)..........................................................................................................................................4Solution – 1.2 (a).........................................................................................................................................5Solution – 1.2 (b).........................................................................................................................................5Solution – 1.3 (a).........................................................................................................................................6Analysis of above ratios...........................................................................................................................6Solution – 1.3 (b).........................................................................................................................................7Solution – 2.1 (a).........................................................................................................................................8Solution – 2.1 (b).........................................................................................................................................8Solution – 2.1 (c)..........................................................................................................................................8Solution – 2.2 (a).........................................................................................................................................9Solution – 2.2 (b).........................................................................................................................................9Solution – 2.2 (c)..........................................................................................................................................9Solution – 2.2 (d).......................................................................................................................................10References:................................................................................................................................................11
Solution – 1.1 (a)Ratio analysis plays an important role in analyzing the financial health of the company. They provides the bird's eyeview of the company's operational and financial performance by analyzing the financial numbers. In the given case,Mary Norton, the manager of Borrower's Ltd. has provided some details and ratios. These ratios are (a)Current ratio (Momoh, 2018) - This is an important liquidity ratio, and reflects the company’s ability to payits current liabilities from its current assets; it is calculated by dividing current assets with current liabilities.Hence, the company’s ability to pay off its current liabilities is reflected from its current ratio. The ideal current ratio is 2:1. If the current ratio is below than 1, than it means that the company’s liabilitiesare greater than the company’s assets. This is not a good signal for company’s health as the company doesnot have sufficient current assets to settle its current liabilities. Further, if the current ratio is greater than 3,than although it shows that the company is having sufficient current assets for paying its current liabilitiesbut on the same hand, it reflects the company’s inability to properly utilize its current assets.In the given case, the current ratio of Borrowers Ltd. is 2.1:1 in the year 2017, which is the perfect currentratio and shows that the company has sufficient current assets to pay off its current liabilities bysimultaneously utilizing its current assets effectively.(b)Quick Ratio (Momoh, 2018) - Quick ratio is company’s ability to pay off its current liabilities from itsquick assets. Quick assets are those assets which can be converted into cash within a period of 90 days or ina short term period, and is calculated by subtracting inventories and prepaid expenses from current assets.The higher the quick ratio the better it is, however too high quick ratio reflects the company’s inability toproperly utilize its quick assets. The Ideal quick ratio is 1:1. In the given case, the quick ratio of the company is 1.4:1 in year 2017 as compared to 0.8 in year 2016.Hence, it reflects that the company has sufficient quick assets to pay off its current liabilities and moreover,the company's quick ratio has been significantly improved from the last year.(c)Assets turnover ratio (Momoh, 2018) -Assets turnover ratio shows that the efficiency of company’s assetsto generate the sales revenue and is calculated by dividing net sales with the average assets. This ratio ishigher the better as higher ratio indicates that the company's is generating more revenue per dollar of assets.In the given case, the company's asset turnover ratio has fallen from 2.8 to 2.2 which means that therevenue generated per dollar of asset has fallen from 2.8 to 2.2.(d)Cash debt coverage (Accounting for Management, 2018) - Cash debt coverage ratio is the company'sability to pay off its current liabilities from its cash generated from operations and is calculated by dividingcash generated from operations with the current liabilities. Generally, the cash debt coverage ratio of 1:1 isconsidered good. However, the higher the ratio the better it is.In the given case, the company is having cash debt coverage ratio of 0.2 in year 2017 as compared to 0.1 inyear 2016, it means that the company's cash generated from operations are unable to pay off the company's
current liabilities. This ratio is unfavorable to the company and reflects that the cash generated fromoperations is insufficient to cover the liabilities and the company can face liquidity crunches in the future.(e)Profit - Profit is the important element and driving factor for any business, in the given case, the profit ofthe company has fallen by 8% in the year 2017 as compared to profit in year 2016, so it in unfavorable forthe business. (f)Earnings per share - Earning per share is the amount of income generated by business on every share heldby the investors. This is an important ratio for the investors as it shows the amount earned by them on theirinvestments. Since, the profit earned has gone down, the EPS of the company is also down by $0.8 ascompared to earlier year.Solution – 1.1 (b)The other three ratios to be included are:(a)Profit Margin ratio - This is an important profitability ratio and is calculated by dividing net profit with netsale. This shows the % of profit generated as compared to sales. Or in other words, the profit per $ of sale.From this ratio, the company's profitability performance can be evaluated.(b)Debt to Equity Ratio - This ratio shows the proportion of debt and equity in the capital structure of thecompany and is calculated by dividing total liabilities with total shareholder's equity. It helps in evaluatingwhether additional loan can be granted to the company or not to maintain the optimum debt to equity ratio.(c)Debt Service Coverage Ratio – This ratio reflects that whether the company’s operating profit are sufficientto meet the debt service obligations. This ratio is most useful in evaluating the company’s eligibility forfurther loan and the company’s credibility to pay off the loan and interest in the future.Solution – 1.1 (c)The limitations of ratios analysis for credit and investing decisions are (Bragg and Bragg, 2018):(a)The ratios are calculated on the basis of current business conditions, if these conditions changes, than theratio analysis will be no use.(b)The results of ratio analysis has many interpretations and it depends upon person to person, that how heinterprets the results.(c)The ratio analysis is based on the historical information and does not take into account the futuretransactions.
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