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Accounting and Finance - Doc

   

Added on  2021-06-14

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Finance
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Running head: ACCOUNTING AND FINANCEAccounting and FinanceName of the Student:Name of the University:Author’s Note:
Accounting and Finance - Doc_1

ACCOUNTING AND FINANCE1Table of ContentsAnswer to Question 1......................................................................................................................2Requirement 1.1...........................................................................................................................2Requirement 1.2...........................................................................................................................4Requirement 1.3...........................................................................................................................5Answer to Question 2......................................................................................................................6Requirement 2.1...........................................................................................................................6Requirement 2.2...........................................................................................................................8Reference.......................................................................................................................................10
Accounting and Finance - Doc_2

ACCOUNTING AND FINANCE2Answer to Question 1Requirement 1.1Part aAs per the case study Mary Norton who has applied for a loan for a period of 8 years hasprovided financial ratios as a proof of the businesses worthiness to acquire such a loan. Thefinancial ratios which are shown by Mary Norton some of which are considered to be financialindicators of the businesses performance. The current ratio of the business is shown to be 2.1which has reduced from the previous year. There has been a fall in the current assets of thebusiness even though the ratio is still ideal. The quick ratio of the business has improved fromthe previous year which shows that the firms liquidity position has further improved and thesame is depicted as 1.4. The asset turnover ratio of the business has fallen from the previous yearwhich is not a favorable sign for the business. The cash debt ratio has improved slightly whichshows improvement in debt servicing of the company. The profit of the business has decreasedfrom previous year by 8% which is a significant fall as compared to 2016 which shows that theprofit has increased by 32%. As the profit of the business has decreased therefore the earning pershare of the business has also fallen which is shown as 2.5 per share in 2017.The ratios which are provided by Mary Norton shows mixed results. In terms of liquiditycondition, the business is very much favorable as it has a perfect current ratio and a near perfectliquid ratio. The current ratio and quick ratio which is considered to be ideal is 2:1 and 1.5: 1respectively. The current ratio of the business shows the company’s ability to meet the currentobligations of the business effectively. In addition to this, the acid test ratio of the businessshows the current obligations of the business which is similar to current assets of the business.
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ACCOUNTING AND FINANCE3The only difference which lies between current ratio and acid test ratio is that inventory is notincluded in acid test ratio of the company. This suggest that the business will be reliable if theyare granted the debt amount. However, the asset turnover ratio has fallen and the profit which isgenerated by the business during the year has also fallen which suggest that the currentperformance of the business is not good. The asset turnover ratio of the business represents howmuch profit the business can earn employing the assets of the company and the return which isearned on the assets are financial indicators of the strength of the company. Therefore, theanalysis of profitability does not paint the business as favorable. The ratios which are providedby Mary Norton are somewhat important for decision making but some other ratios like interestcoverage ratio, debt service ratio, debt equity ratio are also important and provides a great deal ofinformation which will be required before the loan amount can be granted to Mary Norton.Part bThe three other ratios which needs to be calculated for Borrowers ltd are Debt servicingratio, interest coverage ratio and debt equity ratio. The debt service ratio reveals the ability of thecompany to manage and maintain the debt capital which the business has taken. The ratio revealsa great deal about the company’s capability to meet the obligations which are related to debtcapital of the business (Rasoolpur 2014). The interest coverage ratio of the business reflects thecompany’s ability to pay the interest charges which are associated with the borrowings of thebusiness. The interest coverage ratio is used often by financial institution to judge whether thebusiness is able to meet the interest payments for existing loans (Baños-Caballero, García-Teruel& Martínez-Solano, 2014). Debt equity ratio is considered to be one of the financial indicators ofthe business’s performance. It also reveals the capital structure of the business and also thenature of the capital which the business uses that is it can tell whether a business is leveraged
Accounting and Finance - Doc_4

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