Accounting and Finance: Financial Ratios and Financial Statement Analysis

Running head: ACCOUNTING AND FINANCE
Accounting and finance
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1ACCOUNTING AND FINANCE
Table of Contents
Part A – Financial ratios and financial statement analysis.........................................................2
a. Explanation and calculation of ratio..................................................................................2
b. Short term solvency and efficiency...................................................................................2
Part B – Income and revenue.....................................................................................................3
Part C – Comparing balance sheet............................................................................................3
a. More favourable application for analysing credibility........................................................3
b. Payment of higher price for buying the entity...................................................................4
c. Changes in decision..........................................................................................................4
Reference....................................................................................................................................5

2ACCOUNTING AND FINANCE
Part A – Financial ratios and financial statement analysis
a. Explanation and calculation of ratio
Computation of ratios with detail formula are presented below -
Current ratio – it measures the company’s ability in terms of payment of the short term dues.
It is used by the analysts and investors to measure the liquidity position of the entity that will
help them to take decision regarding whether to invest in the company or lend fund to the
entity (Dalnial et al. 2014).
Quick ratio – current ratio is the stricter version of current ratio where the current assets those
are not readily available in cash or take some time to get converted into cash are not
considered while the ability of meeting the short term liability is assessed (Moghimi and
Anvari 2014).
Accounts receivable turnover – it reveals the time taken by the entity to collect its debts due
from the debtors. It measures the entity’s efficiency in collection the debt. High receivable
turnover ratio indicates that the company has conservative credit policy and the collection
department is aggressive (Dalnial et al. 2014).
Inventory turnover – it reveals the time taken by the entity to sell or replace its entire stock of
inventories during the concerned period. It measures the entity’s efficiency in selling its
inventories during the concerned period. Inventory turnover ratio can be used for comparing
with other companies under the same industry to measure the efficiency as compared to
others (Moghimi and Anvari 2014).
b. Short term solvency and efficiency
Short term solvency –