Accounting: Compute Ratios, Interpret Findings and Risk/Return Trade Off

This report includes the calculations of ratios and recommendations based on the findings. It also explains the risk/return trade off and its relevance to the bank in assessing the request for further loan finance.

Accounting

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
1. Compute ratios, interpret the findings of the results derived from the calculations. Also
recommend the actions that can be taken by the management,...................................................3
2. Explain what is meant by ‘risk/return trade off’ and its relevance to the bank in assessing
the request for further loan finance..............................................................................................9
3. A bank is an example of a financial intermediary. Explain the role of financial
intermediaries and their usefulness to the private investor........................................................10
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Ratios are used to compare two numbers or more numbers. It is used to compare the how
much a value deviates from the selected value. These values are compared with the other value,
in this process the value which is in numerator is termed as ‘antecedent’ and the value in divisor
is ‘consequent’. Financial ratios help in determining the financial performance and further helps
to the investors in determining the position of the business. Ratios are further divided into three
types of ratios which are activity ratio, liquidity ratio, solvency ratio and profitability ratio
(Eldali, Suryanarayanan and Samper, 2019). The following report includes about the calculations
of ratios and recommendation on the basis of ratios. Elaborate risk or return trade off and how it
is used by the banks in financing its business activities. It further describes the financial
intermediaries and its usefulness for the private investors.
MAIN BODY
1. Compute ratios, interpret the findings of the results derived from the calculations. Also
recommend the actions that can be taken by the management,
Liquidity Ratio: This ratio is used to pay its debt obligations from the current assets. It is
determined by using various ratios such as current ratio, operating cash flow, quick ratio, data
sales outstanding ratios, etc.
Current Ratio = Current Asset / Current Liabilities
In 2010 = 904 / 290
= 3.12 Times
In 2011 = 1102 / 290
= 3.8 Times
In 2012 = 1250 / 288
= 4.34 Times
Where, current assets = Inventory + Trade Receivables + Cash
In 2010 = 400 + 492 + 12
= 904
In 2011 = 540 + 550 + 12
= 1102
In 2012 = 620 +633 + 15

= 1250
Current Liabilities = Trade Payables + Tax payables
In 2010 = 270 + 20
= 290
In 2011 = 270 + 20
= 290
In 2012 = 280 + 8
= 288
Liquid Ratio = Liquid asset / Current liabilities
In 2010 = 504 / 290
= 1.73 Times
In 2011 = 562 / 290
= 1.94 Times
In 2012 = 630 / 288
= 2.19 Times
Where, Liquid Assets = Current assets – inventories
In 2010 = 904 – 400
= 504
In 2011 = 1102 – 540
= 562
In 2012 = 1250 – 620
= 630
Days Sales Outstanding Ratio = Average Account Receivables / Revenue per day
In 2010 = 492 / 5.07
= 97.04
In 2011 = 550 / 6.08
= 90.46
In 2012 = 633 / 6.85
= 92.41
Revenue per day = Total yearly sales / 365
In 2010 = 1850 / 365

= 5.07
In 2011 = 2200 / 365
= 6.08
In 2012 = 2500 / 365
= 6.85
Profitability Ratio = This ratio defines the amount of profit earned by the organisation by various
business activities. It denotes that how efficiently an organisation uses its assets in generating
sales (Greenbaum, Thakor and Boot, 2019).
Gross profit Ratio = Gross profit / Sales * 100
In 2010 = 600 / 1850 * 100
= 0.3243 * 100
= 32.43 %
In 2011 = 700 / 2200 * 100
= 0.3181 * 100
= 31.81 %
In 2012 = 750 / 2500
= 0.3 * 100
= 30 %
Net Profit Ratio = Net profit / Sales * 100
In 2010 = 47 / 1850 * 100
= 0.0254 * 100
= 2.54 %
In 2011 = 40 / 2200 * 100
= 0.0181 * 100
= 1.18 %
In 2012 = 20 / 2500 * 100
= 0.008 * 100
= 0.8 %
Solvency Ratio: This ratio is used to know the long term paying capacity of the business
concern. It determines that the Cash flow of the organisation is sufficient to pay off its long term

debt. This ratio includes various ratios such as Debt equity ratio, interest coverage ratio,
Shareholders equity ratio, etc.
Interest Coverage Ratio = Earnings before interest and tax / Interest Expenses
In 2010 = 50 / 25
= 2
In 2011 = 60 / 60
= 1
In 2012 = 50 / 110
= 0.455
Debt Equity Ratio = Debt / Equity
In 2010 = 320 / 90
= 3.55
In 2011 = 292 / 90
= 3.24
In 2012 = 282 / 90
= 3.13
Shareholders’ Equity Ratio = Total Shareholders’ equity / Total Assets
In 2010 = 372 / 1182
= 0.314
In 2011 = 382 / 1392
= 0.274
In 2012 = 372 / 1590
= 0.234
Activity Ratio: It describes how proficiently company uses its assets to generate sales of the
company (Grundke and Kühn, 2020). This ratio includes various ratios such as assets turnover
ratio, inventory turnover ratio, etc.
Assets turnover ratio = Revenue / Average Total Assets
In 2010 = 1850 / 1182
= 1.57
In 2011 = 2200 / 1392
= 1.58

In 2012 = 2500 / 1590
= 1.57
Inventory Turnover Ratio = Cost of goods sold / Average inventory
In 2010 = 1250 / 400
= 3.125
In 2011 = 1500 / 540
= 2.77
In 2012 = 1750 / 620
= 2.82
Net benefit is vital for any business. By and large, the higher the net overall revenue the
better it is. A high net benefit implies that the organization did well in dealing with its expense of
deals. It is seen that as far as dollar sum, net benefit is higher in year 2012, yet the net overall
revenue has diminished every year. As far as overseeing cost of deals and creating net benefit,
the organization improved in year 2010 than in year 2011 and 2012. Consequently, the net
revenue might be worked on by expanding deals cost or diminishing expense of deals (Koch,
2018).
The mark-up was 48% in 2010, 46.7% in 2011 and 42.9% in 2012. This means Citizen is
selling its goods at 48%, 46.7% and 42.9% more than the total price paid over three years.
However, there is a decrease every year. The higher the increase, the more income you get when
making a transaction. This reduction in growth actually means lower revenue compared to
previous years (48% - 2010, 46.7% - 2011 and 42.9% - 2012)
The mark-up was 48% in 2010, 46.7% in 2011 and 42.9% in 2012. This means that Citizen's
sale price of goods is 48%, 46.7% and 42.9% higher than the total price paid over three years.
However, it is decreasing every year. The higher the increase, the more you earn when making a
transaction. This decline in growth actually means lower revenue compared to previous years
(48% - 2010, 46.7% - 2011 and 42.9% - 2012).
The operating ratio was slowly declining from 2010 to 2012. Subsequently, this shows that
the cost is very business constrained and higher work gains can be realized. It can equally
demonstrate whether an organization can increase transactions without proportionally increasing
the cost of work. Here, the element expands both its business and cost aspects without impacting

its operating expense ratio (OER). To be honest, the decline in the operating ratio this year shows
that the organization is more productive and well managed (Kroll, Marchioni and Ben-Horin,
2021).
ROCE attracts financial investors to put resources into the enterprise, and it can be seen that
Citizen's ROCE is actually static. Financial investors are keen to understand how effectively an
organization is using the capital it uses and the proportion of the financing process it draws out.
Interpretation of static ROCE may be due to diminishing returns or the organization having a
large amount of resources.
In most cases, a higher ratio is advantageous because the organization is efficient in
generating transactions. A lower ratio indicates that the organization is underutilizing resources
and has internal problems. From the situation of Citizen, it can be seen that the ratio of resource
turnover remained unchanged for two consecutive years, and the ratio decreased in 2012. This
reflects the organization's poor management of resources, showing creation and board problems.
The current ratio estimates a firm's ability to address current risks with current resources.
The ongoing percentage of this business continues to expand every year. This meant Citizen was
not able to proficiently utilize its ongoing resources or temporary support offices. This may
indicate a problem with working capital management.
Acid test ratio is essential for an organization to have sufficient funds nearby to pay the
exchange due, and the higher the ratio, the higher the temporary financial security of an
organization. From the estimates, there is a tendency to infer that the Citizen retail store,
although obtained, the fundamental analysis ratio suggests that it is not really utilizing its assets.
The high stock turnover rate is liked, but due to Citizen's reasons, the stock turnover rate
in 2010 was found to be very large. Later, however, the organization faced declining inventory
turns during two consecutive years (2011 and 2012). This may come with the extent to which
Citizen controls credit transactions during the year. Additionally, a reduction in inventory turns
can be a means by which an item sits for a long time before it can be sold and must be
resupplied. As Citizen works in different stores, Citizen may also take advantage of bulk
purchases (Labi and Arsalidou, 2021).
It should be seen that the receivables classification period is shortening, indicating that the
business has been successfully monitored. The instantaneous classification period is generally
preferred because it can understand the terms of the credit presented to the credit customer. Early

classification is not only great from a liquidity perspective, but it also reduces the poor obligation
and organizational cost of collecting receivables. Receivables turnover decreased due to
expansion of debt holders.
The interest coverage ratio has been reduced, which means the cost of its debt is causing
trouble for the organization. An interest frontier of twice or less would be low and should be
more than many times. Its ability to cover interest costs may be sketchy as the interest coverage
ratio is decreasing. In addition, the bank may refuse to lend more cash to the organization
because the organization's "default risk," the chance that the organization or individual will not
be able to pay the expected instalments, may be deemed too high. In many cases, a drop in
revenue inclusion is something that financial investors want to be careful about, as it indicates
that the organization may not be able to pay its obligations later on (Lee and Yun, 2021).
The proportion of Citizen's gear has expanded over three years, indicating that the group has
a more severe monetary influence and is more powerless to downturns in the economy and
business cycle. Elements with a high proportion of equipment, the scale of obligations is also
higher. Businesses that use expensive fixed resources usually have a higher proportion of
equipment, because these decent resources are usually obligated to fund.
The foremost reason of bank financing is that the organisation is not been able to generate
much cash from the activities from operations. This has led to the situation that has occurred
over the past three years of net cash deficiency. Also, the interest which should be payable
cannot be paid appropriately as the company does not hold much cash from its operating
activities.
The recommendations that are given for the actions that needs to be taken is:
 To bring down how much exchange receivables, the association should lead a review of
its credit terms.
 Stock levels are additionally extremely high and ought to be checked.
 To bring in additional money from deals, working costs should be kept up with taken care
of.

2. Explain what is meant by ‘risk/return trade off’ and its relevance to the bank in assessing the
request for further loan finance.
Risk and return are totally unrelated. More hazardous resource financial investors need to
be compensated for their risk. Standard offers give financial investors a return as an ascent in the
offer value (a capital increase) as well as profits. By and large, thse capital addition part of the
anticipated return is more applicable the higher the risk of the investment. Essentially, higher-
risk borrowers should pay higher loan fees to remunerate banks for the expanded risk they give.
Banks will look at the borrower's financial soundness and set a loan fee on the credit that is a
specific rate point over the base rate. The higher the loan fee, the bigger the risk. Citizen has
turned into a more hazardous suggestion, and in the event that the bank can be convinced to raise
the credit office, the pace of revenue charged will unquestionably be expanded (Lokin, 2019).
The risk and return trade-off contends that when hazard rises, so does the conceivable
award. As per the risk return trade-off, a financial backer's cash can yield greater gains provided
that the person in question will face a more noteworthy challenge of misfortune. The ideal risk
resistance still up in the air by various rules, including the financial backer's risk resilience, the
quantity of years till retirement, and the capacity to supplant lost funds. Investors consider the
risk reward trade-off as perhaps the main elements in pursuing venture choice and assessing their
portfolios overall. Financial investors should assess an assortment of components while
ascertaining a suitable risk return trade-off, including general risk resistance, the capacity to
recharge lost money, from there, the sky is the limit. As per the risk return trade-off, a financial
backer's cash can yield greater gains provided that the individual will face a more prominent
challenge of misfortune. One of the main parts of decision-production for financial investors is
the risk reward tradeoff. They likewise use it to assess their whole portfolios.
3. A bank is an example of a financial intermediary. Explain the role of financial intermediaries
and their usefulness to the private investor.
A financial intermediary is an organization or establishment that goes about as a mediator
between specialist service providers and buyers. It is a foundation or individual between at least
two gatherings in a monetary climate. In principle, it transforms reserve funds into ventures.
Financial intermediary exists in the monetary framework for benefit and in some cases require
guideline of their exercises (Mosavi, 2019). Likewise, late patterns propose that the job of

monetary intermediation in saving and speculation capacities can be utilized for effective market
frameworks, or they may likewise be of worry, as the subprime contract emergency has shown.
Some of the financial intermediary are:
 Commercial Banks
 Financial houses
 National Savings Bank
 Insurance Companies
 Unit trust companies
 Investment trust companies
 Pension Funds
 Building societies
Banks allow incredible economies to more directly transact the shocking range of
transactions that take place in the business of goods, jobs and money capital. Briefly imagine
what the economy would look like if all instalments had to be paid in real money. In fact, even
independent companies need to reserve funds to pay for labour and buy supplies. For example,
banks allow individuals and organizations to store this cash in financial records or investment
accounts, and then use immediate withdrawal, write a check, or use a debit card to withdraw this
cash as appropriate (Muhtar and Baki, 2021).
In the payment system framework, the bank is an essential intermediary that helps the
economy trade services and products for cash or other monetary resources. Likewise, those with
extra cash that they want to set aside can put the cash in the bank rather than looking for
someone who can take the cash from them and pay it back at some point in the future.
Individuals who need access to cash can go directly to the bank, rather than trying to find
someone to lend them cash. Transaction costs are the fees associated with tracking down money
lenders or borrowers to obtain this cash. As a result, banks reduce transaction fees and act as
currency intermediaries - they unite savers and borrowers. In addition to making exchanges safer
and simpler, banks also play a key role in cash production.
A "intermediary" is someone who stays between two different parties. A bank is a currency
representative—that is, an organization that works between savers who deposit cash in a bank
and borrowers who get an advance from that bank. Money intermediaries remember the different
foundations of the money market, such as insurance agents and annuity reserves, but they are not

remembered because they are not seen as security organizations that recognize cash shops and
then use them to make progress. Every asset held is mixed in a main pool, which is then lent out.
It also depicts the role of banks as money intermediaries, with stores flowing into banks and
credit flowing out. Obviously, when banks make loans to businesses, the banks will try to direct
monetary funds to sound organizations that have a good chance of repaying the credit, rather
than businesses that suffer misfortune and may not be able to repay (Parikh, 2019).
Financial intermediaries play multiple roles in society by facilitating efficient transactions.
These intermediaries play a vital role in converting savings into investment. This is achieved by
pooling the funds of various individuals, enabling them to make large and complex investments.
They also make it easier to store cash and other valuables that may not be safe in investors'
hands. Thanks to the secure storage facility, private investors can conduct other business
activities without loss due to theft or other losses. Financial intermediaries are also necessary to
provide long-term and short-term loans to these private investors.
Role of financial intermediaries and its use for the private investors:
1. Risk reduction through pooling: Since the financial intermediary lend to large numbers of
people and associations, any losses; the borrower or default suffered by capital
misfortune is successfully pooled and assumed to be representation Fees which is to be
borne by the intermediary itself. Given the sound financial status of the trustee itself, the
loan specialist should not risk lose his career. Currency intermediaries in re-lending
activities have had bad debts.
2. Transformations for maturity amounts: An example of this is Structural Society, which
allows investors to quickly enter them Invest funds while lending to contract holders for a
considerable period of time. mediator use continuous cash flow between borrowers and
financial investors to achieve this (Reby and et.al., 2022).
3. Convenience: They provide a direct way for the moneylender to donate money without
actually having to think it is appropriate borrower directly. All financial investors need to
choose is how long to keep the cash and what kind of return is needed; at that point, all it
has to do is pick a suitable representative, and then use the form of deposits.
4. Regulations: A complete set of guidelines has been established in the currency business
area, focusing on protect financial supporters from carelessness or malpractices.

5. Information: Intermediaries can provide a wide range of expert advice on a variety of
investment opportunities not directly available to private investors.
Therefore, financial intermediaries can provide private investors with many benefits,
including general information and available investments.
CONCLUSION
From the above report, it can be asserted that the ratio analysis plays an important a crucial
role in approaching the decision and the critical choices that re to be made by the business
organisation. The company has to go through its financial statement and then certain ratios are
computed for finding out the monetary position of the business entity. It can be summarised also,
that the business financial means loan is taken from bank by an organisation because it lacks
cash and this is estimated by the operating ratio and the margin that is computed to backed up the
position of the company. In the above report, also the risk and return trade-off is determined and
its relevance is explained for assessing the loan from the bank itself. Further, the financial
intermediaries are explained in relation to the bank which act as a monetary intermediary.
Moreover, the role of financial intermediary is elaborated for the use of new investors.

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