Advanced Financial Accounting Assignment( AFA)

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UndergraduateAssignment Cover SheetStudent NumberUnit codeKAP013-3Assignment No.1Unit TitleFinancial Accounting 2Unit CoordinatorPeter DjabangDue Date20thJan 2018
2ADVANCED FINANCIAL ACCOUNTINGExecutive summary:The report is prepared to illustrate and evaluate the financial performance of three companies using thetool of ratio analysis. Three companies that have been selected from London stock exchange that is ABDynamics, Quartix Plc and Spectris Plc. Data for carrying out ratio analysis of these companies havebeen retrieved from annual reports present on their websites. Companies financial performance havebeen evaluated by analyzing their liquidity position, solvency position, efficiency position, profitabilityposition and investment position. Later part of report provides with the recommendations forcompanies to improve their financial performance.
3ADVANCED FINANCIAL ACCOUNTINGTable of ContentsExecutive summary:.....................................................................................................1Introduction:..................................................................................................................3Theoretical background:...............................................................................................4Advantages of ratio analysis for assessing financial performance of companies:......5Limitations of using ratio analysis:...............................................................................6Comparative analysis:..................................................................................................7Findings, Conclusions and Recommendation:..........................................................22References and Bibliography list:...............................................................................24Appendix:...................................................................................................................27
4ADVANCED FINANCIAL ACCOUNTINGIntroduction:In this particular assignment, assessment of financial position and financial performanceof three companies that are listed on London stock exchange have been done. Report preparation alsoincorporates exploring academic literature for identifying the imitations, advantages and critiquesassociated with ratio tool in financial performance assessment. Assessment and evaluation of financialperformance of AB Dynamics, Quartix Holding Plc and Spectris Plc are demonstrated in the report. ABDynamics is a recognized leader in supplying whole car solutions for testing of vehicles (abd.uk.com2018). Organization is experiencing steady growth due to improved performance of reputation andquality of their products. Quatrix is one of the leading suppliers of vehicle tracking services and systemin Europe (Quartix.net 2018). Organization has developed a considerable market presence in theinsurance telematics market of United Kingdom. Spectris is one of the important suppliers of controlsand instrumentation that helps in enhancing productivity (Spectris.com 2018). It is engaged incontrolling and measuring instruments of the industrial applications that are most technicallydemanding. All these stock listed companies are analyzed for carrying out assessment of their financialperformance using the tool of ratio analysis. Evaluations of financial performance of companies havebeen done by analyzing data presented in financial statements such as income statement, cash flowstatement and balance sheet.Theoretical background:A certain set of ratios are chosen for displaying the company’s financial performance and someof the most commonly used ratios involve profitability ratio, efficiency ratio, gearing ratio, liquidityratio and investment ratio. Financial ratios are a time-tested method for analyzing the financialperformance of companies. Ratio analysis is regarded as an indispensable part for interpretation ofresults presented in the financial statement of entities. Users and investors are provided with crucialfinancial information and they are able to assess the areas for carrying out investigations (Wahlenet al.2014). Investors are able to ascertain in depth analysis of liquidity, profitability, efficiency andsolvency levels of business. Cross sectional analysis of organization can be done by gaininginformation as the performance of companies are done with the best industry standards. Financialstatements users are able to gain information for making estimates and projections for future (Callen2015).
5ADVANCED FINANCIAL ACCOUNTINGAdvantages of ratio analysis for assessing financial performanceof companies:The understanding of efficiency of users in way business are conducted is improved and thelatent aspects of business receive light by identification of numerical relationship. Investors will be ableto have detailed understanding of bright spots as well as problem areas of business if analyses of ratiosare done properly. It also assists management of organization to improve their financial situation infuture. Advantages of ratio analysis can be summarized below:Assist in making comparative analysis-Calculation of ratios are not done for anyparticular year, rather they are calculated year on year. Trends of business can be exploredwhen figures are kept side by side. Trend knowledge would help business in makingprojections about its future performance (Schrandet al.2016).Enabling understanding the efficacy of decisions-Investors are able to make assessmentabout whether business have undertaken proper investing, operating and financing decisions(Hendersonet al.2015). It would indicate the contribution of such factors in performanceimprovement.Relationship establishment and simplification of complex figures-Ratio analysis helpsin generating relationships and simplification of accounting figures that are complex(Konchitchki and Patatoukas 2016). Effectiveness of financial information can besummarized using ratio tool and assessing credit worthiness of firms, managerial efficiencyand earning capacity.Identifying problem areas of business-Investors are able to spot bright as well asproblematic areas of business. It is important for business to segregate these two areas, asmanagement will be focusing more on problematic areas and sharpening, and improvingfurther bright areas to get better results.Enabling SWOT analysis-Changes occurring in business environment can be explainedby employing tool of ratio analysis (Cascinoet al.2016). Management of organization isable to perform SWOT analysis and understand current opportunities and threats posed tobusiness with the help of information of change.
6ADVANCED FINANCIAL ACCOUNTINGLimitations of using ratio analysis:No standardized definitions-Several concepts that are used in ratio analysis does not havestandardized definitions. Liquid liabilities do not have any standardized definition. Itgenerally incorporates all current liabilities but sometimes exclude bank overdraft.Lack of Universally accepted level of standards-There level of ideal ratio cannot bespecified for judging the financial position as there do not exist any universal yardstick(Maynard 2017).Lacking ability for problem solving-Ratio analysis do not intend to provide any particularsolution to problems as they play a role of whistle blowing and is essentially indicative.Current versus historical cost-It is certainty possible that some elements in the balancesheet of reporting entity is stated at historical costs while income on income statement isstated in current cost. This would create disparity between the results obtained byconducting ratio analysis.Accounting policies-Accounting policies of one company is different from anothercompany.Accounting data limitations-Finality and precision of results obtained through ratio toolcomes with an unwarranted impression due to accounting data. Generally, materiality ofinformation is affected by accounting data that reflects a combination of accountingconventions, personal judgments and recorded facts (Dutta and Patatoukas 2016). It iscertainly possible that financial statements do not reflect true state of affairs and hence truepictures will not be provided by ratio.Ignoring changes in level of price-Analysis of financial statements of different years oforganization becomes meaningless because change value of money is changed due toaccounting records.The above listed points relating to ratio analysis depicts that there various advantages anddisadvantages. Due to several critics and limitations associated with ratio analysis, it is suggested thatinvestors and business should be used with due consciousness while evaluating the financialperformance of organization (Weygandtet al.2015). This will help organization and investors as awhole in planning strategies that will help in improving future performance. Furthermore, it has alsobeen ascertained that critics of ratio analysis is also associated with limitations of financial statements.
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