Finance and Accounting: Ratio Analysis, Investment Appraisal, Usefulness of Financial Statements

Finance and Accounting

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
1. Ratio analysis.....................................................................................................................3
2. Investment appraisal...........................................................................................................5
3. Usefulness of financial statements.....................................................................................7
CONCLUSION..........................................................................................................................9
REFERENCES.........................................................................................................................11

INTRODUCTION
Finance refers to the management of money in various forms and accounting refers to
proper recording of the same so that the organization or an individual will be having
complete information about the allocation of money. In this report, the financial performance
of the business is analysed with the help of financial ratios. Also, there is an application of
investment appraisal techniques in order to take decisions with respect to investment
proposal. It also provides insight about the purpose of the financial statements along with
their usage and limitation.
MAIN BODY
1. Ratio analysis
Ratio analysis refers to the quantitative method used for gaining insight about the
company’s financial position and performance in the form of ratios (Hasanaj and Kuqi,
2019). It includes liquidity analysis, operational efficiency, profitability etc. It is used by
investors and creditors to know the financial health of the company.
Profitability ratios: It is the financial metrics which is used in evaluating and
measuring the ability of the business to generate income in relation to sales, operating cost,
assets and so forth.
Gross profit ratio
This ratio depicts the relationship between gross profit and net sales of the company.
It helps in evaluating the operational performance of the business (Edwards, 2016). The
Gross profit of North Ltd has reduced from 33% to 22% in 2019 which is a drop by 33.33%
which is very huge. It may be because of reduction in sales revenue.
Net profit ratio
It expresses the relationship of net profit and net sales (Öztürk and Karabulut, 2018).
The net profit ratio of the company has dropped drastically from 13% in 2018 to 3% in 2019
which is because of high direct and indirect cost which has resulted into lower net profit and
also the fall in sales.
Return on capital employed

This ratio measures the efficiency of the business in generating profit from the capital
employed. It helps in analysing the long-term profitability and longevity of the business. The
return on capital employed of North Ltd has shown a sign of reduction to 11% in 2019 as
compared to 40% in 2018. This means that the company is not effective in utilizing its capital
employed.
Profitability ratios
Name Formula Working
2018
Working
2019
Result
2018
Result
2019
Gross profit
ratio
Gross profit/ net
sales
3500/10700 2050/9500 33% 22%
Net profit
ratio
Net profit/ net
sales
1400/10700 300/9500 13% 3%
Return on
capital
employed
Net operating
profit/Employed
Capital
1400/3500 300/2800 40% 11%
Liquidity ratios: These are the ratios which are used to measure the ability of the
business to pay off its short-term obligations.
Current ratio
This ratio is used in measuring the liquidity position of the company. It helps in
analysing whether the company is having enough cash to meet its short-term liabilities. It is
the most popular ratio for measuring the liquidity of the business (Hasanaj and Kuqi, 2019).
In case of North Ltd, the current ratio the company is high even though it has reduced from
3.38 times to 3.10 times in 2019. It means that the company is having enough liquid assets
but it may also mean that the lot of cash is blocked in its debtors and having recovering issues
which has caused rise in current ratio. Also, too much amount is invested in the inventory can
be reason for rise in current asset.
Quick ratio
It measures the liquidity but in a more conservative manner as it does not consider
inventory and prepaid expenses (Linares-Mustarós, Coenders and Vives-Mestres, 2018). The