Financial Evaluation of Rio Tinto for Arden Fund Investors

The report evaluates the financial performance of Rio Tinto through ratio analysis to guide the investment decision of Arden Fund investors. It identifies potential risks and issues and recommends analyzing the future performance of the company before investing.

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Corporate Performance Report of Rio Tinto

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Executive Summary
The present report is developed for carrying out financial evaluation of Rio Tinto to
determine its prospects of future growth and development. This is mainly carried out for guiding
the decision of Arden Fund investors who want to invest in the company. As such, the report has
incorporated the use of ratio analysis for determining the profitability, liquidity, leverage and
earning potential of the company to identify the potential risk and issues in advance. It has been
identified through the use of financial analysis that there is significant risk of generating good
profits for the shareholders within the company. Thus, it has been recommended to the investors
for analyzing the future performance of the company for the coming period of time before
investing within the company.

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Contents
Executive Summary.........................................................................................................................2
1.0: Answer 1: Financial Report of Rio Tinto.................................................................................4
2.0: Introduction.............................................................................................................................4
3.0: Understanding the meaning of the financial statement analysis...............................................4
4.0: Factors that influences the making of investment decision......................................................4
5.0: Analysis of financial statements of Rio Tinto..........................................................................5
5.1: Ratio Analysis...........................................................................................................................5
Financial Data of Rio Tinto.............................................................................................................5
Profitability Analysis.......................................................................................................................6
Liquidity Analysis...........................................................................................................................8
Financial Leverage Analysis............................................................................................................9
Efficiency Analysis........................................................................................................................11
5.2: Earnings Analysis...................................................................................................................12
6.0: Potential Risks or Potential Issues..........................................................................................12
7.0: Conclusion..............................................................................................................................13
8.0: Solution 2: Analysis of financial report produced in question 1 through using corporate
accounting principles.....................................................................................................................14
9.0: Solution 3: Reflective Statement Commenting on the Effectiveness of the Process from
Questions 1 and 2...........................................................................................................................16
10.0: References............................................................................................................................18

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1.0: Answer 1: Financial Report of Rio Tinto
2.0: Introduction
The analysis of internal and external performance of a firm is very important for
assessing its present and future potential of growth. This forms the basis for decision-making
process of investors for their investment decisions. In this context, the present report is
developed for assessing the internal as well as external performance of Rio Tinto, an Australian
multinational metals and mining company established in the year 1873 and headquartered within
the UK. This is mainly done for guiding the decision-making process of Arden Fund, a collection
of ethical investors interested in buying a significant volume of shares in Rio Tinto Plc. The
external performance of the firm is evaluated in the report through the use of financial analysis
that is through the technique of ratio analysis. The internal performance is evaluated by assessing
the effectiveness of its internal processes as analyzed on the basis of the results of its financial
analysis.
3.0: Understanding the meaning of the financial statement analysis
The financial statements can be defined as the summary of the operating, financing and
investment activities of a business. The financial statement analysis can be described as the
process of reviewing and analyzing the financial performance of a company through evaluation
of its financial reports. It intends to examine the past and current financial data for assessing its
present and future growth potential. The most important benefit of financial statement analysis is
to provide idea to the investors for guiding their investment decisions by prediction of a
company future financial performance. The main type of financial statements that are developed
by a business entity for disclosing the financial performances to the external stakeholders are
equity statement, income statement, balance sheet and statement of cash flow. Equity statement
reflects the part of the value of a firm that is owned by the creditors whereas income statement
reflects a summary of the revenue and expenses. Balance sheet depicts the summary of assets,
liabilities and equity while cash flow statement depicts the summary of cash flows over a period
of time. The analysis of all these financial statement determines a firm internal strength and
weakness and established its future strategic direction by developing of possible measures to
overcome its weakness.
4.0: Factors that influences the making of investment decision
Financial ratio analysis can be regarded as the most important tool for financial analysis
that guides the decision-making process of investors. Ratio analysis proves to be most
appropriate for evaluation of the various aspects of a company’s performance that are, efficiency,
liquidly, profitability and solvency. The Arden Fund Investors through the use of technique of

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financial ratio analysis can adequately evaluate its operating financial performance that will help
in assessing its potential of future growth and development. In addition to this, investors can
adequately analyze the market value of firm securities with the use of earning analysis. Earning
analysis can be carried out by evaluation of the earning per share of a firm that given a depiction
of its market worth by measuring its operating earnings. As such, Arden Fund investors can
analyze the EPS of Rio Tinto before making the investment decision.
5.0: Analysis of financial statements of Rio Tinto
5.1: Ratio Analysis
Ratio analysis is regarded as the most important accounting tool used to perform the
financial analysis. All the required information that is needed to be processed is primarily
gathered from the financial statements of the selected company. Ratio is referred to the
mathematical relationship two main quantities from the financial statement of the company.
Through use of ratios, investors can have information about the five major aspects of the
financial performance mainly return on investment, liquidity, efficiency, profitability, and capital
structure or financial leverage.
Importance of Ratio Analysis
Ratios are one of the most important tools that were used in finance and that almost every
business does and by calculating these ratios, it is easy to express an opinion about the
performance of particular enterprise.
We can use ratio analysis to tell us whether the business is –
• Profitable
• Has enough money to pay its debts
• Could be paying its employees higher wages, remuneration or so on
• Is able to pay its taxes
• Is using its assets efficiently or not
• Has a sufficient amount of fund to meet their daily obligations (Brigham and Michael,
2013)
Types of Ratios
• Profitability Analysis
• Liquidity Analysis
• Efficiency Analysis
• Financial Leverage Analysis

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Financial Data of Rio Tinto
Financial Data of Rio Tinto for last four years
Particulars 2013 2014 2015 2016 2017
Sales Revenue
$
51,171.00
$
47,664.00
$
34,829.00
$
33,781.00
$
40,030.00
Gross Profit
$
34,497.00
$
27,960.00
$
18,010.00
$
18,251.00
$
24,223.00
Net Profit
$
3,665.00
$
6,527.00
$
(866.00)
$
4,617.00
$
8,762.00
Total Assets
$
110,073.00
$
107,515.00
$
91,271.00
$
89,263.00
$
95,726.00
Shareholder's
Equity
$
45,886.00
$
46,285.00
$
37,349.00
$
39,290.00
$
44,711.00
Current assets
$
21,330.00
$
20,813.00
$
15,261.00
$
15,055.00
$
18,678.00
Current
Liabilities
$
15,371.00
$
12,580.00
$
10,157.00
$
9,400.00
$
11,349.00
Inventory
$
5,737.00
$
4,350.00
$
3,168.00
$
2,937.00
$
3,472.00
Quick Assets
$
15,593.00
$
16,463.00
$
12,093.00
$
12,118.00
$
15,206.00
Average Total
Assets
$
108,794.00
$
99,393.00
$
90,267.00
$
92,494.50
Average Equity
$
46,085.50
$
41,817.00
$
38,319.50
$
42,000.50
Total Liabilities
$
65,139.00
$
61,542.00
$
54,215.00
$
49,973.00
$
51,015.00
Account
Receivables
$
4,667.00
$
3,623.00
$
2,386.00
$
3,460.00
$
3,443.00
Average
Account
Receivable
$
4,145.00
$
3,004.50
$
2,923.00
$
3,451.50
(Annual Reports, 2017)
Profitability Analysis
Financial Ratios
Profitability Analysis
Particulars Formula 2014 2015 2016 2017
Gross Profit Ratio Gross Profit/Net Revenue
58.66
%
51.71
%
54.03
%
60.51
%
Net profit Ratio Net Profit/Net Revenue
13.69
% -2.49%
13.67
%
21.89
%
Return on assets Net Profit/Average Total Assets 6.00% -0.87% 5.11% 9.47%
Return on equity Net Profit/Average Equity 14.16 -2.07% 12.05 20.86

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% % %
(Damodaran, 2011)
2014 2015 2016 2017
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
58.66%
51.71% 54.03%
60.51%
13.69%
-2.49%
13.67%
21.89%
6.00%
-0.87%
5.11% 9.47%
14.16%
-2.07%
12.05%
20.86%
Profitability Ratios
Gross Profit Ratio
Net profit Ratio
Return on assets
Return on equity
(Annual Reports, 2017)
Gross Profit Ratio
This Ratio tells us the profit a business makes on its sales. It is the profit we earn before
we take off any administration cost, selling cost and so on.
Formula: Gross Profit ratio = Gross Profit/Net sales*100 (Davies and Crawford, 2011)
It can be stated from analyzing the gross profitability ratio of the company over the past
four years that it has maintained a higher ratio margin that is above fifty percent over the selected
financial period. Thus, a good gross profit percentage maintained by the company depicts that it
has covered both the costs and also realized competitive return from the investment in the
business. Also, the overall gross profitability of the company has been significantly increased
form the year 2014-2017 as depicted in the above table which reflects its good prospects of
realizing operating profits in the future context.
Net Profit Ratio
This ratio measures the overall efficiency of production, administration, selling and
financing management.
Formula: Net Profit Ratio = Net Profit after Tax/Net Sales*100 (Krantz, 2016)

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The after-tax profits realized to net sales has depicted an increasing trend from the year
2014-2017 which depicts that its efficiency to meet the cost of production and financing has been
improved reflecting its good financial position. However, it has been reflected from the table that
the ratio for the year 2015 reflects a negative trend depicting that it has suffered loss in the
respective financial year. The ratio has then reflected an increasing trend till the year 2017
reflecting that it has improved its ability to meet the operating expenses which consequently lead
to increase in its sales revenue.
Return on Assets (ROA)
This ratio actually measures the profitability of the investments in the firm.
Formula: Return on Assets = Net Profit after Tax/Total Assets*100 (Madura, 2014)
The return on assets of the company has depicted an increasing trend from the year 2014-
2017 reflecting the improvement in its ability to gain returns on the investment. The company
ROA has been negative in the year 2015 indicating that it has incurred losses on its investment
but has then improved its ability to realize returns on its investments as the ratio has depicted an
increasing trend from the year 2015-2017.
Return on Equity (ROE)
It measures the profitability of a business in relation to the equity invested by its
shareholders.
Formula: ROE=Net Income/Shareholder equity (Moles and Kidwekk, 2011)
The ROE has reflected an increasing trend from the year 2014-2017 as depicted in the
above table. The ratio has depicted a negative trend in the year 2015 which means that it has
earned loss on its equity investment. However, the company has then improved its ROE but it
has depicted a financial risk present within the company for the shareholders as its ROE is below
10% as analyzed for the last four years.
Liquidity Analysis
Financial Ratios
Liquidity Analysis
Particulars Formula 2014 2015 2016 2017
Current Ratio Current Assets/Current Liabilities 1.65 1.50 1.60 1.65
Quick Ratio Quick Assets/Current Liabilities 1.01 1.31 1.19 1.29
(Annual Reports, 2017)

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2014 2015 2016 2017
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80 1.65
1.50 1.60 1.65
1.01
1.31 1.19 1.29
Liquidity Ratios
Current Ratio
Quick Ratio
Current Ratio
It is a part of liquidity ratio. It provides information about a firm’s ability to meet its short
term obligations. A complete liquidity ratio analysis can help to uncover weakness in the
financial position of business. Generally higher the ratio, larger the margin of safety that the
company possesses to covers short term debts.
Formula: Current Ratio = Current Assets/Current Liabilities
The current ratio of the company has reflected an increasing trend for the year 2014-2017
which depicts that it has adequately meet its financial obligations from the asset base. The ratio
for the last four financial years is higher than 1 which represents that it is capable of meeting its
financial obligations.
Quick Ratio
This ratio indicates whether a firm has enough short term assets to cover its immediate
liabilities without selling its inventories. Liquid asset is all current assets except the inventories
and prepaid expenses, because prepaid expenses cannot be converted into cash.
Formula: Quick Ratio = Quick Assets/Current Liabilities (Reilly and Brown, 2011)
The quick ratio of the company has also depicted an increasing trend from the year 2014-
2017 and is higher than 1 for all the four financial years which reflects that it has maintained
sufficient liquidity to meet its short-term financial obligations.
Financial Leverage Analysis
Financial Ratios
Financial Leverage Analysis

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Particulars Formula 2014
201
5 2016 2017
Debt Equity Ratio Total Liabilities/Shareholder's Equity 1.33 1.45 1.27 1.14
Debt Ratio Total Liabilities/Total Assets 0.57 0.59 0.56 0.53
(Annual Reports, 2017)
2014 2015 2016 2017
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Financial Leverage Ratios
Debt Equity Ratio
Debt Ratio
Debt Equity Ratio
It defines the relationship between the long term liabilities and capital employed. It
establishes relationship between borrowed fund and owner capital to measure the long term
financial solvency of the firm. Ideal ratio is 2:1.
Formula: Debt Equity Ratio = Debt/Shareholder’s fund (Ross, Jaffe and Kakani, 2008)
The debt to equity ratio of the company has depicted a decreasing trend over the years
2014-2017 indicating that it has maintained lower debt in comparison to the equity investment.
This means that it is incorporating less use of debt in comparison to the equity funds which
reflects lower financial risk for the company for not meeting its interest debt obligations.
Debt Ratio
It measures the extent of leverage possessed by a company that is sued for financing its
asset base.
Formula: Debt Ratio=Total Liabilities/Total Assets
The company has maintained a lower debt ratio for the selected financial year which
depicts that it is utilizing less debt for financing its asset base. Also, the ratio has depicted a

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decreasing trend which means that there is less financial risk for it to default but it also
represents a doubt regarding the future financial growth prospects of the company.
Efficiency Analysis
Financial Ratios
Efficiency Analysis
Particulars Formula 2014 2015 2016 2017
Accounts
Receivables in Days
Average Account
Receivable*365/Revenue 31.74 31.49 31.58 31.47
Asset Turnover in
days Average total Assets*365/Revenue 833.12 1041.62 975.33 843.38
(Annual Reports, 2017)
Accounts Receivables in Days
The average number of days a company takes to collect payments on goods sold.
Formula: Accounts Receivables in days= 365/ (Average Accounts Receivable/Total value of
credit sales) (Weston and Brigham, 2015)
It can be stated on the basis of the trend of the ratio for the selected financial period that it
has maintained an effective control on the number of days required for collection of its
receivables from the customers. There was no major change in number of days required to
collect the account receivables during the last four years. Rio Tinto takes 1 month to collect all
its receivables that were due on starting of the month. It reflects high efficiency of management
at Rio Tinto. So it can be said that company manages its accounts receivables successfully and
helps to maintain the cash cycle in proper manner.
Asset turnover in day’s ratio
This ratio reflects the use of assets to earn the revenue by the management of the
company. The purpose of this ratio is to evaluate efficiency of the management to make optimum
utilization of resources to earn the maximum sales. This ratio shows times the revenue earned on
total assets for the selected period. This ratio takes average assets put to use within the process to
earn the sales revenue.
Formula: Asset turnover ratio in days: 365/ (Average Total assets/ Net Revenue)
Rio Tinto is the mining industry that requires heavy investment in machinery and many
other assets that makes value of total assets much more than the value of revenue earned by
company. Asset turnover ratio in days has increasing trend during the last four years that shows
Rio Tinto consume more assets to earn the same amount of sales in current as compared to
previous year. It shows management at Rio Tinto does not manage assets in proper manner.

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Overall considering the type of industry in which Rio Tinto belongs it can be said that
management needs to make sure that they can put more efforts in utilization of assets and earn
maximum amount of sales.
5.2: Earnings Analysis
Financial Ratios
Earnings Analysis
Particulars Formula 2014 2015 2016 2017
Earnings per
Share
Profit attributable to
shareholders/WANS
$
3.53
$
(0.48)
$
3.36
$
4.90
(Annual Reports, 2017)
2014 2015 2016 2017
$(1.00)
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$3.53
$(0.48)
$3.36
$4.90
Earnings per Share
Earnings per Share
In order to provide right investment decision for investors there is need to forecast firm
market value or value of cash flow in the future period. Earnings analysis is most common
method used to evaluate the operating earnings of the company. The earnings earned by the
company during the past years are calculated and analyzed to forecast the value of cash flows
earned in future. The most common ratio used to make analysis of earnings management of the
company is EPS (Earnings per share). Earnings per share reflect how much earnings have been
earned by the company in the given accounting period. A company with high earnings per share
is regarded as the profitable firm that earns good revenue and this analysis is useful in investment
decision making (Zimmerman and Yahya-Zadeh, 2011).
Rio Tinto provides very good earnings per share (EPS) during the last four years except
in year 2015. It is highly expected from Rio Tinto to provide good flow of earnings in future
period that makes certain that company will provide good earnings in future years.

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6.0: Potential Risks or Potential Issues
It can be stated from the financial analysis of Rio Tinto that there is significant risk
present in the context of its future profitability context. As depicted from its profitability
analysis, the company has suffered losses in the financial year 2015 and therefore it is highly
essential for the business managers to adopt strict measures for reducing its operating expenses
to realize higher profitability. The company has sound liquidity financial position as reflected
from its liquidity analysis but there can be potential risk to meet its short-term financial
obligations as its quick ratio is less than current ratio. Also, it is incorporating less use of debt
than equity for financing its asset base that can present a significant risk for the business
expansion and growth (Annual Reports, 2017). Although, there is less significant risk for the
possibility of default on part of the company due to less use of debt to finance its asset base. In
addition to this, there is also risk present in the context of efficiency of the company to generate
sales from its asset base as the ratio has depicted an increasing trend. Therefore, it can be said
that the increasing trend of the ratio presents a significant potential risk due to requirement of
higher number of days to utilize its asset base to generate profits. As such, it is recommended to
Arden Fund investors to analyze the future growth and profitability position of the company
before taking any significant investment decision. This is largely due to presence of significant
potential financial risk present within the company context that can impact its long-term
performance (Annual Reports, 2017).
7.0: Conclusion
It can be stated form the overall discussion held within the report that ratio analysis can
be regarded as the most important tool for evaluating the financial performance of a company.
The technique of ratio analysis helps in developing an insight into the profitability, liquidity,
efficiency and market performance by calculation of the relevant ratios in the context. It has also
proved to be very important for analyzing the relation between two financial items to develop an
insight into the financial performance. The Arden Fund investors can use the technique of ratio
analysis for analyzing the financial performance of Rio Tinto as it incorporate the use of both
current past financial data to predict its future growth prospects.

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8.0: Solution 2: Analysis of financial report produced in question 1 through using
corporate accounting principles
Accounting principles refers to the rules and guidelines that need to be followed by the
companies while making the financial report. There are mainly 10 corporate financial reporting
principles that have to be followed while producing the financial report. Below are some of
accounting principles used to evaluate the financial report made in question 1:
Going Concern Principle
As per this principle there is assumption that entity will exist for long term and there is no
such material information that leads to liquidation of the company in near future. So, if auditors
and accountant find any signs that company will not able to continue in future that it essential to
disclose such information in notes to accounts (Shalimova and Kuzmenko, 2016).
On the basis of analysis of report made in question 1, it can be said that financial position
of Rio Tinto is strong and there is no sign that company will liquidate in near future. Through
this information it is proved that accountant and auditors that strictly followed the going concern
accounting principles while drafting the financial report of Rio Tinto for last three years (CPA
Australia, 2012).
Monetary Unit Assumption
As per this principle the amounts or figures reflected in the annual report must be
transacted or reported through using the currency of home country and only one currency must
be used in whole of the report. This principle brings in the uniformity in the reporting of
accounting figures and also it is feasible for the users of the financial reporting to evaluate the
financial report easily (Shalimova and Kuzmenko, 2016).
The evaluation of report, it has been found that all figures has been reported in Australian
Dollars that has helped in bringing the uniformity and also helped the readers to evaluate the
report. So, principle of monetary assumptions has been followed in report provided in question.
It also proves that annual report of Rio Tinto is also following this accounting principle.
Matching principle
This accounting principle of requires that accountant must report all transaction through
using accrual basis of accounting. According to this principle expenses must be matched with
revenues while reporting in the financial statements. For example, sales commission linked with
particular sales revenue will reported in period in which sales are earned not in period when sales
commission are paid. This helps to follow the accrual based accounting concept and helps to
report the expense in the period in which particular income is earned. There are some cases when

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it is not possible to match the revenue with the expense as it revenue cannot be measured at the
time of expenses is occurred (ASB, 2011).
This accounting principle has been strictly followed in the report as in annual report all
outstanding expenses and accrued expenses are reported to match the income earned in the
particular period. Through this principle all the liabilities are reported in the period in which it is
linked and has to be paid. While making the report in question 1, it has been found that there are
some expenses reported in income statement that are not linked with particular period but same
has been paid. On evaluation it has been found that these expenses have no material impact on
the performance of the company so it does not violate the accounting principle (Shalimova and
Kuzmenko, 2016).
Materiality Principle
Materiality principle is the most important accounting principle that allows accountant to
violate the other accounting principle in case if the amount is not material and it is not that
significant. In this there is need of professional judgment to prove that amount is not material.
Due to this principle, accountants are allowed to show the figures in financial statement in
nearest thousands or nearest millions on the basis of size of company (Shalimova and
Kuzmenko, 2016).
As Rio Tinto is the large enterprise and all the figures shown in financial statements of
the company are rounded off to nearest million it is viable to say that they are following the
accounting principles while preparing the annual report. In preparing the report for question 1, all
the figures has been taken in million to match the figures given in annual report and there is no
significant amount that impacts the other accounting principle. So overall it can be said that
figures used to evaluate the performance of Rio Tinto are correct and follows the accounting
principle criteria (Shalimova and Kuzmenko, 2016).
Revenue Recognition Principle
As per this accounting principle of accounting revenues must be recognized as the
products are sold and services are given. This accounting principle does not allow reporting the
revenue on cash basis as it leads to uncertainty in income. Income must be reported for that
period in which it has been provided not when the cash has been received. It helps to keep the
accrual basis of accounting intact while reporting the revenue in the book of the accounts.
In preparing the financial report of Rio Tinto in question 1 it has been found all revenue are
reported for the particular period and any advance or outstanding revenues are adjusted through
use of balance sheet entries. So it can be said that accountants are following revenue recognition
accounting principle (Shalimova and Kuzmenko, 2016).

16

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9.0: Solution 3: Reflective Statement Commenting on the Effectiveness of the Process from
Questions 1 and 2
The first part of the report has carried out analysis regarding the financial status of Rio
Tinto Plc for providing suggestions to the Arden Fund Investors regarding the financial
investment within the company. It can be reflected from carrying out an analysis of this part of
the report that financial reporting process is an important internal process within a company that
is carried out for providing financial information to the external stakeholders. I have developed
an understanding of the importance of financial statement analysis and its benefits for the
investors to guide their investment decisions. The positive as evaluated from the feedback of this
process is that financial statement analysis helps me in summarizing the overall operational,
financial and investment activities of a company. This helps in assessing the future growth
performance of a company based on its past and present financial growth position.
The financial statement analysis technique that has been selected in the part 1 for carrying
out overall financial analysis of Rio Tinto is ratio analysis. I have understood from this section of
the report that ratio analysis is an important method of financial evaluation that is used for
describing the relation between two financial items. I have adopted the use of financial ratios that
are profitability, liquidity, efficiency, leverage and earnings for gaining an insight into the past
and present financial performance of the selected company. This helps in gaining an analysis of
the future growth performance of the selected company. The most important benefit that I have
realized of the technique of ratio analysis is that it helps in easy identification of the problem
areas and brings out the attention of the management to such areas. It can accurately assess the
efficiency of a company in terms of operations and management and thus evaluating the
weakness of the operations of the company. The technique provides an adequate assessment of
the effectiveness of a company performance over the years and depicting its comparison with
other firms operating within the similar industry. Therefore, it proves to be an effective technique
for trend analysis and providing a comparison of a single company over other.
However, I have realized that financial ratio analysis technique is also associated with
some drawbacks. The different companies that operate within various industries have different
environment conditions such as regulation, market structure and other factors that make
valuation of them relatively different by the use of ratio analysis technique. Also, the results
obtained with the use of financial ratio analysis are largely affected by the estimates and
assumptions that are used by the management in development of financial reports. It also
predicts the future financial performance of a company on the basis of past information and
therefore its prediction may not be sometimes adequate to be used by investors for taking
investment decisions.
The second part of the report has carried out an evaluation of the financial analysis
carried out of the company in the first section of the report through the application of the

18
principles of corporate financial reporting. This part of the report has helped me to gain an
understanding of the relative importance of principles of corporate finance that are used by the
accounting managers in development of financial reports. It has been understood by me during
extraction of financial information from the various financial statements prepared by the
company that the application of relevant accounting and finance principles is very necessary for
the generation of the financial reports. The reliability and faithful presentation of financial
information in the financial reports is highly dependent on the application of appropriate
accounting principles and policies. The accounting policies such as going concern, cost principle
and matching principle are applied for the analysis of relevant accounting information presented
within the financial report. These principles are developed by the international accounting
bodies such as IASB (International Accounting Standards Board) for guiding the process of
development of financial reports. The most important benefit of the application of the accounting
principles is that it leads in development of accurate financial reports. The presentation of
accurate financial information through the financial reporting process helps in efficient allocation
of investment funds and the selection of right investment opportunities.
However, there are many limitations of financial reporting process that are prepared with
the use of principles of corporate financial reporting as I have analyzed with the development of
this section of the report. The major issue as I have analyzed of this process sis that some of the
accounting principles often leads to the development of ambiguousness in the financial reporting
process. This requires the management decision in selection of adequate accounting policy for
the development of financial report. However, it may lead to inaccuracy in presenting the
financial information as management tends to adopt various estimates and assumptions for
development of various sections of the financial statement. Therefore, it can be said that
accounting managers can face difficulty in application of relevant accounting policies for
development of various sections of the financial reports.
This can be stated as the major negative point associated with the use of principle of
corporate finance. The use of accounting principles leads to the adoption of various conventions,
postulates and personal judgments for development of accounting data. This can lead to
negatively impacting the accuracy of the financial information presented within the financial
reports and therefore may affect the reliability of the financial information. The financial
information extracted form the financial reports of the company Rio Tinto have been sued for
carrying out its financial analysis with the use of technique of ratio analysis. As such, the use of
various accounting conventions and method often pose a restriction before the accounting
managers that the financial statement data is not precisely prepared. Therefore, it can sometimes
present inaccurate depiction of the financial information which can negatively impact the
investment decisions of the investors. The completion of the accounting processes in the above
sections of the report has demonstrated that they are associated with various positives and
negatives that can impact the investment making decision process of the various investors.

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10.0: References
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https://www.riotinto.com/investors/results-and-reports-2146.aspx [Accessed on: 30 December
2018].
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Principles-for-Financial-Reporting-1999.pdf [Accessed on: 28 January 2019].
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage
Learning.
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principles.pdf [Accessed on: 28 January 2019].
Damodaran, A, 2011. Applied corporate finance. John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Krantz, M. 2016. Fundamental Analysis for Dummies. John Wiley & Sons.
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Moles, P. and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.
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Shalimova, N. and Kuzmenko, H. 2016. Qualitative characteristics and principles of financial
reports in the context of disclosure of information about the enterprise as a subject of tax

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relations. [Online]. Available at:
https://www.isma.lv/FILES/SCIENCE/Publications/E_E/E_E_0102/08_E_E_0102_Shalimova_
Kuzmenko.pdf [Accessed on: 28 January 2019].
Weston, J.F. and Brigham, E.F., 2015. Managerial finance. Hinsdale, IL: Dryden Press.
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