Financial Statements Elements and Financial Statement Analysis

Financial Statements 1
FINANCIAL STATEMENTS ELEMENTS AND FINANCIAL STATEMENT ANALYSIS
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Financial Statements 2
Financial Statements Elements and Financial statement Analysis
PART A. Financial Ratios and Financial Statement Analysis
a. To measure the solvency and efficiency of business, several ratios are
computed, analyzed and interpreted (Lucic, 2014). Some of the key ratios are
discussed below,
Current ratio and quick ratio are both liquidity ratios which are mostly used by
investors to evaluate the financial strength of the business and the ability to
repay short-term loans. A business to be considered able to pay its debts, these
two ratios should be at least 1 and above. When the ratios give a value of 1, it
means the business has current assets equal to current liabilities and thus it can
pay its debts. The higher the value the better it is for the business.
Accounts receivable turnover is an efficiency ratio used to evaluate how the
business is efficient with the collection of its debts from customers. It shows how
many times a year the company collects money from its debtors.
Inventory turnover is used to measure the efficiency of the management to
control inventory levels to avoid overstocking and to minimize inventory storage
cost. It is calculated by taking cost of goods sold divided by average inventory.
Ratios Year 2019 Year 2018
Current Ratio 218,000/105,000
=2.07
222,000/81,000
=2.74
Quick Ratio 88,000/105,000
=0.84
72,000/81,000
0.89
Accounts Receivable Turnover 630,000/65,000
=9.69 times
365/9.69
=37.67 days
490,000/69,000
=7.10 times
365/7.10
=51.41 days
Inventory Turnover 290,000/140,000
=2.07 times
365/2.07
=176 days
250,000/140,000
=1.79 times
365/1.79
=203.9 days
b. The business current ratio indicates that the assets are 2 .07 times of the current
liabilities in the year 2019 and 2.74 times in the year 2018. This shows that the
business can pay all its current liabilities as and when they fall due. A current
ratio of 1 and above is considered good for the business. The business short-
term solvency can be said to be okay since the business is able to cater for all its
short-term debts should they fall due.