Sample Assignment on Management Accounting (pdf)
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Added on 2021-06-17
Sample Assignment on Management Accounting (pdf)
Added on 2021-06-17
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MANAGEMENT ACCOUNTING
ContentsSolution 1:..................................................................................................................................3Solution 1.1:...........................................................................................................................3Solution 1.2:...........................................................................................................................5Solution 1.3:...........................................................................................................................7Solution 2:..................................................................................................................................9Solution 2.1:...........................................................................................................................9Solution 2.2:.........................................................................................................................11
Solution 1:Solution 1.1:a.Ratio analysis helps provide an insight into the financial performance of the company.In the given case we are provided with some ratios of company for two financialyears, from which we need to determine the credit worthiness of the company. Fromthe ratio analysis of two years we can see that the company has earned lower profits inthe current year, nut the liquidity position of the company is in a good state. Thebenchmark for current ratio is 2 and the company has the ratio of 2.1. This shows highliquidity and availability of funds for repayment of loan. The ratios paint a kind offavourable picture for the credit worthiness of the company, but taking the decisionsolely based on ratios will not be correct. it is important that we consider qualitativeinformation regarding company also, in order to have a complete picture. It isimportant we also see other aspects of the business so that its real position can beunderstood. b.The above ratios give us an idea of the liquidity and profitability of the company.there are few other ratios too which will help us analyse the company’s worth:-Debt to equity ratio: this ratio helps us calculate the ratio of debt and equityinvolved in the capital structure. This gives us the idea on how much debt isalready used by the company. Taking the general capital structure of the industryto which company belongs we can see if more debt would be suitable for thecompany or not. Based on the existing debt history of the company, the repaymenthistory can be analysed for future performance of the company.-Interest coverage ratio: the interest coverage ratio helps us analyse the earningsof the company. It helps us evaluate the company’s ability to earn eng profits topay back the interest accrued. This ratio calculates the number of times is theearnings of the interest expense. Higher the ratio better it is. It is important tocheck the company’s profitability before sanctioning of any loan. The companyshould have a secure financial health so that it can secure the lenders of therepayment of loan and interest expense.[ CITATION Atk12 \l 1033 ]-Debtor turnover ratio: this is a kind of efficiency ratio that will help usunderstand the cash flow of the company from its debtor. Higher turnover ratiosindicate that the company will have its fund stuck with the debtors for higher
period. Company needs to make policies in order to ensure regular flow of fundsfrom debtors in order to ensure liquidity. c.Though ratio analysis is a very essential tool which helps in taking financial decisions,it also has a few limitations:-Ratio analysis is based on past performance, it s not necessary that the pastperformance will be continued by the company in the near future-The figures of the financial statement fail to incorporate the inflation rates, whichwill affect the future financial status of the company.-There may be changes taking place in the management of the company or in theshareholding which are likely to affect the operations, ratio analysis fails toincorporate effects of decision like these on the financial performance of thecompany.-Interpretation of ratio analysis is not a easy task. It is important that the data formratio analysis is interpreted properly in order to have correct results.-Few of the ratios involve figures from the balance sheet. We should keep in mindthat these figures are on the last date of the balance sheet. These figures keepchanging and so does the financial viability of the company.
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