Role of Financial Accounting on Risk Management

This article explores the role of financial accounting in risk management. It discusses the relationship between profitability and risk, the impact of debt on capital, the importance of liquidity ratios, and the role of interest coverage ratio. The article also provides references to relevant books and journals.

ROLE OF FINANCIAL
ACCOUNTING ON RISK
MANAGEMENT

TABLE OF CONTENTS
MAIN BODY...................................................................................................................................3
REFERENCES................................................................................................................................6

MAIN BODY
Hypothesis Constructs Question/ Measurement Item Reference
H1: Profitability ratio
allows the company to
monitor and measure the
profitability of the
organisation.
Profitability
ratio
1. Does profitability ratio
clearly reflect the growth of
company.
(Alfina, Nurlaela and
Wijayanti, 2018)
2. Does more than one profit
margin make it easier for
organisation to address the
success of strategic direction.
(Hirdinis, 2019)
1. Is the risk management
has a direct relation with the
profitability.
(Susanti, Latifa and
Sunarsi, 2020)
2. Do profitability
minimises business risk.
(Brastama and
Yadnya, 2020)
H2: Debt to capital ratio
depicts the financial
burden over capital hold
by business entity.
Debt to capital
ratio
1. Do debt hold by business
create burden over the capital of
entity.
(Pontoh, 2017)
2. Does the direct
relationship exist between the
debt hold by business and the
capital obtained by the same.
(Ernayani and Sari,
2017)
1. More debt increased the
risk in business.
(Martellini, Milhau
and Tarelli, 2018)
2. Failing in repayment of
debt influence the stakeholders
(Mota and Moreira,

for investing in the business. 2017)
H3: the liquidity ratio
measures the ability of
organization in
meeting short term
requirement of cash in
order to analyse the
financial position of
company
Liquidity ratio 1.In analyzing risk management
is very important aspect for the
company to analyse the liquidity
of company
(Zaghdoudi and
Hakimi, 2017)
2. higher liquidity has positive
impact on return on investments
1. The liquidity of the company
fluctuates the share price within
the financial market.
(Chasanah and
Sucipto, 2019).
2. The liquidity of the company
assist in measuring the assets
which can be easily converted
into cash
H4: Interest coverage
ratio states the liquidity
position of the company
for its investors to show
overall company
financial performance
Interest
coverage ratio
1. ICR being a leverage of
liquidity ratio states the
company’s ability of paying its
investors.
(Chen and et.al.,
2017)
2.ICR helps investors in short
term investment
1. ICR helps investors in
knowing level of liquidity of
firm.
(Xiong and et.al.,
2017)
2. ICR are useful for short term
creditors

REFERENCES
Books and Journals
Alfina, I. T., Nurlaela, S. and Wijayanti, A., 2018, August. The Influence of Profitability,
Leverage, Independent Commissioner, and Company Size to Tax Avoidance.
In PROCEEDING ICTESS (Internasional Conference on Technology, Education and
Social Sciences).
Brastama, R. F. and Yadnya, I. P., 2020. The Effect of Capital Adequacy Ratio and Non
Performing Loan on Banking Stock Prices with Profitability as Intervening
Variable. American Journal of Humanities and Social Sciences Research
(AJHSSR). 4(12). pp.43-49.
Chasanah, N. and Sucipto, A., 2019. Liquidity ratio, profitability, and solvency on stock returns
with capital structure as an intervening variable (study on food and beverage sub sector
listed in Indonesia Stock Exchange (Idx) period 2013-2017). Ekspektra: Jurnal Bisnis
dan Manajemen, 3(1), pp.52-68.
Chen, J.H., and et.al., 2017. Improving hedging decisions for financial risks of construction
material suppliers using grey system theory. Journal of Management in Engineering,
33(4), p.04017016.
Ernayani, R. and Sari, O., 2017. The effect of return on investment, cash ratio, and debt to total
assets towards dividend payout ratio (a study towards manufacturing companies listed in
Indonesia stock exchange). Advanced Science Letters. 23(8). pp.7196-7199.
Hirdinis, M., 2019. Capital structure and firm size on firm value moderated by profitability.
Martellini, L., Milhau, V. and Tarelli, A., 2018. Capital structure decisions and the optimal
design of corporate market debt programs. Journal of Corporate Finance. 49. pp.141-
167.
Mota, J. H. and Moreira, A. C., 2017. Determinants of the capital structure of Portuguese firms
with investments in Angola. South African Journal of Economic and Management
Sciences. 20(1). pp.1-11.
Pontoh, W., 2017. The Capital Structure: Is Debt just a Policy or Requerement?. European
Research Studies. 20(2). p.128.
Susanti, N., Latifa, I. and Sunarsi, D., 2020. The Effects of Profitability, Leverage, and Liquidity
on Financial Distress on Retail Companies Listed on Indonesian Stock
Exchange. Jurnal Ilmiah Ilmu Administrasi Publik. 10(1). pp.45-52.
Xiong, W., and et.al., 2017. Ex post risk management in public-private partnership infrastructure
projects. Project Management Journal, 48(3), pp.76-89.
Zaghdoudi, K. and Hakimi, A., 2017. The determinants of liquidity risk: Evidence from Tunisian
banks. Journal of Applied Finance and Banking, 7(2), p.71.