University Financial Analysis Assignment: FIN 5310 Module 2

This document provides a comprehensive solution to a financial statement analysis assignment, addressing key concepts and practical applications. The solution begins by identifying the financial ratios most relevant to short-term lenders, long-term lenders, and stockholders, explaining the rationale behind their interests. It then delves into the DuPont analysis, detailing how it breaks down return on assets (ROA) and return on stockholders' equity (ROE) to provide a deeper understanding of a company's financial performance. The document explores the relationship between the accounts receivable turnover ratio and the average collection period, highlighting the implications of a decreasing turnover ratio. It also contrasts the fixed charge coverage ratio with the times interest earned ratio, emphasizing the former's advantage in assessing a firm's ability to meet its fixed obligations. The solution critiques the validity of rule-of-thumb ratios, explaining why they may not be universally applicable. Trend analysis is discussed as a valuable tool for analyzing ratios, allowing for the comparison of present and past performance and the identification of industry changes. The impact of inflation on various financial ratios, including return on investment, inventory turnover, fixed asset turnover, and debt-to-assets ratio, is thoroughly examined, with explanations of the direction of the impact. Furthermore, the document addresses the effects of disinflation on reported income and financial assets. Finally, it acknowledges the challenges in comparing financial statements across different companies due to variations in reporting methods. The document concludes with a list of references used in the analysis.

Running Head: FINANCIAL STATEMENT ANALYSIS
FINACIAL STATEMENT ANALYSIS
Name of the Student
Name of the University
Author Note

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FINANCIAL STATEMENT ANALYSIS
Answer to question 1
(a) Short term lenders will be interest in liquidity ratio like current ratio & quick ratio.
because they will be more interested in extending the short-term credit of the firm.
(b) Long-term lenders will be more interest in solvency ratios like debt ratio, debt to
equity and interest earned ratio. They will be interested while providing funds
with higher ratio in long-term & charge of a higher rate of interest on borrowing
(Liang et al., 2016).
(c) Stockholders- They are interested in company’s profitability ratios like Return on
Equity & operating profit ratio. ROE is used to calculate the company’s ability for
generating income from shareholders investments.
Answer to question 2
(a) ROA- In DuPont analysis, the ROA is the multiplication of company’s operating
profit margin with asset turnover ratio. Hence, is higher ROA is maintained, then it
increases the operating profit margin. This is done by efficient use of assets or
increase the revenue.
(b) Stockholders equity- In DuPont analysis, the return on equity is the multiplication of
profit margin with the asset turnover and financial leverage. Therefore, the company
breaks down the return on equity to understand its ROE in every period of time.
Answer to question 3
If accounts turnover is decreasing, then average collection period is more and taking
longer period of time.
Answer to question 4
Fixed charge coverage ratio measures the ability to meet fixed obligation rather than
just interest payments by taking assumptions that failure will be risky for the firm.

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FINANCIAL STATEMENT ANALYSIS
Answer to question 5
Rule of thumb ratios are not valid for all corporations (Hosaka, 2019). This rule
doesnot provide any initial insight to the firms operations and analyst can provide
information.
Answer to question 6
Trend analysis helps to compare the present outcomes with past findings & evaluate
the patterns of industry change.
Answer to question 7
(a) Return on Investment is the ratio of net income with total assets. Inflation may
overstate the income and hence, total assets can be disturbed.
(b) Inventory turnover ratio is ratio of total sales with inventory. Inflation will overstate
the sales and then inventory will be affected.
(c) Fixed asset turnover ratio is ratio of sales with fixed assets. The replacement cost will
be effected and hence, fixed asset will be understated.
(d) Debt to asset ratio is ratio of total debt with total assets. Inflation will not affect that
much because, both are a type of historical cost.
Answer to question 8
In case of disinflation, the inflation earnings will be squeezed out from the income
statement (Arkan, 2016). This may happen for industries where price trends is continuously
changing.
Answer to question 9
Disinflation will lower the demand of return from the investors on the financial assets,
hence the future interest or future earnings will have a higher current evaluation.

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FINANCIAL STATEMENT ANALYSIS
Answer to question 10
Comparison is difficult because different company use different methods of financial
reporting (Soares & Pina, 2017). Hence, the two firms may show different value for research
& development, losses and other items in the income statement.

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FINANCIAL STATEMENT ANALYSIS
References
Arkan, T. (2016). The importance of financial ratios in predicting stock price trends: A case
study in emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia, 79(1), 13-26.
Hosaka, T. (2019). Bankruptcy prediction using imaged financial ratios and convolutional
neural networks. Expert systems with Applications, 117, 287-299.
Liang, D., Lu, C. C., Tsai, C. F., & Shih, G. A. (2016). Financial ratios and corporate
governance indicators in bankruptcy prediction: A comprehensive study. European
Journal of Operational Research, 252(2), 561-572.
Soares, J. O., & Pina, J. P. (2017). Macro-Regions, Countries and Financial Ratios: A
Comparative Study in the Euro Area (2000-2009). Revista Portuguesa de Estudos
Regionais, (45), 83-92.

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References

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