Financial Analysis

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Description

Please just follow the assessment instructions:

Overview

Complete a 2-part assessment in which you analyze and compute financial ratios and interpret the results of a multi-year financial ratio analysis.

Smart investors also execute due diligence by performing a bit of financial statement analysis (also known as ratio analysis), where financial statement numbers are used to evaluate three characteristics of an organization's performance: (1) liquidity, (2) profitability, and (3) solvency.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 2: Apply accounting cycle strategies to manage business financial events.
    • Compute financial ratios using accounting data from financial statements.
    • Interpret the results of financial ratios.
    • Interpret trends found in a multi-year financial ratio analysis.
    • Recommend strategies to improve financial trends.

Context

You have reached the end of the organization's accounting period. The accounting cycle, consisting of recording transactions, transferring to the ledger, and preparing the financial statements, is complete for this calendar or fiscal (an accounting period other than January to December) year. So now, what do you do with all the accounting information that has been gathered? You analyze it, synthesize it, and use it to make decisions concerning the current health of the organization and its future financial direction.

If you were a potential investor (and had some disposable income to burn), you would mostly likely look through the annual reports of various organizations, read the comments of key decision makers, talk to friends and family members, and make an informed decision about which organization deserves your hard-earned money. Or, you could trust Wall Street to advise you on where to invest your money (but remember, they get a cut of your investment dollars as a commission).

Assessment Instructions

This assessment includes two parts. Use the templates provided as you complete each part. Both of the templates are linked in the Resources under the Required Resources heading. Note that for Part 2 you will use the template for data but will create your own document to submit.

Part 1: Ratio Analysis

Making sense of accounting data on financial statements can be difficult. Thankfully, combining numbers from income statements, balance sheets, and other data provides a starting point to analyze a company's financial results. You now have the opportunity to demonstrate your prowess by identifying and computing financial ratios.

Using the Assessment 5, Part 1 Template, analyze and compute the necessary financial ratios. The Financial Statements worksheet in the template contains the income statement, balance sheets, and additional information needed. The Ratio Analysis worksheet contains space for your calculations and answers.

Part 2: Interpreting Financial Statement Analysis

What does the calculation of a financial statement ratio represent? How does one year compare to another? Is there a trend to the ratio data? Is the trend positive or negative? What can be done to change the trend? These are some of the questions that can be answered when the ratio data is interpreted. For this part of the assessment, demonstrate your ability to interpret the results of a multi-year financial ratio analysis.

On the Assessment 5, Part 2 Template you will find selected ratios for a company over a two-year period. Compare the ratios, and in a separate document (Word or Excel), submit your answers to the following questions:

  1. What does the calculation of each ratio represent?
  2. How does year one compare with year two, and what trend can be seen when you compare the two years?
  3. Is the trend from year one to year two positive or negative?
  4. What are the possible reasons for the trend?
  5. What recommendations do you have for turning a negative trend to a positive trend?

Submit the completed template for Part 1 and the document you created with answers to the questions for Part 2 for this assessment.

Unformatted Attachment Preview

BUS-FP3061 - Fundamentals of Accounting Assessment 5, Part 1 Template 2013 Calculations Current ratio Quick ratio Receivables turnover Inventory turnover Profit margin Asset turnover Return on assets Return on equity Earnings per share Price-earnings Cash Dividend payout Debt ratio Debt-to-Equity Times interest earned 2013 Answers BUS-FP3061 - Fundamentals of Accounting Assessment 5, Part 1 Template Orange Company Income Statement For the Years Ended December 31 2013 Net sales (all on account) Expenses: Cost of Goods Sold Selling and administrative Interest Expense Income Tax Expense Total expenses Net Income 2012 $ 600.000 $ 520.000 $ $ $ $ $ $ 415.000 120.800 7.800 18.000 561.600 38.400 $ $ $ $ $ $ 354.000 114.600 6.000 14.000 488.600 31.400 Additional Data: 1. The common stock recently sold at $19.50 per share. 2. Cash dividends in the amount of $15,400 were paid-out in 2013. Orange Company Balance Sheets December 31 Assets Current Assets Cash Short-term investments Accounts Receivable Inventory Total Current Assets Plant Assets Total Assets Liabilities and Stockholder's Equity Current Liabilities Accounts Payable Income Taxes Payable Total Curent Liabilities Long-term Liabilities Bonds Payable Total Liabilities Stockholder's Equity Common Stock ($5 par value) Retained Earnings Total Stockholder's Equity Total Liabilities and Stockholder's Equity mpany heets r 31 2013 2012 $ $ $ $ $ $ $ 21.000 18.000 86.000 90.000 215.000 423.000 638.000 $ $ $ $ $ $ $ 18.000 15.000 74.000 70.000 177.000 383.000 560.000 $ $ $ 122.000 23.000 145.000 $ $ $ 110.000 20.000 130.000 $ $ 120.000 265.000 $ $ 80.000 210.000 $ $ $ $ 150.000 223.000 373.000 638.000 $ $ $ $ 150.000 200.000 350.000 560.000 BUS-FP3061 Assessment 5, Part 2 Template BUS-FP3061 – Fundamentals of Accounting Ratio Year 1 Year 2 Current ratio 3.12:1 2.96:1 Quick ratio 1.34:1 1.02:1 Receivables turnover 9.7 times 10.2 times Inventory turnover 2.4 times 2.3 times Profit margin 11.4% 12.6% Asset turnover 1.21 times 1.22 times Return on assets 13.7% 15.4% Return on equity 28.5% 29.3% Price-earnings ratio 10.4 times 12.4 times Debt ratio 50.2% 45.3% Times interest earned 9.6 times 13.0 times Capella Proprietary and Confidential ShortDoc_Internal.doc Last updated: 7/17/2018 4:29 AM 1
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Explanation & Answer

Attached.

Surname 1

Name
Supervisor
Course
Date
Fundamentals of Accounting

The current ratio represents a liquidity measure that indicates the firm’s ability to meet is
short-range debt obligations using the current resources. A ratio of 3.12:1 indicates that the
current assets were 3.12 times more than the prevailing obligation indicating that the company
has strong liquidity. The quick ratio evaluates the ability of the company to settle is bills and
obligations as they arise using its quick assets. Quick assets are those current assets that could be
easily turned into cash with a 90 day period. Notably, the quick ratio is above 1 in both years
indicating that the firm had enough quick assets to cover the prevailing obligations.
The receivables turnover represents the number of times the firm can turn accounts
receivables into cash. In year one, the company collected its accounts receivables times 9.7 while
in year two it collected accounts receivables 10.2 times. The inventory turnover ratio shows how
frequent the company was able to buy and sell its inventory during the year. Notably in year one
and year two, the company purchased and sold its inventory 2.4 and 2.3 times respectiveley.

Surname 2

Profit margin represents are profitability ratio which indicates the percentage of revenue
tha...


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