Impact of Financial Ratios Analysis †Free Samples to Students

Question: Discuss about the Impact of Financial Ratios Analysis. Answer: Introduction The present report provides an analysis of financial position of Wonderland Construction Supplies established on July 16 through the help of calculating the financial ratios. The company has started its business with the initial capital of $70,000 and has developed its general purpose financial reports after taking into account the overall year adjustments. In addition to this, the report also illustrates the technique of deprecation used by the company for accounting its long-term assets and the significant methods adopted for managing and controlling the inventory. Income Statement: This financial statement provides an insight into the revenue and expenses incurred by the company during a reporting period. The end-users can interpret the information in relation to operating expenses of the company such as administration and manufacturing through income statement. As analyzed from the income statement of Wonderland management, it can be stated the operating expenses incurred are more than the revenue realized. This is an issue of concern for the company as it should develop effective strategies for reducing the operating expenses for improving its profitability position. Equity Statement: Also known as statements of equity change and disclose the information related to equity structure of a company. The analysis of equity statement of the company has revealed that it has equity capital of $70,000 and there is withdrawal of about $2000 from the equity capital as drawings. The significant reduction in the equity capital is attributed to the loss made by the company. Balance Sheet: The statement depicts the position of the assets and liabilities of the company at the end of a reporting period (Robinson et al., 2015). Accounting Ratio Analysis Current ratio: The ratio provides a measure of the liquidity position of the company and is calculated through the use of following formula: Current ratio=Current assets/Current liabilities Current ratio of Wonderland=$78,247.20/ $18,227.00=4.3 Thus, the current ratio of the company is 4.3 that is regarded to be better in comparison to its competitor ratio that is estimated to be in between of 15 to 2.7 times. Therefore, it can be said that Wonderland has maintained good liquidity position. Gross Profit Ratio: The ratio depicts the profitability position of the company and is calculated through the use of following formula: Gross Profit=Net Profit/Sales Revenue Gross Profit=$20,664.00/ $69,120.00 = 29.9% The gross profit ratio of competitor of Wonderland is estimated to be in between 3.8% to 4.3%. Thus, it can be said that profitability position of the competitors of the company is better as compared to Wonderland and therefore it should develop effective strategies for improving its financial profitability (Beyer, 2010). Depreciation Techniques The business entities incorporate the use of following two methods for calculating deprecation: Straight-line basis: The method involves calculating deprecation of an asset over its useful life. The sales value of an asset is deducted from its cost and the residual value is depreciated over its useful life. The method is easy for use and thus is widely used by businesses management for calculating deprecation. Reducing Balance Method: The method is also known as written down value method that involves calculating deprecation through charging it to the asset value that remains after deducting the depreciation amount of each year. Thus, the method involves calculating deprecation on an annual basis (Beyer, 2010). The inventory can be monitored and controlled through the use of following two methods: FIFO (First in First Out): The method involves selling the goods that are produced first. Thus, it involves selling the inventory with lower value first as compared to higher value inventory and therefore can lead to significant increase in the inventory value on the balance sheet. LIFO (Last in Last out): The method involves selling the goods primarily that are brought last and therefore lead to decrease in the value of inventory (Warren, Reeve, and Duchac, 2015). The use of internal control methods is essential for the company to prevent the occurrence of any fraudulent activities leading to manipulation of its accounts. In this context, the company can use internal control mechanism such as developing risk and audit committee for monitoring and controlling the cash operations. This will help the company to prevent the chances of occurrence of any frauds related to its financial activities (Albrecht, Stice, Stice and Swain, 2007). Conclusion It can be inferred from the overall report that Wonderland through is experiencing some operating losses but yet has performed well in its first year of business. Thus, the company is expected to deliver better financial results in the coming period and is recommended reducing its operating expenses for improving its profitability position. References Albrecht, W., Stice, J., Stice, E and Swain, M. 2007. Accounting: Concepts and Applications. Cengage Learning. Beyer, S. 2010. International Corporate Finance - Impact of Financial Ratios on Long Term Credit Ratings. GRIN Verlag. Robinson, T. et al. 2015. International Financial Statement Analysis Workbook. John Wiley Sons. Warren, C., Reeve, J. and Duchac, J. 2015. Accounting. Cengage Learning Management.