Question

Why is it advantageous to use comparative financial statements to analyze a company's performance rather than a single date? Select five ratios, describe how each is calculated and what information it provides.

Please provide one main post . Your main post must be a minimum of 200 words (no quotes) that indicates an understanding of the concepts and material

Answer 1

Comparative financial statements are financial statements that reveal financial information of more than one period.

Comparative Financial Statement is set of

• Income statement (show profit or loss of more than one period)
• Balance Sheet(show financial position of business for more than one accounting period)
• Cash flow statements(show cash position for more than one period.)

Comparative financial statements is used to analyse whether financial performance of company(Earning) improved from previous year or not.

Ratios

• Current ratio - It is liquidity ratio which shows company ability to pay short term obligations.

formula to calculate it = Current asset/current liabilities

Lower current ratio show cash problems in organisation.

Current assets - Realizable in one year For example accounts receivable,inventory,cash ,prepaid expense

Current liabilities - payable within one year for example accounts payable, bank overdraft

• Debt Equity ratio - It is leverage ratio that shows financial health of business.

formula = Short term debt + long term debt/Shareholder Equity

Higher debt ratio indicates higher degree of debt financing.

Shareholder Equity(net worth) =Share capital + Retained Earning

Short term debt - Portion of debt that is payable within one year

Long term debt - portion of debt payable in long term.

• Times interest earned ratio - denoted ability of organisation to pay its debt payments (Interest)

formula = Earning before interest & tax/Interest expense

Higher this ratio means company is able to pay its interest payments.

• Asset turnover Ratio - measures the efficiency of business in managing and utilizing the assets

Formula = Cost of goods sold or sales/Average assets

higher ratio means higher efficiency in utilizing the assets

Average assets = opening assets + closing assets/2

• Debtors Turnover ratio(Accounts receivable ratio turnover ratio) - shows how effective a company is in collection of debt

Formula = Net credit sales/Average debtors

Higher the ratio means credit sale are more likely to collectible

Average debtors = opening debtors +closing debtors/2