Question

From the e-Activity, determine why it is sometimes misleading to compare a company’s financial ratios with those of other firms that operate within the same industry. Support your response with one (1) example from your research. * From the scenario, determine two (2) strategies that Trevose Fittness Center could utilize to reach its expansion goals. You may, for example, consider your analysis of Trevose Fitness Center’s financial statements, as well as your knowledge of TFC’s excessive cash position. Provide a rationale for your response.

Answer 1

1. It is sometimes misleading to compare two forms on the basis of ratios calculated because of the different accounting policies followed by them, but this problem will not last more as the FASB has provided the companies with specific guidelines regarding accounting policies and reporting methods which will make the financial statements more comparable. For eg. Wal mart and Tesco which reports sales on different basis, Wal mart have the aggressive policy of recording revenue whereas Tesco have the conservative policy. Therefore the ratios analysis for comparability is misleading.

2. While analysing the financial statements of Trevose it has been noted that the cash balance and the net working capital has decreased which shows the need to get more liquidity to expand the business.

Strategies are:

Q

1. Raising funds through equity issue, but for that we need to consider the cost of equity, if it is quite high then opting for debt would be beneficial.

2. Getting loans or Bank draft facility is also helpful in getting additional liquidity for working capital.