Question

the following questions related to financial analysis.

Provide an example of a decision that would be affected by information on an organization’s financial statement. In addition to the example you have identified, consider the use of financial statement information in the following scenarios:

If a firm’s ROE is low and management wants to improve it, explain how debt might help. Is this a good decision? Why/why not?

Give some examples that illustrate how seasonal factors and different growth rates might distort a comparative ratio analysis. What can be done to correct this?

Answer 1

An example that would be affected is "Hiring of new employees or workers". If the admin and staff expenses in the income statement are seen as very high affecting the net profit, the top management may use this information on the income statement to stop hiring new employees.

If the firm's ROE is low, taking on additional debt is a good thing since when debt is increased the risk increases and shareholders demand higher return for the additional risk. This would be a good idea if the firm has limited debt. If the firm already has large debt, taking additional debt may not be a good idea since it may increase the probability of bankruptcy

Yes, Seasonal factor do affect ratio analysis. For example a company selling consumer goods may always makes profit in the last quarter of the financial year because of more buying during thanksgiving an Christmas. So the 4th quarter number always looks good when compared to other quarters. This can be corrected by looking a year on year data as against quarter on quarter.