Question

1. In this discussion question, you will discuss the relevance of ratio analysis.

How does ratio analysis assist an organization with decision making for both short-term and long-term strategic goals? Compare and contrast liquidity ratios to profitability ratios.

2. In this question you will discuss the purpose of the financial statements and the requirements of the regulatory bodies.

Describe the unique purpose of each of the three financial statements (Income Statement, Balance Sheet and Statement of Cash Flows) and discuss how each statement provides value to the users of the statement. In addition, describe the importance of the regulatory bodies on the preparation of the financial statements.

Answer 1

1-

Ratio analysis is a widely used technique of financial statement analysis.Ratio refers to one number expressed in terms of another.Ratio analysis can be used for decision making,both long term and short term.Ratio is actually studies the short term and long term solvency of the firm.so the management can take appropriate actions related to the solvency of firm.By analysing the performance of the company, they can take proper measures . One of the main objective of ratio analysis is to forecast the future.By analysing the current solvency,they can identify the liquidity position of the company and take appropriate actions to maintain a healthy liquidity position.these ratios are useful to identify the debt paying capacity of the company.ratio analysis is helpful for comparisons and by that also, the company can take proper decision.

Liquidity ratio and profitability ratio

Both ratios are used to measure the efficiency of the firm.Liquidity ratio are used to measure the solvency of the company and profitability ratio are used to measure the profitability and operating efficiency of the company. Only a profitable company can maintain a liquidity position.Otherwise the company may scares for lack of funds.

Difference

Liquidity ratio is for finding out the liquidity and solvency of the company

Profitability ratio is for measuring the profitability and operating efficiency of the company

Liquidity ratio include current ratio,quick ratio, super quick ratio etc

Profitability ratio include gross profit ratios,net profit ratio, operating ratio etc

Liquidity ratio measure the firm's ability to meet the current liability

Profitability ratio measure the ability of the business to earn maximum profit.

2-

Income statement is prepared for getting the profit or loss of business.By analysing the results ,can identify whether the business is going good or bad.The income statement shows the earning capacity of the business.

Balance sheet is used to identify the current status of business.it gives us the true and fair view of financial position of the company

Cash flow statement is used to identify the cash inflows and outflows of business.From where the cash comes and to where the cash goes.

The internal and external users should get the income statement in order to make decisions about the company.investors can decide whether to invest or disinvest in that company,for tax purposes the authority should get the actual income of the company.customers also need information about the company for deciding whether to continue or discontinue as the customer of the particular company.The auditor needs all those statements for auditing the financial statement . Management and employees also need the status about the company .

For preparing such statements,there should be a regulatory body,as the need of financial statement are already discussed.so the concerned authorities should prepare financial statement at the end of the financial year.If the company cannot prepare or maintain a proper record of financial statement,then in the short run itself the company cannot stay.and try to audit all the statement,it will helps to verify the details and to find out fraud.