Question

a) There are different rules for different investments. Would it not be easier if there were just one way to record investments? What is the value-added by the separation if you were the manager reviewing the financial statements? Is there an ethical implication to this evaluation?

b) The CEO of the company asks the question: Is vertical or horizontal analysis better? How do you respond? Which ratios would you identify as the top three that would supplement the analysis? Is there an ethical reasoning that supports your choices?

Answer 1

Answer for a)

There are different rules for different investment because not every thing can be treated equally and alike.

It won't be easier if there were just a way to record all investments alike. The type of investment you held help in evaluation of your portfolio.

The value addition that you gain for this separation is that how balance your portfolio is and that in turn help in evaluation in how secured you investment is in. For example your investment in shares will have positive effect on your portfolio only if the financial performance of the company in which your investment is good. However, the investments in bonds are safe as your have a definite percentage of income on your investments and they are mostly secured unless the organization in which your bonds are in is not insolvent. However, the income from bonds are limited regard less the massive profits of the organization which is now in case of shares. This as a manager this would be a value addition as it explains me that how balanced are the investments of my organization.

Of course there will be ethical implications for such evaluation as such evaluation must be done with proper knowledge and unbiased opinion. There must be proper analysis of environmental conditions of the industry in which our investments is in and record it in current conditions after understanding all the roads in which it is surrounded in.

Answer for b)

IfI am a CEO,I would rather feel horizontal analysis was better if my organization was not on earlier state of ours life cycle as at that point of time I won't get any past tend our sufficient past tend to observe financial position of the organization. This is because in evaluation of past trends I may get some methods to cost saving which may not be a case in vertical analysis as I may look for cost cutting which intern results in other news issues like effects on quality etc

Although there is no better alternative other than analysis,I would choose combined leverage,Return on equity ration and debt coverage ration.

The reasons for choosing these rations is

1.combined leverage have both financial and operating leverage in it.

2.Return on equity helps in how much are we earning on Equity as return on equity will be the amount after all expenses.

3.Debt coverage ratio helps in finding how many times excess are we earning more than our amount of liability we have on your in a year which tells us how strong that we are .financially is.

Thanking you