Question

1. How do you think financial ratios differ across different industries? Compare two industries of your choice and select a few ratios and explain whether you think the ratios would be higher or lower for each of those industries and explain why.

2. What are some uses and limitations of financial ratios?

3. How is the financial plan and budget related to a company’s strategic plan?

Answer 1

Answer:

1)

The facts demonstrate that financial ratios vary across various enterprises since fundamental objective of various industry is unique so when principle objective isn't same of a wide range of industry then financial data of a wide range of businesses will be different. We realize that financial ratios are determined based on financial data that is the reason financial ratios will be distinctive for various types of businesses.

Presently let’s study some financial ratios for two unique kinds of industry;

i) For Bank and Financial industry;

Following financial data are given;

• Cash - $15000
• Short term investment - $25000
• Other current assets - $10000
• Current liabilities - $20000
• Fixed assets - $25000
• Net profit - .$10000

Presently we should figure some financial ratios;

Current ratio

= Current assets/Current liabilities = ($15000 + $25000 + $10000 ) / $20000 = $50000 / $20000 = 2.5 Times

2.5 Times

Return on total assets

= Net profit / Total assets = .$10000 / $15000 + $25000 + $10000 +  $25000 = ($ 10000 / $75000)*100 [Convert to percent] = 13.33%

13.33%

Return on fixed assets

= Net profit / Fixed assets = (.$10000 /  $25000 ) * 100 [Convert to percent] = 40%

40%

Return on current assets

= Net profit / Current assets = [$10000 / .($10000 / $15000 + $25000)]*100 = ($10000 / $50000) *100 [Convert to percent] = 20 %

20 %

ii) For Manufacturing industry;

Following financial data are given;

• Cash - $10000
• Short-term investment - $15000
• Other current assets - $5000
• Current liabilities - $20000
• Long-term loans - $15000
• Fixed assets - $40000
• Net profit - $20000
  

Presently how about we figure some financial ratios;

Current ratio

= Current assets / Current liabilities =  $10000 + $15000 +  $5000 / $20000 = $ 30,000 / $ 20,000 = 1.5 times

1.5 times

Return on fixed assets

= Net profit / Fixed assets =( $20000/ $40000 ) * 100 = 50%

50%

Return on total assets

= Net profit / Total assets = [ $20000/ ( $10000 + $15000 +  $5000 +  $40000) ] *100 = [ $ 20,000 / $ 70,000 ] *100 { convert to percent} = 28.57%

28.57%

Return on current assets

= Net profit / Current assets = $20,000/ $10000 + $15000 +  $5000 =  ($20,000 / $ 30,000)*100 = 66.67%(approx)

66.67%

So based on above ratios of two distinctive industry it is clear that financial ratios indicating various outcomes. Current proportion of bank shows high proportion on the grounds that a bank needs to keep up high liquidity while manufacturing industry works operates on credit that is the reason current proportion of  manufacturing industry is low. Aside from this we realize that an manufacturing industry needs to keep up significant level of fixed assets in contrast with banks that is the reason return on fixed assets, return on current assets will be distinctive for both sort of industry.

In this manner  it is clear that because of various kinds of financial composition of financial information of various industry financial ratios will show diverse picture.

======================================================================

2)

The following are the Uses of financial ratios;

• Financial ratios help in analyzing execution of industry during a time-frame of time.
• Financial ratios help in comparative study since it give to the point budgetary data.
• Financial ratios help in monetary dynamic in light of the fact that because of accessibility of summarized data quick decisions can be taken.
• Financial ratios helps in discovering feeble and strength areas in the business.
• Financial ratios helps in better controlling.
• Financial ratios help in giving exact financial data to the different partners or stakeholders.
• Financial ratios helps in investigation of past execution of a specific firm or overall investigation or study of the business.
• Financial ratios  helps in setting ordinary norms for the firm and industry.
• Financial ratios helps in future correct planning and so forth.

The following are the Limitations of financial ratios;

• Financial ratios are determined based on authentic or historical financial data that is the reason these proportions can not give up to date data.
• Effect of inflation can not be estimated in the ratios analysis .
• Each firm and each industry utilizes various policies that is the reason these financial ratios can not give practically identical data.
• As we realize that financial ratios  depend on past accounting data that is the reason future planning can not be made precisely.
• At some point controlled  financial ratios can prompt  inaccurate standards for the business and so forth.

=======================================================================

3)

According to C.I.M.A London "A Budget is a financial or a quantitative statement arranged and affirmed preceding a particular time-frame, of the approach to be sought after during the period to accomplish a given goal and may incorporate the income and expenses brought about during the particular time frame" .

The point here is that a budget is prepared well in advance for example it is a part of the key strategic plan of the organization. To comprehend it better the organization has certain vital objectives to be accomplished in the new financial year, so it instructs the Budget Committee to think about these focuses while setting up the budget for the following budgetary year. All the key strategic plans are deliberately analyzed and the objectives are figured in while setting up the Master Budget for the financial year. The key objectives could be : cut down in representative expense for a specific office and this should be factored in while setting up the budget for that specific division or particular department.