In your report to upper management, analyze the companys financial statements for 20Y7 and 20Y8:
Discuss the purpose of the report and the role of accounting in business.
What are the two major objectives of accounting and how are they achieved?
What kind of information do these financial statements provide to internal stakeholders, such as organizational leaders within the company, and to external stakeholders, such as lenders and current or potential investors?
How do internal and external stakeholders use financial accounting information?
Prepare a liquidity analysis by computing and using the appropriate ratios to assess liquidity.
Compute a minimum of three liquidity ratios for the years ended Dec 31, 20Y8 and Dec. 31, 20Y7 and show your supporting calculations. Use the same three liquidity ratios for both years.
Analyze the ratios computed and discuss any insights or conclusions that can be drawn from your analysis.
Prepare a solvency analysis by computing and using the appropriate ratios to assess solvency.
Compute a minimum of three solvency ratios for the years ended Dec 31, 20Y8 and Dec. 31, 20Y7 and show your supporting calculations. Use the same three solvency ratios for both years.
Analyze the ratios computed and discuss any insights or conclusions that can be drawn from your analysis.
Prepare a profitability analysis by computing and using the appropriate ratios to assess profitability.
Compute a minimum of three profitability ratios for the years ended Dec 31, 20Y8 and Dec. 31, 20Y7 and show your supporting calculations. Use the same three profitability ratios for both years.
Analyze the ratios computed and discuss any insights or conclusions that can be drawn from your analysis.
Draft a summary of what the financial statements indicate about the companys overall financial health and performance, strengths and weaknesses of the company, as well as any identified positive or negative trends and the risk of investing in the company.
Full Answer Section
Objectives of Accounting
The two primary objectives of accounting are:
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Financial Accounting:
- Provides financial information to external users, such as investors, creditors, and regulators.
- Focuses on historical data and financial performance.
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Management Accounting:
- Provides financial information to internal users, such as managers and employees.
- Focuses on future planning and decision-making.
Use of Financial Information by Stakeholders
Internal Stakeholders:
- Organizational Leaders: Use financial information to make strategic decisions, allocate resources, and assess the overall performance of the company.
- Managers: Use financial information to monitor costs, evaluate performance, and make operational decisions.
External Stakeholders:
- Investors: Use financial information to assess the company's profitability, risk, and potential return on investment.
- Creditors: Use financial information to evaluate the company's creditworthiness and ability to repay debt.
- Regulators: Use financial information to ensure compliance with laws and regulations.
Financial Analysis
Liquidity Analysis
Solvency Analysis
Profitability Analysis
Analysis of Ratios
[Analyze the calculated ratios and discuss the implications. For example, a decreasing current ratio might indicate liquidity issues, while a high debt-to-equity ratio might signal solvency concerns. Compare the ratios for both years to identify trends and potential areas of improvement.]
Overall Financial Health and Performance
[Summarize the overall financial health of the company based on the analysis. Highlight the company's strengths, weaknesses, positive trends, and negative trends. Assess the risk of investing in the company by considering factors such as liquidity, solvency, profitability, and industry trends.]
Sample Answer
Financial Analysis Report
Purpose of the Report and Role of Accounting
The primary purpose of this report is to analyze the financial performance of the company for the years 20Y7 and 20Y8. By examining key financial ratios, we can assess the company's liquidity, solvency, and profitability.
Accounting plays a crucial role in business by providing financial information that helps stakeholders make informed decisions. It provides a structured framework for recording, classifying, summarizing, and interpreting financial transactions