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Analysis and Interpretation of Financial Statements

Q1

Some limitations of financial statements are the level of dependence on financial statements, this perspective changes to historical prices.

The second limitation is based on the effect on inflation that are though reflected in the financial statements but are not elaborated. the yearly comparison is based on this inflation as well so horizontal analysis of the financial statements is not possible.

Another limitation is that the intangible assets are not recorded and this undermines the asset side and the equity proportion as well.

The Real solution to these problems is the efficient display of characteristic in terms of intangible assets and the information that is available to the prospective readers of those statements. To view inflation a second copy on consolidation should be made that would remove the effects of inflation from the whole scenario.

Q2

2014 2015
a i Net Profit Margin 15.00% 6.67%
ii ROE 15.00% 8.33%
iii Current Ratio 7.00 5.00
iv Acid Test Ratio 5 1.67
v Gearing ratio 10 3.43
vi Inventory Turnover Period 168 191

b

  1. The Profitability of the company is decreasing; this indicates a downward trend for the organization
  2. the Short term liquidity for the company is also decreasing highlighting a decrease in the trend for solvency
  3. the gearing ratio is decreasing and the inventory period is increasing indicating a downward trend for the organization

Q3

  1. Efficiency is the lowering of costs and effectiveness is successfully completing all the goals that are assigned. In whole efficiency is cost cutting and efficiency is meeting targets.
  2. Liquidity is short term and solvency is long term. Overall liquidity covers short term transfer of funds and Solvency is long term fluency of the funds of the company. The Short Term determines the ability to pay back current liabilities and solvency is the ability that covers long term debt coverage.
  3. Horizontal Analysis observes the company’s analysis as compared to its past performance and vertical analysis denotes comparison to its sales in the income statement and to the total assets in the balance sheet
  4. Return on assets and return on capital employed differ in form of their denominator. The first the involves division by total assets and the latter excludes current assets.

Q4.

This is not a good idea as it encompasses a huge liability that centers a self-funded business and adding insult to injury, this has a fixed interest rate. This rate does not fluctuate with the official changes in bank rate.

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