...THE LIMITATIONS OF FINANCIAL RATIOS Joseph Faello, Mississippi State University ABSTRACT The purpose of this paper is to provide financial statement users and accounting academics with some useful insights when working with financial ratios. Initially, the uses and benefits of financial ratios and the limitations of using financial ratios are discussed from the financial statement users’ and accounting academics’ perspectives. Then, practical advice is provided to both financial statement users and accounting academics alike to mitigate the limitations of using financial ratios. Financial statement users and accounting academics will find the issues discussed in this paper useful in their work with financial ratios. Keywords: Financial ratios, Comparability, Homoscedasticity, Outliers INTRODUCTION Financial ratios play an important role in the analysis of financial statements and accounting research. However, the use of financial ratios comes with its hazards. Both accounting academics and financial statements’ users need to understand the problems and limitations in working with financial ratios. The purpose of this paper is to address these issues and to provide guidance on how to mitigate the problems surrounding financial ratios. Both accounting academics and financial statement users will find this study useful in their dealings with financial ratios. The study is organized as follows: 1. 2. 3. 4. Uses and benefits of financial ratios; Limitations...
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...+1 918 809 7378 Tel: +1 214 840 1066 Summary of Experience and Qualifications Over one year of Consulting experiece Primarily in the Financial Services Industry in the area of Mortgage Banking, and in the Retail Industry in the are of Finance Transformation – Close Consolidation for one of the largest retailer in the world. Prior to which, I have had nine years of combined industry and public accounting experience. Prior industry experience includes six years in Financial Services in areas of Consumer Banking and Wealth Management. Public accounting experience in audit in variety of industries, including Financial Services, Health Care and Not-For-Profit. Excellent work ethic detailed oriented, positive attitude, client service oriented, quick learner and self-motivated. Deloitte Experience Industry: Financial Services – Banking: Consulting Service Line: Finance Senior Consultant; October 2012 to Current. 2,652 Billion (Assets) Global Financial Services Corporation. Deloitte was hired to help one of the world’s largest banking and financial services organizations divest and outsource the servicing of a $50 billion loan portfolio. Deloitte help identify and create all relevant documents and contract content required and necessary for the transaction. Role: Responsible for: Gethering information, creating data and developing content for key contract exhibits. Organized and held meetings with key Senior Management of the Organization. Worked closely...
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...METHODS OF FINANCIAL ANALYSIS Dorothy E Vincent-Greene ACC 281 Accounting Concepts for Health Care Professionals Professor James Bell 26 MAY 2014 The process of restating and summarizing data by establishing ratios and trends is known as a financial analysis. The financial statement analysis is the process of examining and identifying the relationships among financial statement elements and making comparisons with relevant information. The analysis is a powerful tool used by a variety of people like creditors, investors, and managers, etc. who all have different reasons for learning about the financial circumstances of an organization (Financial Statement Analysis, 2014). There are a variety of tools that can be used to evaluate the financial statements data. The three most commonly used tools are the ratio analysis, horizontal analysis, and vertical analysis. In this paper I plan to evaluate these three methods and discuss how the financial information is used to make certain business decisions, while giving an example that may be seen in the health care arena. The ratio analysis is a method of analyzing data to determine the overall financial strength of a business. The broad method by which the financial data is converted into simple mathematic ratios for comparison makes it easy very user friendly. An advantage to this method is that it can be used by anyone with access to organizations public financial statements since the data is widely available. Calculations...
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...Analytical Procedures – A Powerful Tool for Auditors (Relevant to Paper 8 – Principles of Auditing and Management Information Systems) David Chow FCCA, FCPA, CPA (Practising) Audit tests Auditors normally carry out the following types of audit tests to determine whether financial statements are fairly stated: (i) procedures to obtain an understanding of internal control (ii) tests of controls (iii) substantive tests: • substantive tests of transactions; • analytical procedures; and • tests of details of balances. assessment of risks of material misstatement at the assertion level includes an expectation that controls are operating effectively. This means that auditors perform tests of controls only when: (i) a system exists; and (ii) the system has controls. The performance of tests of controls is to establish whether those controls in the systems are actually functioning properly and effectively so that the auditors can determine whether or not they can rely upon the controls. Substantive tests Substantive tests (also known as substantive procedures) are procedures designed to test for dollar errors or irregularities directly affecting the correctness of financial statement balances. Auditors perform substantive tests in an audit to detect material misstatement at the assertion level. Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger. Analytical procedures...
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...Audit Week 2: Financial Statement Audits, Financial Statement Assertions and Audit Evidence Financial Statement Audit * A systematic process of objectively obtaining and evaluating evidence regarding assertions about the economic actions and events to ascertain the degree of correspondence between assertions and established criteria * Purpose: To enhance the degree of confidence of intended users in the financial statements by the expression of an opinion by the auditor Overall Objectives of the Auditor: * To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material aspects, in accordance with an applicable financial reporting framework * To report on the financial statements and communicate in accordance with the auditor’s findings Audit Process Overview: * Step 1: Client Acceptance and Retention * Step 2: Risk Assessment (Through understanding client business environment and operations Assess risks of material misstatement Assess Audit Risk) * Step 3: Audit Procedures Planning * Step 4: Test of controls (IF reliance on controls) * Step 5: Perform substantive tests * Step 6: Audit Completion and Reporting Financial Statement Assertions: * Assertions are representations made by management, explicit or otherwise, that are embodied in...
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...Ratio and Financial Statements Analysis Kimberly Y. Gruber University of Maryland University College Dr. Sunando Sengupta 07/25/2013 Turnitin Score: 23% Executive Summary The purpose of this paper is to examine ratio and financial statement analysis. Such analysis is a useful tool for managers and stakeholders to evaluate a company’s financial health in order to identify opportunities for growth and areas of weakness so as to institute corrective measures. Financial statements are used in order to predict trends of cash flow within the business as well as predict the potential of a business and if they are capable of financial growth. Ratio analysis examines the probability of a company’s profit or a company’s loss. This paper will examine the benefits and limitations of ratio analysis, explain what factors impact the meaningfulness of such measures and what new practices or theories may be emerging regarding the application of ratio and financial statement. The paper concludes that ratio and financial statements is an essential tool used in analyzing a company’s profit. Introduction to Ratio and Financial Statement Analysis Though there are various methods for monitoring the liquidity of businesses the most common has been the use of financial ratios. Ratio analysis is an established technique—involving the relationship between two or more variables--that is used to conduct qualitative analysis of information contained in a company’s financial statement to evaluate...
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...ACCT 497 summer 2014 50 points Due Monday at the beginning of class Assignment Read the case “The Leslie Fay Companies” from your audit case book. Go BACK in time and assume that your firm, Christensen & Hoffman CPAs, has assigned you to be the audit in-charge (senior) for the upcoming 1991audit of Leslie Fay. You are responsible for reporting any concerns you may have to the engagement partner, Nick Hoffman. 1. Prepare common-sized financial statements for Leslie Fay for the period 1987-1991. For that same period, compute for Leslie Fay the ratios shown in Exhibit 2. Given these data, which financial items do you suggest should be of particular interest during your 1991 audit of Leslie Fay? EXPLAIN and SUPPORT your answer. As part of your comments addressing this topic, you should include all RELEVANT numbers coming from the financial statements and ratios within your answer. (There is a template directly below this assignment in Blackboard that you should use to create your common-sized financial statements and ratio computations. This should save you lots of time.) Please include a printed set of your completed templates behind your written answers when you turn this in on Monday. I expect these to look professional. You need to keep the entire financial statement on one page. (Don’t have ½ of the income statement on one page and the other ½ on another page. You would never turn something like this into your boss.) 2. Provide and explain the nonfinancial...
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...the conduct of an audit in accordance with Philippine Standards on Auditing” “The auditor should plan and perform an audit with professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated.” * Overall Strategy * Audit plan Preliminary Audit Engagement 1. Perform procedures regarding the continuance of the client relationship and the specific audit engagement 2. Evaluate compliance with ethical requirements, including independence. 3. Establish an understanding of the term of engagement. Benefits of Audit Planning 1. It helps ensure that appropriate attention is devoted to important areas of the audit. 2. It aids in identifying potential problems and resolving them on a timely basis. 3. It helps ensure that the audit is properly organized, managed and performed in an effective and efficient manner. 4. It assists in the proper assignment and review of the work of the engagement team members. 5. It helps coordinate the work to be done by auditors of components and other parties involved such as experts, specialists, etc. The Overall Audit Strategy sets the Scope, Timing & Direction of the Audit SCOPE 1. The financial reporting framework 2. Industry specific reporting requirements, and 3. The locations of the components of the entity. TIMING 1. Deadlines for interim and final reporting, and 2. Key dates for expected communications with management...
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... a. “Analytical procedures are an important part of the audit process and consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. Analytical procedures range from simple comparisons to the use of complex models involving many relationships and elements of data. A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Particular conditions that can cause variations in these relationships include, for example, specific unusual transactions or events, accounting changes, business changes, random fluctuations, or misstatements (Public Company Accounting Oversight Board, AS 2305.02).” b. “Analytical procedures are used as a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions. In some cases, analytical procedures can be more effective or efficient than tests of details for achieving particular substantive testing objectives (PCAOB, AS 2305.04).” c. “Analytical procedures involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. The auditor develops such expectations by identifying and using plausible relationships that are reasonably expected to exist based on...
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...analysis. The use of multiple sets of data for comparison to detect trends is comparative analysis. Comparative analysis demonstrates trends within an organization. With continued use, Comparative analysis can identify diminishing trends through the use of quarterly data analysis. Ratio analysis also helps to establish trends, and make financial comparisons that assist management in making healthy financial decisions. Also, ratio analysis identifies strengths and weaknesses within an organization that allows management to make strategic decisions that benefit the success of the operation. According to Wiley (2013), “Information from financial statements can be gathered by examining relationships between items on the statements and identifying trends in these relationships” (Chapter 13). The relationships are numerically expressed in percentages or ratios, then trends can be recognized with a comparative analysis. With comparative analysis, the exact same data is provided for two or more different periods so similar data can be compared. Ratio analysis only provides a glimpse, due to the analysis being for a single given period. With comparative analysis a company can determine whether a trend is diminishing or growing from year to year and by what proportion. According to Lohrey (2015), “Comparative analysis is the item by item comparison of two or more comparable products, processes, alternatives, systems, sets of data, or qualifications” (Comparative Analysis)...
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...Appendices, Exhibits, etc) Chapter 1 The Problem and Its Background a) Introduction The researcher cites the relevance and the importance of the study in term of its existence. The researcher likewise mention theories or concepts linked with his/her present study in relation to the total industry setting where it belongs and how it helped them to overcome problems of the firm. The introductory chapter will have the background of the problems to give the reader a bird’s eye view of the study. b) Background of the Study This section discusses the research environment (locate) under study stating briefly the history of the company. It contains concise situational analysis of the past, present and the future outlook of the company. It discusses the thorough analysis of the organization problems and how the company will solve them. There are case papers which include: c) Scope and Limitation of the Study This includes the coverage of the study, the participants, the issues and constraints that have direct bearing on the case study. d) Significance of the Study This section presents the importance of the study from its intended beneficiaries. The researcher should prove that study has important contribution to the above beneficiaries. e) Definition of Terms Relevant key terms must be defined in scholarly manner. It will help the...
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...observes and calculates the actual costs of a company’s operations. It is the process of identifying, measuring, analyzing, interpreting, and communicating information in the pursuit of a company’s business goals. “ Farlex Financial Dictionary. (2012). Retrieved from: financial-dictionary.thefreedictionary.com/Managerial+Accounting Managerial accountants provide information to managers within a company. The managers then use the information to make decisions, prepare external reports, and budgets. They make decisions by analyzing the statements to evaluate performance and control costs in the most efficient way possible to meet the company’s goal. Managerial accountants must have a bachelor’s degree, in some places a master’s degree, and in some states be a CPA. Once a person becomes a managerial accountant they can work in an office or from home depending on the employer. With the rise in globalization, the need for managerial accountants familiar with international finance is also on the rise. Managerial accounting should not be confused with financial accounting as there are many differences between the two, outlined in the following table: Financial Accounting Managerial Accounting Must be accurate and timely Usually approximate but relevant & flexible Is compulsory under company law Except for few industries, it is not mandatory Provides data for external users Provides data for internal users Subject to GAAP No rules and regulations to be followed Relates...
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... 21 - 23 References and Bibliography: 24 - 25 Environmental Management Accounting (EMA) versus Environmental Financial Accounting (EFA): If so, what is the significance of knowing the better accounting method to use when identifying environmental cost? It has become indispensable for companies to increase their responsibility regarding all facets of the environment and to acclimatize existing practices to cause limited environmental impairment; more especially at this present time when stakeholders linger ‘bitterly’ about how corporate failure have influence organization’s environmental performance and measurement issues. Yoking this emergent obligation within the corporate sector is consequently a strategic component in any strategy for accomplishing the goal of sustainable development; and evaluating the viability of such a strategy requires both the resolution of scientific and manufacturing problems; and also the attention of how organization’s account for environmental cost to demonstrate their corporate social responsibilities. The Environmental Management Accounting (EMA) and the Environmental Financial Accounting (EFA) are the two mainstream accounting approaches that have allowed an upsurge in the demand for relevant information to augment...
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...To: Professor Ainsworth From: Kevin Cassidy Re: ABRY Partners V, L.P. v. F & W Acquisition LLC Background The ABRY case brought forth the circumstances in which a seller may contractually protect itself in a purchase agreement from claims by a buyer for rescission and post-closing damages due to intentional misrepresentations concerning the business or assets being sold. F & W Publications (F&W) is the operating company whose ownership was the key asset effectively sold in the Stock Purchase Agreement. F&W was a publishing company that published special interest magazines and books both in the United States and internationally. Providence Equity Partners (Seller) is a sophisticated private equity firm that specializes in communications and media companies and is the owner of F&W. ABRY Partners (Buyer) is a sophisticated media-focused private equity firm that currently owns several media companies throughout the United States. In the ABRY Partners case, Buyer attempted to rescind, several months after the closing, its $500 million purchase of F&W from Seller. Shortly following the transaction’s closing, Buyer began to identify a number of serious financial and operational problems that let Buyer to conclude that it had been defrauded by the Seller and F&W. Buyer alleged that Seller and F&W’s management manipulated F&W’s financial statements in order to fraudulently induce Buyer to purchase F&W’s at an excessive price. Buyer...
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...Final Business Model and Strategic Plan BUS475 Final Business Model and Strategic Plan A company that has a clear vision and mission statement is setup to be successful. The mission of Magellan Health is to provide its customer’s with greater insights into their health, while keeping healthcare affordable, and returning value to its shareholders. Those are three very different goals. What may benefit their customers may not benefit their shareholders. Additionally by keeping costs lost their institutional plan members may benefit but at the expense of the patients or physicians. This paper will outline the various steps Magellan will take to deliver on all three of these principles. Target Outcomes and Measuring Results The most obvious thing a business can do to be successful is to maintain its profitability. Without turning a profit and maintaining cash flow the business would be forced to close its doors. Therefore, financial objectives are one of the most important considerations. With the recent passage of the Affordable Care Act, an insurer can no longer deny coverage for pre-existing conditions. Additionally all members of the public are required to be insured by 2014 as there are penalties for, not purchasing health insurance. This influx of new additional clients has created a boon for the healthcare industry, (La Monica 2015), insurance companies will face rising costs as more people join plans with pre-existing conditions. To ensure that the risks associated...
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