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  1. Possible limitations of ratio analysis

     

    QUESTION

     

    Instructions

    Question 1

    Identify and explain two possible benefits and two possible limitations of ratio analysis. (Max. 120 words)

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    Question 2

    Describe how pressure exerted on senior management by shareholders and other parties may impact the accuracy of financial statements. (Max. 50 words)

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    Question 3

    Suggest one action management can take to mitigate the risk of fraud occurring when financial statements are being compiled. (Max. 50 words)

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    Question 4

    View the most recent annual report for M&S. This can be found by visiting their website.

    Do you think M&S is performing well as a business? Provide three examples or arguments from the annual report to justify your answer. 

     

 

Subject Business Pages 3 Style APA

Answer

Financial Accounting

Question #1

Advantages

Ratios analysis helps forecast and plan, where the trend in profits, sales, and other factors is determined by computing relevant figures. Besides, the ratios also help in budgeting. It helps in estimating burger figures

Disadvantages

It does not consider the external factors such as global recession. Nonetheless, it does not measure the human element of a firm (Palepu, Healy, Wright, Bradbury & Coulton, 2020). Nonetheless, the information provided in ratios analysis is not current.

Question #2

Pressure from senior management may result to wrongful stating of financial values. Nonetheless, it results to hiding transactions by related parties, and this directly inflates company earnings. Furthermore, it results to window dressing (McNally, Cerbone & Maro, 2017). Window Dressing is a way of overstating the earnings and understating the company expenses. The investors of the company would make moves based on misleading information.

Question #3

            The management should establish and empower a board audit committee to oversee the correctness of financial statements. The committee is the company’s independent body that oversees the integrity of the financial statements (Easton, McAnally, Sommers & Zhang, 2018). The committee’s role in financial matters makes it equally important in determining financial fraud during the compilation of the statements.

 

Question #4

  1. According to the 2020 annual report for M & S, the Company is experiencing losses. The net profit has decreased by 39.51. Thus, the earnings per share have also come down.
  2. The net cash inflow has also reduced compared to the previous year, and this does not paint a good picture of the firm going into the future.
  • The revenue for the previous year was 10377.30, and the revenue for 2020 was 10181.90. This shows a reduction of -1.88%, which is an indication of a significant reduction in net profits and marginal reduction in revenue.

 

 

References

Easton, P. D., McAnally, M. L., Sommers, G. A., & Zhang, X. J. (2018). Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.

McNally, M. A., Cerbone, D., & Maroun, W. (2017). Exploring the challenges of preparing an integrated report. Meditari Accountancy Research.

Palepu, K. G., Healy, P. M., Wright, S., Bradbury, M., & Coulton, J. (2020). Business analysis and valuation: Using financial statements. Cengage AU.

 

 

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