Essay on "Financial Analysis Ratios"

r />

Real world scenarios are key in understanding the use and benefit of financial statement and ratio analysis. In an article where the authors examined if and ultimately how expressively the recording of accounting communications in accordance with the Czech accounting legislation did concerning ratios; they wanted to see if the IAS/IFRS was able to alter the results of four chosen financial ratios. These ratios describe main features of fiscal management of the business. The involvement of the authors consisted of generating an at the time, unpublished model confirming the existing differences between IAS/IFRS and the Czech accounting legislation. "These differences influence the amounts of items that are disclosed in financial statements especially in the balance sheet and income statement. Dissimilarities in input data have caused different results of the four selected financial ratios" (Malikova & Brabec, 2012, p. 162).

When looking at the rest of the article, the highest difference the authors detected was through return on capital-employed ratio as well as through debt ratio. Whereas the outcomes of asset turnover ratio plus acid test ratio were not shown to illicit significant differences. This may be caused chiefly through selection of the defined accounting transactions. These transactions may have predetermined especially the quantity of operating profit also the arrangement of liabilities and equities, while the variances in preliminary measurement of resources did not show significance. "In the case of asset turnover and acid test ratio the own construction of the ratio diminish the differences because separation of interest influence both parts of the fraction" (Malikova & Brabec, 2012, p. 162).

Ultimately, ratios represent a much larger aspect of a business then people expect. Analysis of such ratios determines many outcomes. It also enables information retrieval and higher accuracy.

The purpose of a 2012 study was to deliver financial ratios' maximum and minimum values that businesses used in the 2006-2010 decision-making process. The study continues by explaining ratio analysis in terms of only one output and input. Furthermore, the author's states ratios can be paralleled separately. When the study assessed several businesses' financial performance, one of the approaches they utilized for comparing was Decision Making Units or DMUs, Data Envelopment Analysis or DEA. Ratio analysis and DEA when used in conjunction, support each other considerably.

Accepting some of the ratios as both inputs and outputs, the authors determined financial interim efficiency assessments. "Y-lmaz ve C-rac? (2004), Kavakl-dere ve Karg-n (2004), Y-ld-z (2005), are examples to studies of performance in cement sector in Turkey. In all of these studies, classical DEA models are used. Analyses are made by average values or for years separately (Ba-kaya & Ozturk 2012, p. 177). This shows other routes of analysis when considering ratio analysis. The authors determined the use of DEA could support the process of ration analysis in a beneficial and more effective manner.

Another article compares the CK paper and demonstrates their models of financial statements are founded on Benninga's deterministic sales driven model. The model projects upcoming sales supposing the continuous growth rate. As the authors explained, the CK study assessed the sales growth degrees using a univariate time trend model. They explain the model through Home Depot Sales.

Our sales model assumes that the continuously compounded annual SALES growth rate (equal to the first difference of the natural logarithm of SALES) depends on a time trend and the consumer sentiment index.

Therefore, the sales model directly or indirectly takes into consideration the three interconnected macroeconomic influences on the Home Depot transactions forecasts.

Conclusion

In conclusion, financial statement and ratio analysis have many facets to examine and discuss. In both theory and real world application, it can be simple and complex. Performing such functions allows for higher accuracy within business financial statements. It also allots companies methodology that is both effective and less time consuming. It promotes a stable and successful business.

Businesses often overlook a lot of the resources used and the processes happening within the financial infrastructure of the company. Close examination of the financial statement and ratios helps eliminate unintended neglect or oversight. It can also be good at forecasting potential bankruptcies. Business do not under any circumstances want to owe more than they make. Keeping continuous evaluations of financial statements helps that. However, one has to understand what ratios are used and what they signify.

References

Ba-kaya, Z., & Ozturk, B.A. (2012). MEASURING FINANCIAL EFFICIENCY OF CEMENT FIRMS LISTED IN ISTANBUL STOCK EXCHANCE VIA FUZZY DATA ENVELOPMENT ANALYSIS. Journal of Accounting & Finance, (54), 175-188.

Cuddington, J.T., & Khindanova, I. (2012). Incorporating Macroeconomic and Firm-Level Uncertainties in Stochastic Pro-Forma Financial Modeling. Journal of Accounting & Finance (2158-3625), 12(3), 24-37.

Daniel, B., & Ionu?, G. (2013). PREDICTION OF CORPORATE BANKRUPTCY IN ROMANIA THROUGH THE USE OF LOGISTIC REGRESSION. Annals of the University Of Oradea, Economic Science Series, 22(1), 976-986.

Gosman, M.L., & Ammons, J.L. (2013). Ratio-Analysis Challenges Resulting from Retailers' Outsourcing of Their Credit-Card Operations. Business Education Innovation Journal, 5(2), 20-22.

Harris, P., Stahlin, W., Arnold, L.W., & Kinkela, K. (2013). GAAP VS. IFRS TREATMENT OF LEASES AND THE IMPACT ON FINANCIAL RATIOS. Global Conference on Business & Finance Proceedings, 8(1), 42-50.

Lim Ji, Y., Noh, W., Oh Seung, E., & Kim Ok, G. (2013). Financial Ratio Analysis for Developing Nursing Management Strategies in University Hospitals. (English). Journal of Korean Academy Of Nursing Administration, 19(1), 7. doi:10.11111/jkana.2013.19.1.7

Malikova, O., & Brabec, Z. (2012). The influence of a different accounting system on informative value of selected financial ratios. Technological & Economic Development of Economy, 18(1), 149-163. doi:10.3846/20294913.2012.661193

Parrino, R. (2012). Fundamentals of Corporate Finance… READ MORE