Introduction to Ratio and Finance Statement - Essay Example

Introduction to Ratio and finance statement analysis

A Ratio is considered to be a means in which various organizations across the globe express the existing relationship between one accounting outcomes with another, with a primary intention of providing a useful comparison. The studies indicate that accounting ratios employed by the firms assist the company managers in measuring the efficiency as well as the profitability of that particular company basing on its current financial reports. Therefore, accounting ratios are considered to form the basis of the fundamental strategy of analyzing company returns.

In this case, the study is going to feature into various merits as well as demerits that a company will attain as a result of employing ratios in comparison of its various activities. However, despite being one of the key aspect financial analyses, he studies indicate that effective computation of ratios in an organization needs specific knowledge and expertise to ensure effectiveness and efficiency of this service in a financial analysis as well as in the comparison to various operations conducted in a particular organization.

In the recent years, there has been the problem in determining the profit margin, and the trading loss within a company the process several means are a device to cater and to address the same issues; that affects the firm, smooth running and its activities. These measures include the use of ration analysis and financial statement of the past few years, and the future trend can be well drawn from it. Despite the ration index analysis and financials, the statement is claimed to have some of the drawbacks; it has more advantages in determining the future and profit sustainability of firms, the efficiency and smooth running of the company.

Ratio analysis is the interpretation and quotation of exact figure that appears in the financial statement, such as the fund flow statement, the balance sheet, and profit and loss account as well. The comparison of such figures against one another make it easy for the stakeholders, the creditors and investors to get comprehensive and elaborate financial statement that will help them in the decision-making process. The ration analysis entails four major steps, ranging from the collection of relevant account data from the same financial statement, construction of related accounting figures, getting the average ratio of the one firm and relate it to the competitors, after which valid conclusion would be drawn from it.

Ratio analysis plays a key role especially in determining the numerical relationship between the two figures of the financial statement, to find out the weakness and strength of the certain company and tend to compared it with the performance of another company that is doing better in profit generation and efficiency together with its current financial position and its past performance (Fridson & Alvarez, 2002). The resultant effect creates major principle advantages among them which include;

To forecast and to plan for future success of a company; this come in different dimensions such as the trends in the sales, the cost, loss and profit margin can be easily be determined; by computation of ratios of accounting figures of the sequential years, and hence help in useful for predicting planning for the firm's business activities.

Ratio analysis plays a key role in financial budgeting, future activities on the basis of the past trend and experience. The accounting ratio helps especially in the process of estimating future budgets, for instance, sales budget may be prepared in accordance with the analysis of the past sales. In addition ratio analysis help in the process of measuring the operation efficiency, in this case, indicates the efficiency of the management and utilization of the same assets. Ratio analysis helps in the process of determining the current position and the progress made by business with regard to other parties.

Ratio analysis is used in the inter-firm comparison; hats are the performance of two competitive firms can be can be compared, majorly for the purpose of revealing the efficiency and inefficiency in the firm, which makes if it's easily for inefficiency firm to adopt suitable measure by the efficiency company in the process of improving their efficiency. This process of inter-firm comparisons is arrived at by comparing the relevant ratios of organization with the average ratios of the industry.

Ration analysis and financial statement help in the process of indication of liquidity positions;assessing the liquid positions-the short-term remission ability of debt by the firm to play; this help in the credit analysis by the respective banks, hire creditors and other stakeholders in the process of short-term loans. Ration analysis also a major role in the indicating of long-term solvency position: it is the process of determining and assessing the long term of debt paying capacity of a company. The long-term position of a firm that has borrowed the loan is of great concern to the long term creditors, security analysis and the potential owners of the business. This long term capacity is determined by getting average capital structure and the profitability ratio that indicates the operating efficiency and the earning power of the owner and the respective firm. In regard to ration analysis, both strength and weakness of firm can be determined.

Ratio analysis helps in the indication of overall profitability within a certain company; to determine the firm has the ability to meet is short term and long term obligations to their respective creditors. This process is made easier if all the factors concerning the ratio analysis are well catered for.

Ration analysis its weakness among which can easily make it lose its sight before the process of determining the efficiency of computation of the financial analysis. Some of its limitation include things to deal with financial statements. Ratios are major accrued from the computation of information recorded in the financial statement .The quality analysis is greatly affected it may face difficulties, due to a number of limitation that financial statement my experience. In addition, the financial statement may tend to provide historical information, may not reflect the current position and the conditions of a firm, and hence has no impact in predicting the future.

Ration analysis lacks clear and standard of comparisons, whereby no fixed standards can be laid down for the ideal ratio. For instance, the present is claimed to be ideal if the current assets are twice the current liabilities. This assumption is not valid if those concerns that have adequate arrangements with their respective banks for the purpose of financial provisions, with the require, it may be perfectly ideal of the current assets are equal slightly to more than the current liabilities.

For decades now there has been the emerging of the top competitive companies in the world, which produce the same goods, that is the Coca-Cola Company and the Pepsi cola company. They companies ingredients are what make the apparent disparities, to outdo the other one, that is the addictive such the caffeine and the regarding the demand of the consumers. In addition, the same companies have quite a unique feature that is the entities that make it differ in large extent, the bolting of mineral water, juice, and soft drinks.

In relation to ratio and financial data obtained from the two companies in the year 2010 and 2011, it is easy to determine and verify the financial differences between the two companies, especially when both criteria are put in place, that is the vertical and the horizontal financial analysis.

In ratio analysis concerning g the two companies, the PepsiCola and the Coca-Cola company, it if found out the Coca-Cola firm is making huge profits as compared to the Pepsi-Cola company. The profit generation is a result of new innovation and production of other related drinks. The use of ratio analysis and the financial statement, the PepsiCo Cala firm is forced to adopt the new techniques for them to realize huge profit margins. It also gives clears impression of them a level of bankruptcy the company faces in their long run activities.

The PepsiCo ca after adopting the new trend and techniques it’s now exhibiting the great results, such reconstruction of their brands, which has to date accounted for the average percentage of the world’s varietal drinks. This has resulted in stiff completion in the market hence the term cola wars. In addition, the Coca-Cola stands to outshine its quality and profit margins. This is attributed to the increased partnerships with related soft drink companies, which provides them with a larger share of the profits to be from the soft drink company.

In conclusion, different accounting policies in the respective firm have made major restrictions in the use of ratio analysis, since they might result in the distortion of clear comparison of a company. The firm should refrain from practices such as window dressing in their operation of financial analysis and final reporting. Despite the challenges in dealing financial and ratio, it also plays major roles in evaluating the performance and profitability of a firm. The ratio, on the other hand, gives full information about the bankruptcy of that company in the past few years. In ration analysis, and the same financial statement, partnerships have great influence in the huge profit realization, and hence affecting the stock price.

Reference

Fridson, M. & Alvarez, F. (2002). Financial statement analysis. New York: John Wiley & Sons.