I need help with an assignment, "The Tools and Methodologies Used to Support Financial Decision Making"
Accounting is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. It is also used to help management to know the performance of organization. Moreover financial statements are useful tools for evaluating both profitability and liquidity. Used separately, or in combination, the income statement and balance sheet help interested parties to measure a company's current financial performance, and to forecast its profit and cash flow potential.
Techniques employed by the firm
Some of the techniques which are employed by them are Ratio analysis, Divisional Income statement, Intra firm analysis (Incremental analysis and percentage change analysis).
Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In other words it helps in inter firm and intra firm comparison.
They have used return on investment ratio which is a very important ratio. It helps in measure of how profitably the assets have been employed.
They have also done Intra firm analysis in form of Horizontal analysis. It is conducted by setting consecutive balance sheet, income statement or statement of cash flow side-by-side and reviewing changes in individual categories on a year-to-year or multiyear basis. The most important item revealed by comparative financial statement analysis is trend.
A comparison of statements over several years reveals direction, speed and extent of a trend(s).
The divisional income statement reveals the profitability, revenue and cost of the Bell Division. Further one can also analyze the direct costs and corporate charges.
Various key ratios are:
Try to measure how profitable the firm is. Note that their success in this endeavor depends on how accurately the financial statements reflect reality.
Gross Margin Percentage.
The gross margin percentage is defined to be the gross margin as a percentage of sales revenue.
It indicates the operational efficiency. The gross margin percentage can be expected to improve as sales increase. This occurs because fixed manufacturing costs are spread across more units.
Profit Margin on Sales = Net Income available to Common Shareholders / Sales
It indicates the overall efficiency of the business.
Liquidity ratios measure the ability of a firm to satisfy obligations due in the near future, usually within the next year.
The Current Ratio = Current Liabilities / Current Assets
A current ratio of less than 1:1 is usually unacceptable since in that case current liabilities would exceed current assets?a warning that there may soon be a cash flow problem. A general rule of thumb calls for a current ratio of 2:1. Its liquidity is adequate as its ratio is more than 2:1. Thus this ratio is important for the creditor.
Debt-to-Equity Ratio. Long-term creditors would like a reasonable balance between the capital provided by creditors and the capital provided by stockholders. Creditors would like the debt-to-equity ratio to be ...
This discusses the Tools and Methodologies Used to Support Financial Decision Making