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The Jumbo Group: Basic Ratio Analysis, limitations of ratios

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Financial Statement Analysis

Briefing Note Financial Statements - JUMBO GROUP

The JUMBO GROUP has traded successfully for a number of years.. The Finance Department of ABC is preparing draft financial statements for the year ended 31st December 2009 for review by the company's Board of Directors. The draft financial statements, including comparatives, are shown in Appendix A. The Finance Director expects the Board to focus upon ABC's financial performance and has asked you to prepare a briefing note containing the information that will be required:


Prepare a briefing note for the Finance Director of JUMBO GROUP that includes:

1. Calculation of following Ratios
a. Working Capital
b. Current and Quick Ratio
c. No of days Payable
d. No of days receivable.

- A short discussion of other factors that have impacted the JUMBO GROUP's funding and liquidity position
- Three limitations of ratio analysis that could be relevant in JUMBO GROUP's situation.

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Solution Summary

The answer includes the calculation of the ratios along with the brief details regarding the factors which have impacted the funding and liquidity position of the company and the limitations of ratio analysis.

Solution provided by:
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
Recent Feedback
  • "I got this feedback and I wanted to know if you can explain it to me. I noticed something within your workings which I believe is incorrect.  It looks like you've mistaken the Debt ratio for the Equity Multiplier.  You've done a calculation to determine Return on Equity (ROE) but if you take a look at the ratios provided for us you'll see ROE listed on the bottom line already.  You can use ROE, Profit Margin and Total Asset Turnover to figure out the Equity Multiplier amount.  Equity multiplier is not provided for us and we need to calculate it.  I really hope this is helpful to you.  "
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