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Technical Knowledge of Accounting

Please provide help with the following questions:

SCENARIO:

You and your small group have been asked to create an informative slide presentation to managers, most of whom do not have a technical knowledge of accounting.

QUESTIONS:

1. First, you will discuss key elements with top executives.
2, How will investors assess the stability of our company?
3. What are the key financial ratios that measure the stability of an organization?
4. Define stability.

Objective:
Use financial ratio analysis to assess the stability of an organization.
Use effective communication techniques.

The student should understand why stability of an organization is important and what is meant by 'stability'. The student should also demonstrate an understanding of the key ratios which measure stability.

Solution Preview

Please see response attached, which is presented below as well. I also attached one supporting article. I hope this helps and take care.

1. What is stability?

DEFINITIONS...

"...We have financial stability where there is: (a) monetary stability; (b) employment levels close to the economy's natural rate; (c) confidence in the operation of the generality of key financial institutions and markets in the economy; and (d) where there are no relative price movements of either real or financial assets within the economy that will undermine (a) or (b). Michael Foot (U.K. Financial Services Authority)(1)

"...Monetary stability is defined as stability in the general level of prices, or as an absence of inflation or deflation. Financial stability does not have as easy or universally accepted a definition. Nevertheless, there seems to be a broad consensus that financial stability refers to the smooth functioning of the key elements that make up the financial system or business." Wim Duisenberg (European Central Bank) (1)

Notes:

As anyone who has tried to define stability and financial stability knows, there is as yet no widely accepted model or analytical framework for assessing financial system stability as there is for economic systems and in other disciplines.

This is because the analysis of financial stability is still in its infant stage of development and practice, as compared with-for example-the analysis of monetary and/or macroeconomic stability.

However, even though there is no consensus about how to define stability, financial stability is usually defined in terms of its ability to facilitate and enhance economic processes, manage risks, and absorb shocks.

Moreover, financial stability is considered a continuum: changeable over time and consistent with multiple combinations of the constituent elements of finance. (1)

2. Why is Stability important?

·Allows for the delineation of financial conditions
·Allows for potential difficulties according to their:
oIntensity,
oScope, and
oPotential threat to systemic stability (1)

Notes:

For success: All successful business owners need to constantly evaluate the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. It identifies potential threats to the health of your business, the intensity, scope and the location of the threat e.g., working capital, liquidity, and so on.

To complete a thorough examination of your company's effectiveness, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible. This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking. As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable. (5)

One tool used to evaluate 'Stability' is the Financial Ratio Analysis

3. Financial Ratio Analysis...

Takes Your Fiscal Temperature with Financial Ratios:
·Determines the overall financial condition of your business
·Puts the information from a financial statement into perspective
·Spots financial patterns and threats
·Ratios also used to make comparisons between your business and other businesses in your industry
o For example, comparing ratios can indicate whether a business is holding too much inventory or collecting receivable too slowly. This comparison provides a window into ways in which your business can improve its operations
· Used to calculate 11 key financial ratios (3)

Notes: Financial ratio ...

Solution Summary

This solution discusses key elements with top executives, how investors will assess the stability of our company, the key financial ratios that measure the stability of an organization and defines stability.

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