Interpreting Financial Statement Analysis
Complete a 2-part assessment in which you analyze and compute financial ratios and interpret the results of a multi-year financial ratio analysis.
Smart investors also execute due diligence by performing a bit of financial statement analysis (also known as ratio analysis), where financial statement numbers are used to evaluate three characteristics of an organization’s performance: (1) liquidity, (2) profitability, and (3) solvency. By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
Competency 2: Apply accounting cycle strategies to manage business financial events.
Compute financial ratios using accounting data from financial statements.
Interpret the results of financial ratios.
Interpret trends found in a multi-year financial ratio analysis.
Recommend strategies to improve financial trends
You have reached the end of the organization’s accounting period. The accounting cycle, consisting of recording transactions, transferring to the ledger, and preparing the financial statements, is complete for this calendar or fiscal (an accounting period other than January to December) year. So now, what do you do with all the accounting information that has been gathered? You analyze it, synthesize it, and use it to make decisions concerning the current health of the organization and its future financial direction.
If you were a potential investor (and had some disposable income to burn), you would mostly likely look through the annual reports of various organizations, read the comments of key decision makers, talk to friends and family members, and make an informed decision about which organization deserves your hard-earned money. Or, you could trust Wall Street to advise you on where to invest your money (but remember, they get a cut of your investment dollars as a commission).
The following resources are required to complete the assessment.
Click the links provided to view the following resources:
Assessment 5, Part 1 Template.
Assessment 5, Part 2 Template.
The following optional resources are provided to support you in completing the assessment or to provide a helpful context. For additional resources, refer to the Research Resources and Supplemental Resources in the left navigation menu of your courseroom.
The following e-books or articles from the Capella University Library are linked directly in this course:
Fields, E. (2011). The essentials of finance and accounting for nonfinancial managers (2nd ed.). New York, NY: AMACOM Books.
Chapter 6, “Key Financial Ratios,” is particularly applicable to the assessment.
Course Library Guide
A Capella University library guide has been created specifically for your use in this course. You are encouraged to refer to the resources in the BUS-FP3061 – Fundamentals of Accounting Library Guide to help direct your research.
Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
Accounting Basics for Students. (2013). Retrieved from http://www.accounting-basics-for-students.com/
Bean Counter’s Free Accounting & Bookkeeping Tutorial Site. (n.d.). Retrieved from http://www.dwmbeancounter.com/moodle/
The resources listed below are relevant to the topics and assessments in this course and are not required. Unless noted otherwise, these materials are available for purchase from the Capella University Bookstore. When searching the bookstore, be sure to look for the Course ID with the specific –FP (FlexPath) course designation.
McCrary, S. A. (2010). Mastering financial accounting essentials: The critical nuts and bolts. Hoboken, NJ: Wiley & Sons.
Mullis, D., & Orloff, J. (2008). The accounting game: Basic accounting fresh from the lemonade stand. Naperville, IL: Sourcebooks.
Shim, J. K., & Siegel, J. G. (2010). Dictionary of accounting terms (5th ed.). Hauppauge, NY: Barrons Educational Series
This assessment includes two parts. Use the templates provided as you complete each part. Both of the templates are linked in the Resources under the Required Resources heading. Note that for Part 2 you will use the template for data but will create your own document to submit.
Part 1: Ratio Analysis
Making sense of accounting data on financial statements can be difficult. Thankfully, combining numbers from income statements, balance sheets, and other data provides a starting point to analyze a company’s financial results. You now have the opportunity to demonstrate your prowess by identifying and computing financial ratios.
Using the Assessment 5, Part 1 Template, analyze and compute the necessary financial ratios. The Financial Statements worksheet in the template contains the income statement, balance sheets, and additional information needed. The Ratio Analysis worksheet contains space for your calculations and answers.
Part 2: Interpreting Financial Statement Analysis
What does the calculation of a financial statement ratio represent? How does one year compare to another? Is there a trend to the ratio data? Is the trend positive or negative? What can be done to change the trend? These are some of the questions that can be answered when the ratio data is interpreted. For this part of the assessment, demonstrate your ability to interpret the results of a multi-year financial ratio analysis.
On the Assessment 5, Part 2 Template you will find selected ratios for a company over a two-year period. Compare the ratios, and in a separate document (Word or Excel), submit your answers to the following questions:
What does the calculation of each ratio represent?
How does year one compare with year two, and what trend can be seen when you compare the two years?
Is the trend from year one to year two positive or negative?
What are the possible reasons for the trend?
What recommendations do you have for turning a negative trend to a positive trend?
Submit the completed template for Part 1 and the document you created with answers to the questions for Part 2 for this assessment.
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