Financial Accounting For Dummies Hoboken Essay

Question:

Discuss About The Financial Accounting For Dummies Hoboken?

Answer:

Introducation

The liquidity position of the company can be evaluated with the help of current ratios and the quick ratio. The current ratio of the company can be defined as the ability of the company to meet its short term obligations with the help of current asset. The favourable current ratio is usually 2. The current ratio of the industry is 2 that shows that the industry overall has a good liquidity position (Loughran, 2011). In the year 2014, the gelato industries are 1.84 which is not bad but it will be good if it rises in future. Another measure of liquidity is quick ratio, this ratio is more reliable than the current ratio as it excludes the amount of inventories because inventories cannot be easily converted into cash. The quick ratio in the year of 2014 was almost equal to the ratio of industry standards which is good. The quick ratio of the company is 0.78 in the year 2014 whereas of the industry is 0.8.

Profit earning is the primary aim of running a business (Harrison, Horngren & Thomas, n.d.). A profitability ratio includes the operating margin ratio, return on asset ratio as well as return on equity ratio. Normally, as per the industry standards the profitability is 10% but Gelato industries earn a profit of 40% which shows its efficiency and excellent financial performance. The return on asset ratio is calculated by dividing the net income by the total assets (Libby, Libby & Hodge, n.d.). This ratio is calculated in order to determine the ratio of net income that has been earned on investing in the assets of the company. The return on asset ratio of the industry is 11.4% but on comparing we see that the ratio of the company is only 6% which shows the inefficiency of the company to use its assets. The company is unable to make maximum utilisation of its resources (Weygandt, Kieso & Kimmel, n.d.). The total asset turnover ratio was better when compared to the industry standards. However, it also increased from 2014 and 2015.

The capital structure of a company usually comprises of debt and equity. A company with high debt ratio is considered to be in a great risk as there lies a risk of insolvency. The debt ratio according to the industry standards was 58% but in the year 2014 it was low as 51% but it increased drastically in the year 2015 to 60% which is considered very bad for the financial position of the company. A company is in a very dangerous situation as there lies doubt of its survival (Ittelson, 2009).

The efficiency of the management in using its assets is called the asset management efficiency ratio (Warren., 2015). In this question we have computed some ratios of this category namely, asset turnover ratio, inventory turnover ratio and fixed asset turnover ratio. Higher the ratio better it is. Therefore, on comparing it is seen that the fixed turnover ratio is increasing over the years and it is also higher when compared to the industry standards. The inventory turnover ratio is a kind of efficiency ratio which shows the efficiency in managing the inventories on comparing the cost of goods sold over a period with the average inventory .

Earnings per share

Net income

22884

Number of shares outstanding

5000

Earnings per share

4.58

Note: it has been observed that there was no dividend distribution to the shareholders.

Price earnings ratio

Market value per share

15

Earnings per share

4.58

Price earnings ratio

3.28

Market to book value ratio

Market value

75000

Book value

75465

Market to book value ratio

0.99

Note: Market value= Number of shares outstanding* Market value of each share.

Book value of 2015= Total asset – Total liabilities.

The number of shares outstanding which is 5000 and the market value of $ 15 is mentioned in the questions.

From the above computation of ratios and properly analysing them, it has been found out the company has an excellent financial performance over the year and it has been able to use all its resources in an optimum and best possible manner. This can be examined with the help of various efficiency ratios. The financial position of the company is based on the capital structure is not very good because of the presence of high proportion of debt in the capital structure (Piper, 2015). The company is also not being able to maintain a proper liquidity position. Therefore, it has become difficult for the company to pay off its short term obligations. This may be caused due to some flaws in the financial planning of the company. The company is meeting up standards of the industry the only areas where it is left behind is the debt ratio and the liquidity position. If the company makes required changes in these two areas, then the company will have a bright future with growing profits and market (Hart, Wilson & Keers, 2001).

These words “Accounting is a language of business and you have to learn it like a language...to be successful in business, you have to understand the underlying financial values of the business” was spoken by Warren buffet who is considered as one of the greatest investors (Berry & Jarvis, 2007).

He made the world understand the significance of the accounting procedure and how it can be used before taking an investment decision. He spread a message that great companies exists to make great investments. He taught people how to identify the great companies present in the market and developed the sense of reading financial statements. An investor can take correct decisions when he knows how to analyse and compare the financial values that are mentioned in the income statement, balance sheet and cash flow statement of a company.

An investor before taking an investment decision is keen to know the degree of risk that he has to take. Therefore, it is important for us to know and analyse that whether the company is capable enough of paying off its debt or not (Izhar & Hontoir, 2001).

In short, Warren buffet has taught people to take their investment decisions wisely and in a logical manner as there lies risk if we invest in any random company without the knowledge of its financial performance and financial position.

References

Berry, A., & Jarvis, R. (2007). Accounting in a business context. London: Thomson Learning.

Harrison, W., Horngren, C., & Thomas, C. Financial accounting.

Hart, J., Wilson, C., & Keers, B. (2001). Budgeting principles. Frenchs Forest, N.S.W.: Prentice Hall/Pearson Education Australia.

Ittelson, T. (2009). Financial statements. Franklin Lakes, NJ: Career Press.

Izhar, R., & Hontoir, J. (2001). Accounting, costing, and management. Oxford: Oxford University Press.

Libby, R., Libby, P., & Hodge, F. Financial accounting.

Loughran, M. (2011). Financial accounting for dummies. Hoboken (NJ): Wiley.

Piper, M. (2015). Accounting made simple. [United States]: [CreateSpace Pub.].

Warren. (2015). Financial Accounting. Cengage Learning.

Weygandt, J., Kieso, D., & Kimmel, P. Financial accounting.

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