Financial Reporting Quality Of Investment †Myassignmenthelp.Com

Question: Discuss About The Financial Reporting Quality Of Investment? Answer: Introduction: This assignment has been prepared to discuss that how an analyst should proceed step by step starting from the books of accounts of the company for understanding the financial health of the company(Biddle et al.,2009). Here the analyst first check the raw books of accounts of the company and prepare the journal entries for each financial transactions, then the journal entries are posted to the general leader under the appropriate heads of accounts. After that, the trial balance has been prepared and then profit loss accounts and balance sheets have been created to develop the ratio analysis as the calculated ratios are good indicators of the financial health of the company. The ratios are then analysed to understand the financial health of the company and what are the underlying factors that are contributing to the good or bad financial performance of the company. Results Findings: The profit loss statement of the company defines that the annual turnover of the company is around $158333.55 ; therefore the company is falling in the benchmark turnover group of $150,001 $600,000. Items of calculation Net profit transferred to balance sheet 57980.35 Total Revenue receipt 158333.6 Total Asset 435866 Capital Employed 151156 operating income /EBIT 115627.8 Current Asset 2025.67 Current liability 7538 Ratios Profit margin 37% ROA 13% ROCE 76% Current ratio 27% The profit margin ratio of 37% indicates that the company is capable to save 37% of its sales revenue as a net profit. This indicates good operational efficiency to the part of the company The Return-on-Asset of the company is 13%, which indicates that the company is capable to transform 13% of its asset (that is engaged in to the business) in to revenue generation (Higgins, 2012). The ROCE of the company is 76% which indicates that the operating income or the EBIT [Earnings before Interest Tax dividend] of the company is 76% of the amount of capital employed .This result indicates a crucial fact that there is enough scope to the part of the company to enhance the operational efficiency of the company as most of the revenue earnings of the company has been absorbed in the operational activities of the company. That is why the ratios of ROA ROCE largely differs (Kirklin et al., 2013) The Current ratio of the company is less than 1 , which indicates low liquidity position of the company due to high operational cost. Items $ Total expenses 107694.3 turnover 158333.6 Cost of sales 6265.9 Labor expense 20280 Motor vehicle expenses 2610 Ratios Total expenses/turnover 68% Cost of sales/turnover 4% Labor/turnover 13% Motor vehicle expenses/turnover 2% A comparison with the industry benchmark reveals the fact that the company is making a good performance with respect to the industry benchmarks. The Total expenses/turnover ratio of the company is 68% which is within the industry benchmark of ratio ranges between 65%-80% [for the turnover range of $150,001 $600,000].Again the Cost of sales/turnover ratio is 4% which indicates a better performance with respect to the industry bench- mark as the industry bench mark ratio is between 7%-20%.The labor turnover ratio of the company is at 13% which indicates that the labor regulating efficiency of the company is much better than the industry benchmark as the bench mark range is between 22%-35%. Finally the Motor vehicle expenses/turnover ratio of the company lies at 2% which almost at par to the industry benchmark ratio range of 2%-4%. Discussion: From the above financial report summary it can be seen that the overall financial performance of the company is better in comparison to the industry bench mark. The major investment required by the company for kite surfing business is around $23000 out of which $15000 is required for equipment purchase and $ 8000 is required for course attendance by the employees of the company. So this amount of fund the company Wave rider can collect from the unused available fund of 2343.But opting for this business will mop up the entire extra cash of the company And the nature of the kite surfing business reveals that the business will take time to recover the cost of investment and to generate profit over investment (Uotila et al.,2009). More over Kite surfing business is heavily dependent over the tourists so the income from the business has a high possibility to get affected by the impact of seasonality. So opting for this business will be quite risky for the company even if the company is sh owing better financial performance with respect tom the industry benchmark. On the other hand if we look for the option of 12 seater Van transportation business then it can be seen that the total investment that will be required to initiate this new business is an amount of $ 2200. So the capital investment needed for this option is much lower and the business will be less affected from seasonality. The pace of income generation of this business is much higher than the other option. So if the business is looking for a less risky venture then the company Wave rider should opt for the 12 seater Van transportation business, that will help to earn quick money to the company at low cost Conclusion From the above discussion it can be seen though the company is delivering better financial performance with respect to the industry benchmark, but still the company Wave rider has to improve much in terms of operational efficiency and man agent of current asset by current liability as the current ratio of the company is less than 1.More over due to low operational efficiency the business should opt for a low cost low return business that brings less risk to the company (Beyer et al.,2010). Reference: Beyer, A., Cohen, D. A., Lys, T. Z., Walther, B. R. (2010). The financial reporting environment: Review of the recent literature.Journal of accounting and economics,50(2), 296-343. Biddle, G. C., Hilary, G., Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency?.Journal of accounting and economics,48(2), 112-131. Higgins, R. C. (2012).Analysis for financial management. McGraw-Hill/Irwin. Kirklin, J. K., Naftel, D. C., Kormos, R. L., Stevenson, L. W., Pagani, F. D., Miller, M. A., ... Young, J. B. (2013). Fifth INTERMACS annual report: risk factor analysis from more than 6,000 mechanical circulatory support patients.The Journal of heart and lung transplantation,32(2), 141-156. Uotila, J., Maula, M., Keil, T. and Zahra, S.A., 2009. Exploration, exploitation, and financial performance: analysis of SP 500 corporations.Strategic Management Journal,30(2), pp.221-231.