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Unit 6 Analysis of Company Reports

Unit 6 Analysis of Company Reports - BFA103 FINANCIAL...

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BFA103 FINANCIAL ACCOUNTING AND DECISION MAKING TUTOR NOTES Unit 6 – Analysis and Interpretation of Financial Statements Suggested Solutions Discussion Questions 6.18 Sometimes overly simplistic answers are given to questions of this nature. Stakeholders will generally be interested in the different aspects of financial performance or position but may emphasis one over the others. Resource Providers - Current shareholders - Prospective shareholders - Lenders - Suppliers of goods or services - Employees and prospective employees Recipients of Goods and Services Customers Reviewers - Auditors - Taxation authorities - Industry regulators - Unions - Environmentalists - Community groups - Other special interest groups The particular aspects of the business that they will be interested in include: - Compliance with regulations, standards, norms and expectations. - Financial performance - Liquidity - Solvency or financial stability - Efficiency 6.20 Three possible reasons for a high inventory turnover period are: (i) poor inventory controls leading to excessive investment in inventory; (ii) inventory hoarding in anticipation of price rises or shortages; (iii) inventory building in anticipation of increased future sales. A low inventory turnover period may be due to: F ACULTY OF B USINESS UNIVERSITY OF TASMANIA 31
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BFA103 FINANCIAL ACCOUNTING AND DECISION MAKING TUTOR NOTES (i) tight inventory controls, thereby reducing excessive investment in inventory and/or the amount of obsolete and slow moving inventory; ii (ii) an inability to finance the required amount of inventory to meet sales demand; (iii) a difference in the mix of inventory carried by similar businesses (e.g. greater investment in perishable goods which are held for a short period only). 6.21 (a) Liquidity is being assessed. (b) The main difference in the calculation of the two ratios being the exclusion of inventories from the numerator in the ‘quick’ ratio calculation. So it seems that this exclusion has caused the change in the comparative results. Inventory would appear to be relatively higher in this firm then in other firms within the industry. (c) In resolving the possible conflict we could consider other liquidity ratios (eg cash ratio), or review the efficiency ratios for the major non-cash components of working capital (debtors; inventory; creditors) to assess how quickly they turnover. If
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  • Spring '10
  • Allen
  • Financial Ratio, Generally Accepted Accounting Principles, gross profit margin, Inventory turnover period, BUSINESS UNIVERSITY OF TASMANIA

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