Financial Report Study Guide

intro

The financial report is usually used to assist firm to make a better decision by revealing , comparing, and analysing various of ratios, such as assets efficiency ratio, profitability ratio, market performance ratio, liquidity ratio, and capital suture ratio, etc. Specially, those ratios are always based on the company’s finance statement and financial position, and also give precise informations for showing financial activity. In this following repot, in order to meet the best choice for acquiring business by Best Baker, the Melbourne based accounting/consultancy firm will give an appropriate recommend by using  relative ratio from 2010 to 2014 , and also associating  with natural character of company Alpha (Company A)  and Company Beta( Company B)  to compare weakness and strength among those two company.

Liquidity

The liquidity is measuring the “ability of an entity to meet its short-term financial commitments”(Jacqueline, Keryn, Suzanne, Alble, Judy, 2014 ) . In the company A, the current  ratio is rapidly increasing from 1.86 times in 2011 to 2.33 times in 2012. This change is essentially  contributed by a 60 % increase of other assets which is combined by prepaid expense and inventory paid for but not yet received. From 2013 to 2014, the current ratio is decreasing from 2.32 to 1.66 by decrease of total current liabilities which is mainly contributed by larger increasing in account payable and loan due to updating shop fittings.Overall, the ratio is trying to approach to the arbitrary rule of thumb which is 1.5 times of current ratio(Jacqueline, Keryn, Suzanne, Alble, Judy, 2014 ).It represents that company A gain the balance between meeting short run obligation and putting money into profitable assert. For the quick ratio, there is constant trend from 2011 to 2013 and a suddenly decreasing change from 0.63 in 2013 to 0.44 in 2014 because of impact of changing total liabilities . However, those changing figure all all much lower than the arbitrary benchmark ratio which is 0.8 times  (Jacqueline, Keryn, Suzanne, Alble, Judy, 2014 ). This indicates that the company holds many inventories and may face the risk of short-term obligation.

In the company B, the current ratio is decreasing from 2011 to 2014.While, from 2011 to 2012,current ratio of company B experiences a sharply decreasing from 3.22 to 2.77. This trend can be explained by Victoria flood in 2011. This Victoria flood affects profit and hence increases income tax payable which is 44.23%, meanwhile, it also leads to low provision fees(12.50%) when there are significant number of employee take leave. With the arbitrary benchmark, current ratios of company B are all much higher, means that company may put money into unprofitable assets. While, the figures of quick ratio during 4 years are all extremely low comparing with arbitrary benchmark. It can be explained by the large amount of other assets and inventory which is accounted for  major percentage in current asset, hence, it implies  that company may not able to handle the immediate obligation by very liquid assets.