Financial Accounting Exam

Describe the main steps which are useful to develop a complete business analysis.

The main steps to develop a complete business analysis are to evaluate prospects and risks. One must consider both types of information sources, Quantative and Qualative, such as financial statements as well as management discussions & analysis, respectively.

One must analyse the company’s liquidity and solvency, which is the ability to meet short term and long term obligations respectively.

Credit analysis of a business looks to analyse trade and non trade creditors, whereas equity analysis can help forecast future price movements and patterns within them, aswell as establishing the stock intrinsic value.

The procedure for them is to forecast earnings or cashflows and determine the risk aswell as using the valuation model to measure the intrinsic value. The intrinsic value determines whether a stock should be sold or purchased, if the value is higher than the market value then one should buy the stock and if it’s lower then sell.

Accounting analysis is also another step taken within business analysis, it sets out to evaluate financial position and performance using financial statements.

The first step is to identify and assess economic and industry circumstances including product, labor and capital market with value chain analysis, including the industry prospect and degree of actual and potential competition facing.

The second step is to do an analysis of business strategy to look at competitive strengths and weaknesses along with opportunities and threats and then evaluate business decision and its success at establishing a competitive advantage.

(b) Briefly evaluate and discuss the effectiveness of financial ratios in assessing company performance. (60%)

The effictiveness of using financial ratios in assessing company performance can prove vital. The measure of credit(resk analysis) through liquidity, capital structure and solvency can be seen...