Complete a 2-part assignment in which you analyze and compute financial ratios and interpret the results of a multi-year financial ratio analysis.
Smart investors also execute due diligence by performing a bit of financial statement analysis (also known as ratio analysis), where financial statement numbers are used to evaluate three characteristics of an organization’s performance: (1) liquidity, (2) profitability, and (3) solvency.
By successfully completing this assignment , you will demonstrate your proficiency in the following course competencies and assignment criteria:
- Competency 2: Apply accounting cycle strategies to manage business financial events.
- Compute financial ratios using accounting data from financial statements.
- Interpret the results of financial ratios.
- Interpret trends found in a multi-year financial ratio analysis.
- Recommend strategies to improve financial trends.
This assessment includes two parts. Use the templates provided as you complete each part. Both of the templates are linked in the Resources under the Required Resources heading. Note that for Part 2 you will use the template for data but will create your own document to submit.
Part 1: Ratio Analysis
Making sense of accounting data on financial statements can be difficult. Thankfully, combining numbers from income statements, balance sheets, and other data provides a starting point to analyze a company’s financial results. You now have the opportunity to demonstrate your prowess by identifying and computing financial ratios.
Using the Assessment 5, Part 1 Template, analyze and compute the necessary financial ratios. The Financial Statements worksheet in the template contains the income statement, balance sheets, and additional information needed. The Ratio Analysis worksheet contains space for your calculations and answers.
Part 2: Interpreting Financial Statement Analysis
What does the calculation of a financial statement ratio represent? How does one year compare to another? Is there a trend to the ratio data? Is the trend positive or negative? What can be done to change the trend? These are some of the questions that can be answered when the ratio data is interpreted. For this part of the assessment, demonstrate your ability to interpret the results of a multi-year financial ratio analysis.
On the Assessment 5, Part 2 Template you will find selected ratios for a company over a two-year period. Compare the ratios, and in a separate document (Word or Excel), submit your answers to the following questions:
- What does the calculation of each ratio represent?
- How does year one compare with year two, and what trend can be seen when you compare the two years?
- Is the trend from year one to year two positive or negative?
- What are the possible reasons for the trend?
- What recommendations do you have for turning a negative trend to a positive trend?
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