Assignment Content Purpose of Assignment This week’s focus is on the preparation of financial reports for internal users, such as managers. This case study applies the concepts of managerial accounting, through comparative and ratio analysis, and requires students to identify financial data needed by managers for decision making. About Your Signature Assignment This signature assignment is designed to align with specific program student learning outcome(s) in your program. Program Student Learning Outcomes are broad statements that describe what students should know and be able to do upon completion of their degree. The signature assignments may be graded with an automated rubric that allows the University to collect data that can be aggregated across a location or college/school and used for program improvements. Assignment Steps Resources: Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Committee (SEC) Tutorial help on Excel® and Word functions can be found on the Microsoft® Office website. There are also additional tutorials via the web offering support for Office products. Scenario: You are a loan officer for White Sands Bank of Taos. Paul Jason, president of P. Jason Corporation, has just left your office. He is interested in an 8-year loan to expand the company’s operations. The borrowed funds would be used to purchase new equipment. As evidence of the company’s debt-worthiness, Jason provided you with the information in the Scenario Worksheet document attached to this assignment. Jason is a very insistent (some would say pushy) man. When you told him you would need additional information before making your decision, he acted offended and said, “What more could you possibly want to know?” You responded you would , at minimum, need complete, audited financial statements. Develop a minimum 700-word examination of the financial statements and include the following: Explain why you would want the financial statements to be audited. Discuss the implications of the ratios provided for the lending decision you are to make. That is, does the information paint a favorable picture? Are these ratios relevant to the decision? State why or why not. Evaluate trends in the performance of P. Jason Corporation. Identify each performance measure as favorable or unfavorable and explain the significance of each. List three other ratios you would want to calculate for P. Jason Corporation, and in your own words explain in detail why you would use each. As the loan officer, what else would you do to gain a better understanding of Paul Jason’s, and the Corporation’s financial picture and why? Based on your analysis of P. Jason Corporation, will you recommend approval for the requested loan? Provide specific details to support your decision. When you look at the questions in this assignment, the questions address similar areas to the team assignment and what creditors want to see in financial statements from the week 1 paper as well. Look at my comments in your week 1 paper. These are short answer requirements. You do not need any calculations. What you are learning in the team project will make this assignment easier for you to complete. Make sure you address all the requirements. As I have said in many messages, list the requirements in the order of the assignment and grading rubric and answer them so you are sure to cover all the requirements. Format the assignment consistent with APA guidelines. Resources: Center for Writing Excellence Reference and Citation Generator Grammar and Writing Guides Learning Team Toolkit

 

Ratio Analysis

Student’s Name

Institution Affiliation

Course

Date of Submission

 

Introduction

Financial statements are considered to be written records that strategically illustrate the business operations and the financial performance of the organization. Financial statements should incorporate the balance sheet, currency flow statements and revenue statements since the financial statements are typically subjected to government auditing, accountants and other institutions with the aim of ensuring accuracy and for tax, financing and investing reasons. In this scenario, as a loan officer for the White Sands Bank of Taos, there is the need for Jason’s financial statements to be audited as this is the only way of proving the level of assurance that the institution financial statements are fairly outlined. Still, audited financial statements are the only way that will enable the auditor structure and understand an institution’s internal controls and evaluate the associated risks that in turn will highlight the control weakness, provide proper guidance on internal control achievements and recommend another mechanism of lowering risks. As observed by Parsian, H., & Shams Koloukhi, A. (2014), it is still a requirement of the security exchange commission to audit all the publicly held companies.

Implications of the Ratios Provided

While the financial statements are useful in proving the results of a borrowing organization, detailed ratios evaluation is significant and enables the lender which in this case is the white sands bank to explain into details the reasons for the results. Rates typically combine two or many financial numbers with the aim of coming up with a context to assist in the evaluation of the creditworthiness of the borrowing entity (Cao, Chychyla & Stewart, 2015). Therefore, the current ration that is reflected in Mr. Jason institution is 3.1 whereas the previous year was indicated as 2.1, which thus shows that the eight-year loan is likely to be paid back within the needed time frame. Still, the assets turnover ratio evaluates how useful the institution’s assets are capable of generating its revenues. In 2017 there was a 2.8 reflection that seemed to do better than that of 2016 which out looked somehow unimpressive. Thus, the increase of 35 percent is a typical indication that the asset turnover is high and that the productivity of the institution is steadily growing.

Trends of the Performance

As illustrated, the actual ration increase in 2017 is indicated at 3.1 while the assets increased and tripled that size of the existing liabilities; however, in 2016, the ratio was 2.1, and this is an indication of a favorable outcome. In its definition, the current ratio is regarded as a liquidity ratio that strategically measures an institution’s ability to pay short-term operations, or those due within a year. The current rate also illustrates to investors and analysts how the organization can increase the existing assets on its balance sheet to meet its current debt and other payables (Maskell, Baggaley & Grasso, 2016). Precisely, investors look for a business with a current ratio of 2.1 which is an illustration that current assets are twice as substantial as the current liabilities. As indicated, the asset turnover had an increase from 2016 that was 2.2 to 2.8 in 2017, and this illustrates a favorable outcome together with the most speculated of actual results.  The percentages indicated in the net income shows how much revenue is being utilized to pay operating expenses and higher net income will, in turn, generate favorable outcomes as well.

Three other Ratios

The three different significant ratios that would be used to calculate for Mr. Jason would include a profit margin, Return on assets and return on equity as profitability ratio strategically outlines how effective business is progressing in changing business processes into profits. Profit is a critical driver of any stock value, and it is still one of the mainly closely used metrics in businesses, finance and investing (Parsian & Shams Koloukhi, 2014). Return on assets is the ratio that illustrates the total return on assets while the return on equity indicates how effective the business is rewarding its stockholders for their respective investment. Profit margin in turn calculated through dividing the sales by net income and illustrates how much a business’s total sales flow via the bottom line.

Gaining a Better Understanding

As an officer, it would be appropriate to seek for more years of business operations and look further into the income, balance sheets and retained earnings of the past years. It would be appropriate to come up with averages through using similar ratios. There is the need for a horizontal approach with the aim of evaluating if there are any significant variances between the periods (Cao, Chychyla & Stewart, 2015). Various business cycles do occur, and other external factors play a part in up and down years.

Approval for the Loan

The loan should not be approved to Jason Corporation since the ratios described do not add up and Mr. Jason is not consistent with his numbers as variances within one year between 2017 and 2016 seem too much in one year. The current assets tripled to liabilities with the assets turnover also increasing and indicating operations in selling off assets to prepare for declining growth. The net business income shows the processes of getting revenues from selling assets; therefore, the mentioned reason deters Jason from loan approval.

References

Cao, M., Chychyla, R., & Stewart, T. (2015). Big Data analytics in financial statement audits. Accounting Horizons, 29(2), 423-429.

Maskell, B. H., Baggaley, B., & Grasso, L. (2016). Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press.

Parsian, H., & Shams Koloukhi, A. (2014). A study on the effect of free cash flow and profitability current ratio on dividend payout ratio: Evidence from Tehran Stock Exchange. Management Science Letters, 4, 63-70.