Date of Submission
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.
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.