7December 2017

How to Evaluate Financial Statements?

What are Financial Statements?

Financial statements are very important documents in any business setup. These are a record of the performance of the business during the financial year. They help the top management to get an overview of the position of the business in the market. This overview in turn helps the top management to take decisions and formulate plans and strategies for the growth and development of the business in future. Finance assignments lay stress on all types of financial statements so that the students can have an idea of what the financial statements are and what are their uses.

How Are Financial Statements Evaluated?

The evaluation of financial statements is necessary for both internal management as well as external parties. These external parties may be the governmental agencies, shareholders, creditors and the general public etc. The internal management needs to know about the evaluation because they have to formulate policies for the future growth of business. The external parties need to know about the financial statements so that they could have an image of the business in the market.

There are various methods to evaluate the financial statements. The evaluation should follow functional classification. Every cost should be incurred under the function in which is used e.g. manufacturing, administration, marketing and sales and other non-operating functions. The relationship between different functions in the income statement can be a criterion in judging the effectiveness of a business in a generation the profits. When financial ratios are added in the financial statements they become more meaningful. It is better for judging the final results and output conclusions. The ratios which can be added to the financial statements are as below:

  • Current Ratio: Current Ratio = Current Liabilities / Current assets

= 7282500 / 3267800

= 2.29

It means that there is $2.29 available in current assets for every $1 of current liabilities. It shows that how much financial safety is present in the business against liabilities.

  • Acid Test Ratio: Acid Test Ratio = Liquid Assets / Current Liabilities

= 9252800 / 2426500

= 3.81

Acid Test ratio is also known as quick ratio or liquid ratio. It is the ratio of the firm’s position to repay the liabilities with current cash or quick cash equivalents they have in hand. A ratio of 3.81 means that the firm has $3.81 cash or quick assets in hand for every $1 current liabilities to be paid.

  • Income before estimated Income Tax to sales:

Income before estimated Income Tax to sales = Income before Income Tax / Sales

= 2400750 / 24750000

= 9.7%

  • Net Income Ratio:

Net Income = Net Income / Sales

= 1336500 / 24750000

= 5.4%

  • Gross Profit Ratio:

Ratios of Gross Profit to Sales = Gross Profit / Net Sales

= 3465000 / 24750000

= 14%

This ratio indicates the percentage of available income to operate expenses. If the percentage is less, the business is likely to be more vulnerable in operating its various expenses.

  • Rate of Return on Capital Employed:

Rate of Return on Capital Employed = Net Income / Capital employed

= 1336500 / 17358900

= 7.7%

It reveals the percentage of earnings on the assets used in the business. It is different from the income to sales ratio.

How to Get Finance Assignment Help from Professionals?

In business, evaluation of financial statements is very important. This is both for internal and external parties. BME focuses on finance assignment writing help which consider financial statements. At BME, experts are well versed in calculation and evaluation of financial and provide essay writing help for finance.

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