Business Accounting & Finance Value Measurement Assessment Answer

Question 1

Assets, customers, social value, personnel, and suppliers determine a company's worth. The statement of profit and loss shows a company's net income after subtracting operating expenditures. Financial statements show profit or loss. Profits have historically measured company ideals and performance. Most CEOs and CFOs say earnings are the strongest measure of a company's value, but in the current economic context, profits don't tell the entire picture. Managers should assess profit-and-loss accounts for cash, growth, assets, people, and profit. Earnings shouldn't be the only measure of a company's growth. A company's success depends on cash flow. Cash flow, not accounting for profit, determines a company's capacity to pay bills and meet commitments (Saeed et al., 2022). A growing accounts receivable may hide the reality that the business is having problems paying its financial obligations, even though its profit and loss statement may indicate otherwise. The International Accounting Standards (IAS1) explain this best by requiring all financial statements to be prepared using accrual accounting, except for cash flow information. Accrual accounting allows firms to calculate earnings before receiving payment for their goods and services. One IAS, Instead, demands prompt cost reporting. Thus, net earnings aren't misinterpreted. GAAPs allow accrual accounting. That's when a corporation records purchases and sales regardless of payment (Das et al., 2022). Accrual analysis doesn't necessarily show a company's profitability and worth. This method does not need prepayment, unlike the cash basis, which requires enterprises to record transactions when payments are made. The cash basis, which tracks financial transactions, better reflects an organization's success. Thus, profit margins alone cannot assess a company's value. For valuation, the balance sheet lists the company's assets and liabilities. Another factor in corporate valuation is growth potential. If the following are considered, a startup may be worth investing in despite its lack of profitability: addressing rivals by providing exceptional and high-quality products that satisfy customers' needs; providing high standards of customer service and improving customer satisfaction; upholding corporate social responsibility by using safe production methods and releasing only high-quality products.

Question 2

Financial statements, ratio analysis, and an explanation of American Medical Centre numbers are provided below.

The American Medical Centre now has a ratio of 2.35, according to my research. If a corporation has more assets than debts, it may pay off its obligations within a year. If a company's current liabilities exceed its current assets by more than 1 to 1, that's cause for concern. 1.45 is the value of the Quick Ratio (Hasanaj and Kuqi, 2019). It shows that for every $1 in current Liabilities, the company has $1.45 in liquid assets. While greater quick ratios are generally favourable, abnormally high ones might suggest that a firm is sitting on a large amount of capital that it isn't putting to good use in growing the business. Centre has commitments of $0.86 for every $1 in equity, indicating a debt-to-equity ratio of 0.86. Indicative of a healthy relationship between sales and stock, the company's Inventory Turnover is 4.2. It indicates that the business is not low on inventory and has a manageable number of assets taking up space.

Graph 1

Graph 2

The company's success in turning its assets into cash flows is demonstrated by its high Return on Assets ratio of 86%. It's important to keep in mind that these financial statistics will change from business to business (Hasanaj and Kuqi, 2019). So, compare the company's financial ratios to those of similar businesses in the same industry.

Question 3

a)

Although numerical and mathematical calculations can serve as a useful indicators or snapshots of complex processes, they cannot provide the full picture. This is because, by definition, they are reductionist and hence only account for a subset of the relevant factors. Oversimplification and a failure to grasp underlying complexity are possible outcomes. Furthermore, numbers and calculations are not always guaranteed to be exact or reliable because they are subject to interpretation.

Because of differences in company size, it is not always possible for businesses to rely on financial ratio analysis to answer their questions. Some businesses may produce many items and provide multiple services. Let's say we compare this multifaceted firm's ratios to those of a company that specialises in only one or two goods. In that situation, the findings may be inaccurate and misleading. The company involved in the creation of several items may believe it is doing well, but this may not be the case until it is compared to other companies in a similar field.

b)

Managing ambiguity and navigating complexity are two ongoing tasks that are integral to decision-making at every level of an organisation (Quattrone, 2021). Therefore, managers need to be open to ambiguity and uncertainty if they are to deal with it successfully. To aid in the decision-making process, they can create data visualisations. The advent of digital technology has increased the significance of visualising data. Visualisations such as pie charts, graphs, histograms, and organisational charts can be used to simplify and clarify the data.

This shows that businesses should be wary of using calculations to determine the worth of their company. Despite their usefulness as a jumping-off point, financial statements alone are not sufficient to gain a whole understanding of the firm; other factors, such as its debt level, must be considered as well (Dang et al., 2019). It's also important for businesses to realise that different people might draw different conclusions from the same set of facts. Therefore, a consensus on the data's true meaning is required before any decisions can be made.

References

Dang, H.N., Vu, V.T.T., Ngo, X.T. and Hoang, H.T.V., 2019. Study the impact of growth, firm size, capital structure, and profitability on enterprise value: Evidence of enterprises in Vietnam. Journal of Corporate Accounting & Finance, 30(1), pp.144-160.

Das, S.K., Mohanta, R.K. and Sethi, S.K., 2022. Resource Book on Accrual Accounting for Administrative and Finance Personnel. Eds. AK Vyas, GAK Kumar. ICAR-National Rice Research Institute, Cuttack, p.124.

Hasanaj, P. and Kuqi, B., 2019. Analysis of financial statements. Humanities and Social Science Research, 2(2), pp.p17-p17.

Quattrone, P., Ronzani, M., Jancsary, D. and Höllerer, M.A., 2021. Beyond the visible, the material and the performative: Shifting perspectives on the visual in organization studies. Organization Studies, 42(8), pp.1197-1218.

Saeed, S. and Qazi, I.I., 2022. Impact of Free Cash Flow on the Financial Performance: Evidence from Commercial Banks of Pakistan. Pakistan Journal of Social Research, 4(2), pp.545-551.

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