Question

Part IIl. Professional Communication Skills/E tment Analysis Skills/Essays/Selective Topics Total Score: 15 Points Select any four essays from the list of topies below and answer Answer each question in detail. Use Business English. Each essay is worth 3.75 points) them in the blue book attached Each essay's answer should contain the three parts: 1. Brief introduction 2. Main/detail explanation 3. Brief summary/conclusion 1. Why do financial their meaning. analysts and investors use financial ratios? Classify financial ratios and describe 2. Why do we Illustrate your answer by some examples. analyze the operating cycle and its financial consequences? Describe in detail. 3. Describe how receivables can be falsified, why they would be falsified, and why it is difficult to uncover such fraud? Why is it difficult to accurately value real estate? Give specific reasons. Describe the significance of each of the three major sections of the cash flow statement in detail. 5. Why is the cash flow statement important? How does it differ from the income statement? Why do potential creditors and investors use bankruptcy prediction models? Describe these models and briefly explain their usage in relation to cash flow variables. Describe the significance of rating in relation to credit risk. Illustrate your answer with some examples. 6. 7. Describe implications for financial statement analysis of evaluating companies in specialize 8. industries or with unique characteristics.

Answer 1

1. Financial Ratios

Analysts and Investors use financial ratios to compare financial performance across companies and over the years, which is more meaningful and comprehensible than absolute numbers.

For example, for two companies different in size, absolute profit number is not comparable, while profit margin can be directly compared and is an indicator of companies relative financial capability and efficiency.

Most frequently used financial ratios are:

1. Liquidity Ratio - Ability of a company to meet its short term liquidity needs.

2. Profitability Ratios - How profitable a company is i.e. how much of top line can make it to company's bottom line

3. Capital Efficiency Ratios - How efficiently a company is able to generate profits from the assets employed

4. Leverage Ratios - How the firm is sourcing its capital.

2. Operating Cycle

Operating cycle for a company is the time it takes from converting cash to inputs and from final products to cash back again.

Cycle starts with purchase of raw materials from suppliers at credit, converting it to finished products, selling it to customers on Credit, Paying the creditors, getting paid by debtors, with order of last 2 anywhere in the cycle. The ability of a company to manage its creditors and debtors helps its in its working capital management.

5. Cash Flow Statement

Cash flow statement presents a true picture of cash positions of a company i.e. actual exchanges of cash over the year.

While, income statement is based on accrual, and may not have been actually realized. Cash flow statements are important to understand actual cash generating capacity of a company. Income statement might suggest company is making a lot of profit, though most of it might be outstanding in receivables and may never get realized. Cash flow statement helps to get an understanding on this.

Cash flow statement has 3 parts

1. Operating Cash Flow - Cash generated from company's day to day operations. Includes items like profit, change in receivable, change in payables, change in inventory, among others.

2. Investing Cash Flow - Its the cash flow based on company's investing activities that are not really part of company's core operations

3. Financing Cash Flow - Cash flow to and from the investors in the business both debtors and creditors.

7. Credit Rating

Credit rating is the rating determined by credit agencies for the debt raised by a corporate. It helps investors identify the credit worthiness of a company's debt bonds. The ratings fir say S&P is AAA+, AAA, AA+, AA, A+, A, BBB+, BBB, BB+, BB, B+, B, C, D. With AAA+ being the most safe bonds and anything below BBB are non-investment grade or high risk junk bonds.