Paper Example on Reasons for Audited Financial Statements

Paper Type:  Essay
Pages:  4
Wordcount:  880 Words
Date:  2022-05-16
Categories: 

Introduction

Access to reliable financial information is critical to examine the health of the firm using statements that pass through the rigorous audit. The information captured in the auditor's opinion is useful to make a lending decision on whether to lend and the amount one should grant to the borrower (Carrell, 2014). Since putting funds in the borrower carries with it default risk, access to audited financial statements will help determine the financial health of the firm. Consequently, audited financial statements add credibility to the financial position and authenticate the business performance.

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As a proof that the firm is financially sound, credit analysis of the audited financial statement evaluates the allowable loan amount and the probability of the borrower defaulting on the repayment. In the auditor's opinion and evaluating the performance, audited financial statements helps to ascertain the shape of the business and the ability to honor principal repayment and accrued interest (Carrell, 2014). The audited financial statements illustrate the debt levels the firm carries in its books. Such helps to determine creditworthiness and risk-bearing capacity in the event of the severity of losses.

Implication of Ratios Provided

The information provided by Jason is important to determine the creditworthiness and the risk the firm carries when granting the loan. The current ratio the ability to use its current assets to settle the current obligations. Inventory and cash. At 2.1 in 2016, the current ratio indicates the firm is financially sound and capable of meeting its short-term obligations as they fall due to its assets twice the liabilities. A high current ratio shows the firm is likely to repay the loan. The 2017 current ratio of 3.1 shows the inefficient utilization of current assets and short-term financing, thereby holding too much cash. The situation mandates evaluating the liquidity ratio to authenticate the favorable picture shown by the current ratio.

The asset turnover shows the efficiency in firm's utilization of assets to generate sales income. Determined by expressing the sales revenue over total assets, higher asset turnovers shows the ability of the firm to generate more income for every dollar invested in assets (Beccalli & Poli, 2016). The firm realized an increasing asset turnover from 2.2 in 2016 to 2.8 in 2017 indicating improving ability to generate additional revenue for every dollar invested in the asset. However, higher asset turnover ratio arises in firms dealing in products with the thin profit margin. Further examination of the financial statement is critical to avoid a scenario of artificially inflated ratio possible when you sell off assets during declining growth cycle.

Earnings per share reveal the profits made by the firm in every outstanding stock share. The rising earnings per share from $2.50 in 2016 to $3.30 in 2017 matches the increased net income by thirty-two percent reversing the eight percent decline the previous year. Alike current ration and asset turnover, the rising earnings per share shows a favorable position of improving financial health. According to Ahuja, Dawar and Arrawatia (2016), earnings per share indicate revenue growth with the company capable of attaining increasing sales volume and margin expansion through cost minimization strategy. The ratio affirms improved business performance stimulating higher earnings per share. The improving net income affirms higher asset turnover and current ratio possible from higher profitability freeing the firm from debt obligations to finance its working capital requirements.

Evaluating the Financial Health

Conducting further examination of financial statement is important to ascertain the favorable position demonstrated by the information furnished by Jason. Such would involve performing the credit ratio, liquidity ratio, and solvency ratio. The credit ratio involves expressing the debt obligations over the firm's income. Its calculation expresses the debt obligations it has over the business earnings. It indicates the credit risk and ability of the firm to manage repayments from earnings (Beccalli & Poli, 2016). Low debt-to-income shows the firm has struck good debt management hence placing it at the improved change of accessing the loan sought. A higher debt-to-income ratio demonstrates too many obligations laying claim to the income, hence the inability of the firm to meet additional obligations.

Solvency ratio reveals the ability to meet the long-term obligations in future. A stronger solvency ratio shows financial strength and the ability of the firm to overcome financial struggles in future. A solvency ratio above 20% will affirm financial soundness shown in the improving current ratio. From the audited financial statements, calculating liquidity ratios is important. The current debts to inventory will demonstrate the reliability the bank will have on the firm's inventory to repay the debts (Carrell, 2014). Computing the total liabilities expressed over the firm's net worth will show the protection creditors have in the firm from the owners' equity.

Conclusion

The information furnished by Jason reveals shows the firm is financially sound and capable of paying off its short-term obligations. The computation of solvency, liquidity and credit ratios is important to authenticate the improved business performance and not artificial inflation. Lower solvency and credit ratios will proof the financial health to affirm Jason information. The proof will provide a base to get approval of the loan sought by P. Jason Corporation.

References

Ahuja, N. L., Dawar, V., & Arrawatia, R. (2016). Corporate Finance. New Delhi: PHI Learning Private Limited.

Beccalli, E., & Poli, F. (2016). Lending, Investments and the Financial Crisis. Basingstoke: Palgrave Macmillan.

Carrell, R. W. (2014). Borrower's Guide to Commercial Lending:. New Jersey: Evergreen House Publishing LLC.

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Paper Example on Reasons for Audited Financial Statements. (2022, May 16). Retrieved from https://proessays.net/essays/paper-example-on-reasons-for-audited-financial-statements

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