Discussion Question 2

a. List the five (5) basic steps in financial analysis.

b. Why do you believe these steps would be important when conducting a financial analysis?

c. Provide two (2) examples of liquidity ratios and two (2) examples of profitability ratios. For each, include their meaning and how they are expressed.

ANSWER

3.2 Strategic Evaluation and Control

Discussion Question 2
The five basic steps in financial analysis

The first step in financial analysis entails defining and agreeing to the financial objectives and goals of an organization. The second step involves the gathering of financial and personal information, where its success depends on the quality and clarity if the information communicated. The third step is the analysis of both financial and personal information (Areas, 2018). The fourth step includes having a development and presentation of the financial plan based on the information received in step 2, and the analysis completed in step 3. The final step entails the Implementation and review of the financial plan.

Importance of the five steps when conducting a financial analysis

These steps are very critical for successfully having a well-conducted financial analysis. First, they help an organization in effectively planning and understanding the entire financial analysis process. The steps also ensure that the company has the most excellent chance of a successful outcome (Areas, 2018). The steps also provide the firm with an opportunity of pursuing a proper analysis, discipline and expertise, and ultimately help it in attaining its set goals and objectives.

Examples of liquidity profitability ratios

Liquidity ratios are measurements used to examine a firm’s ability to pay off its short term obligations. One example of liquidity ratios is the current ratio which compares the current assets to the current liabilities (Areas, 2018). The second example of liquidity ratios is the same as the current ratio but excludes inventory. For the quick ratio, the most remaining assets are readily convertible unit cash within a short period of time. The profitable ratio, on the other hand, is used to assess the ability of a firm to generate income as compared to its expenses and other costs. An example of a profitability ratio is a return on equity, which is a ratio that measures the profitability of equity fund invested in a firm (Areas, 2018). The second profitable ratio is the earnings per share ratio, which measures the profitability from the point of view of an ordinary shareholder.

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References

Areas, B. (2018). Financial analysis. growth, 30, 10.