ACC/543: Managerial Accounting & Legal Aspects of Business

Assignment #1

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Managerial accounting can be a complex job. As you learned in this week’s practice assignment, many different calculations need to be completed to assist an organization with its financial statements.

Write a 250-word response reflecting on your experience making the calculations from the practice assignment. In your reflection, share your thoughts on the activities within this week’s readings. Consider how calculating financial statements will help drive effective business decisions.

Address the following questions within your response:

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  • Which calculations were challenging for you? Why?
    • Which ratios were difficult to understand?
    • What will you do differently in the following weeks?

If you did not have any challenges, respond to the following questions:

  • What prepared you for these calculations?
    • What advice would you give a classmate who needs assistance?

Assignment #2

Financial statement analysis focuses primarily on isolating information that is useful for making a particular decision. Through ratio analysis, users of financial data can analyze various relationships between items reported.  

Respond to the following in a minimum of 175 words:

  • Describe the 3 main categories of ratios and provide a specific example of a ratio that is used in each category. For each of the 3 ratios you selected, describe how it is used in managerial decision-making.

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Managerial Accounting Response

Assignment 1

           Effective calculation on financial statements is the first step towards having a hold over finances. Financial awareness and planning mean one has to save the right amounts of money and invest in what is beneficial. However, financial calculations are executed through formulas but that does not imply knowing formulas will produce the desired results. The most daunting financial calculations are determining profitability ratios. The ratios are reliant on previous calculations on each value presented on a financial statement. Since there is a probability of having a miscalculated ratio, it hard to evaluate and measure how an organization can generate profit shareholders equity, assets, revenue, operating cost within a definite time (Laitinen, 2017). I find dreary calculating profitability ratios because there is a possibility that the company will not know how assets are used to make profits and be of value to investors. 

            Return on Equity, Return on Invested Capital (ROIC) and Return on Common Equity are the most difficult ratios. Return on equity and Return on invested capital is confusing because similar concepts are used to determine the profitability of an organization (Linares-Mustarós, Coenders, & Vives-Mestres, 2018). The problem comes in when one gets perplexed on determining the finances that the company worked with. I would confuse Return on Common Equity with Return on Equity (ROE) although they are different. ROE calculation blends in the income statement and the balance sheet because the profits are contrasted to the shareholders’ equity. In the following weeks, I got to classify financial ratios into leverage, liquidity, operating, profitability, and solvency to avoid confusion and harness. Understanding finances is all about reading, analyzing and creating statements, but I have been overlooking this important guideline.

Assignment 2

           Profitability, leverage and liquidity ratios are the three main categories of ratios (Linares-Mustarós, Coenders, & Vives-Mestres, 2018). The ratio present in major ratios is the Return on equity (ROE) or return on investment (ROI) ratio because investors would like to measure the returns of money invested in a venture. Financiers always want to know how well or bad a company is doing based on the returns relative to money invested. A profitability ratio is used in managerial decision making because managers get to access companies position based on its ability to generate profits against costs (Laitinen, 2017). With profitability ratios managers can make decisions aimed at increasing productivity, scaling up, reducing cost, fostering efficiency, expanding, developing new products and increasing turnover. Without leverage ratio, the manager would not access the potential and efficiency of the organization if it uses debts to run operations the ratio helps manager make decisions that will ensure proper utilization of debts to generate revenue and service liabilities. Managers need liquidity ratios to enlighten investors whether the company is in a position to address its short term obligations. Managers need to know the safety margins before moving the company to uncollectable debts.

References

Laitinen, E. K. (2017). Profitability ratios in the early stages of a startup. The Journal of Entrepreneurial Finance19(2), 1-28. https://digitalcommons.pepperdine.edu/jef/vol19/iss2/3

Linares-Mustarós, S., Coenders, G., & Vives-Mestres, M. (2018). Financial performance and distress profiles. From classification according to financial ratios to compositional classification. Advances in Accounting40, 1-10. https://doi.org/10.1016/j.adiac.2017.10.003