Accounting Study Set 8

Business

Quiz 17 :
Financialstatement Analysis

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Quiz 17 :
Financialstatement Analysis

The ratio of liabilities to stockholders equity is a measure to determine the amount of debt to equity. Ratio of liabilities to stockholders equity = img The ideal level of debt to equity ratio is 1:2. This is optimum not only for daily operations but this is considered to be the optimum capital structure because debt financing is always cheaper than equity financing. However this capital structure of 1:2, debt to equity does not hold true for all the industries and might vary. Hence optimum capital structures differ from one industry to other. • There should not be a capital structure with all debt which would result in loss of control by the management of the company. • There should not be a capital structure with all equity because dilution of control is vested over large number of shareholders resulting in loss of corporate control. • Hence capitalizing a company with both debt and equity as such the advantages of both equity and debt are availed at the maximum level would give the best results. • Analyzing different possibilities of debt and equity financing for a given amount of capital at a given time by selecting the best possible alternative would lead to the reduction of the overall cost of capital alone helps in achieving profit and wealth maximization by the firm As a public share holder of this company with limited amount of shareholding power I will not support the company's decision to finance the entire capital with equity. I would sell out my stock if my stock is even just above the cost of my purchase price plus commission to the trading agency or platform or broker. As a public share holder of this company with great amount of shareholding power of say 40% or more I will not support the company's decision to finance the entire capital with equity. I will demand the company's management to go for voting system on deciding upon the ways to finance the needed capital either all equity or debt and equity capital structure.

Horizontal analysis is the percentage analysis of increases and decreases in related items in comparative financial items in comparative financial statements. Hence each item in the financial statements is compared with the corresponding item of earlier statements for the following : 1. Amount of increase or decrease. 2. Percent of increase or decrease. Horizontal analysis helps to evaluate the performance of a firm i.e,whether it is improving or deteriorating as compared to its preceding periods. Vertical Analysis : Vertical Analysis is the analysis of the relationship of each component in a financial statement to a total within the same statement. Vertical Analysis includes: 1. Each item of asset as a percentage of total assets. 2. Each item of liability or stockholders equity as a percentage of the total liabilities or stockholder's equity. Vertical analysis helps to analyze the investment of the firm in a particular asset or a share of a particular liability.

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