Quiz 17: Financial Information and Accounting Concepts

Business

Cost control is an integral part of each business firm. Cost control facilitates effective financial management for the companies at the time of eventual needs. It offers the following benefits to the companies- • It helps the managers to analyze and evaluate the financial performance of their company. Hence, the managers can control the financial operations of their company in an effective way. It helps them in taking better business decisions. • Outsiders like suppliers, banks and customers use the cost control data to evaluate the performance of a company. • Cost control is helpful to adjust the cash flows of a company. Hence, at the time of major economic crisis the company can survive and still make profits. • Company can accumulate cash and assets for sudden requirement in case of acquisition or new product development. Hence, it is concluded that every company should have extensive cost controls with the starting of its operations.

Debt to equity ratio is useful to analyze the financial performance of a company. It compares the total financing of company that is accumulated from the creditors with the financing that comes from the investors. High value of this ratio indicates that greater credits amount is used in a company as compared to the investors' amount. Lower value of debt-to-equity ratio shows the stable condition of a business. Higher debt-to-equity ratio shows a risky condition to the creditors and investors. High ratio also indicates that investors do not have much expectation from the company and the company is not performing well. Debt-to-equity ratio of Company G is 0.04 whereas it is 0.15 for Company M. Since, lower debt-to-equity ratio is preferred by the banks. Therefore, Company G would be more attractive candidate for the banks.

Current ratio is a financial instrument to measure the short-term solvency of a company. Short term solvency refers to the ability of a company to fulfill its short term obligations. Short term obligations include the liabilities of a company that are payable within short time period. Current ratio 2:1 or more is most preferable for the companies. Current ratio of Company G increased from 8.77 to 11.91. It indicates that ability of Company G to pay its short term obligations have increased significantly. Therefore, it has reduced the credit risk of Company G in the eyes potential leaders.