“To analyze financial statement through use of ratio analysis technique”- A study on PricewaterhouseCoopers (PWC).
• To identify about concept of financial statements
• To determine the use of ratio analyse technique
• To study about types of ratios used in financial statement Research Question
• What is the concept of financial statements?
• What are the use of ratio analyse technique?
• What are the relationship between financial statement and ratio analysis?
The factors that contribute towards process of selecting research project are: business knowledge, experience, solving arise issue, preconceptions, time pressures, awareness of risk, providing positive results and others (Lee and et. al., 2016).
According to opinion of Chris B. Murphy (2020), financial statements are defined as written records which convey about activities of business as well as financial performance of company (Financial Statements, 2020). These are audited through government agencies, firms and accountants for ensuring about accuracy, investing purposes, tax. This includes mainly balance sheet, cash flow statement and income statement. It is important for PWC to manage their financial statement in proper way to gain high result. Here, balance sheet provides information about assets overview, equity of shareholders and liabilities. Income statement mainly focuses on revenues of company as well as expenses during particular period of time. When expenses are minus from revenues then it is called net income. Cash flow statement is measuring about how company is generating cash in order to pay debts, fund investments and operating expenses.
Investors as well as financial analysts focus on financial data in order to analyse about performance of company and making predictions about direction of stock price of business (Palmer and et. al., 2015). The most significant resources of reliable as well as audited financial data is their annual report that possess all financial statements of business. It is used by market analysts, investors and creditors for evaluating health and earning of company in proper way. This is essential to understand all components of financial statements.
As per opinion of corporate finance institute (2020), ratio analysis is defined as tool that is used for different pieces of information in financial statement of enterprise (What is Ratio Analysis?, 2020). This is used by external analysis for determining about several concepts of firm such as liquidity, profitability and solvency. It is important for PWC to analyse both current as well as past financial data for obtaining data in order to evaluate financial performance of company. This assists in knowing about providing information of financial health on upward or downward trends and drawing comparisons from other competing enterprises.
Ratio analysis is used for various purposes which:-
Comparisons- The main use of ratio analysis is comparing financial performance of company that is similar in industry for understanding position of company at marketplace (Poelking and et. al., 2015). This information is applied by management for formulating decisions which has aim in improving position of market.
Operational Efficiency- PWC is using ratios for knowing trends in financial performance. The established companies are collecting data from financial statements over long term. Such trend is used in predicting direction of future financial performance along with identifying expected financial turbulence.
Trend Line- Management of PWC uses ratio analysis for determining degree of efficiency in managing liabilities as well as assets. Insufficient uses of assets like building, land provide outcome of unnecessary expenses which should be eliminated.
According to article published (2020), financial ratio is defined as mathematical expression which define about relationship among independent or related accounting figure (Types of Accounting Ratios, 2020). These ratios are calculated on accounting information obtained from financial analysis. There are four kinds of ratios that are used in financial statements. They are as follows:-
Liquidity Ratios- This is used for judging to pay capacity of enterprise towards short term liabilities. This assists in evaluation of company’s ability in order to satisfy short term needs and commitments. It includes quick ratio, super quick, net working capital and current ratio.
Solvency Ratio- This assist to determine about long term solvency which is used in judging long term debt to pay capacity of enterprise (Rahimi and Ziaie, 2015). It is looking for long term financial strength in meeting obligations that includes repayment of interests as well as principal. It includes different types of ratios such as debt to equity, debt to asset, proprietary, fixed, interest coverage ratio.
Activity Ratio- It is also known as efficiency, turnover and performance ratio. They are significant in subpart of ratio which symbolise about speed in which sales are made. If there is high turnover then better utilisation of assets that leads towards improving profitability as well as efficiency. It includes turnover, trade receivables, trade payable and working capital.
Profitability Ratio- Efficiency ratio leads toward profitability in indicating success of enterprise. This shows about earning capacity of enterprise in respect with resource employed. It includes gross ratio, net profit, operating profit ratio, price earning, return on investment.
There are different types of research methods which are used by researcher to get data and information in order to attain their research aim and objectives (Robinson, 2020). Different research methods are:
Primary Research- In order to collect data and information, it is important to use primary research where questionnaire is prepared and feedback is taken from them.
Secondary Research- For collection of data and information already used sources such as government agencies, report, financial statements are applied to get information.
The research activities for completing set aim and objective. They are as follows:
• Research background
• Research aim and objectives
• Literature review
• Research purpose
• Research methods
• Research finding
Books and Journals
Lee, J., Wong, D., Velasco Jr, J., Rodriguez-Nieva, J. F., Kahn, S., Tsai, H. Z., Taniguchi, T., Watanabe, K., Zettl, A., Wang, F. and Levitov, L. S., 2016. Imaging electrostatically confined Dirac fermions in graphene quantum dots. Nature Physics. 12(11). pp.1032-1036.
Palmer, S. C., Mavridis, D., Navarese, E., Craig, J. C., Tonelli, M., Salanti, G., Wiebe, N., Ruospo, M., Wheeler, D.C. and Strippoli, G. F., 2015. Comparative efficacy and safety of blood pressure-lowering agents in adults with diabetes and kidney disease: a network meta-analysis. The Lancet. 385(9982). pp.2047-2056.
Poelking, C., Tietze, M., Elschner, C., Olthof, S., Hertel, D., Baumeier, B., Würthner, F., Meerholz, K., Leo, K. and Andrienko, D., 2015. Impact of mesoscale order on open-circuit voltage in organic solar cells. Nature materials. 14(4). pp.434-439.
Rahimi, R., Ochoa, M., Yu, W. and Ziaie, B., 2015. Highly stretchable and sensitive unidirectional strain sensor via laser carbonization. ACS applied materials & interfaces. 7(8). pp.4463-4470.
Robinson, T. R., 2020. International financial statement analysis. John Wiley & Sons.
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