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Management’s Use of Analysis - Expanded Analysis, Financial Analysis and Reporting | Financial Analysis and Reporting - B Com PDF Download
Management can use financial ratios and common-size analysis as aids in many ways. Analysis can indicate the relative liquidity, debt, and profitability of a firm. Analysis can also indicate how investors perceive the firm and can help detect emerging problems and strengths in a firm. As indicated previously, financial ratios can also be used as part of the firm’s corporate objectives. Using financial ratios in conjunction with the budgeting processcan be particularly helpful. An objective of the budgeting process is the determination of the firm’s game plan. The budget can consist of an overall comprehensive budget and many separate budgets, such as a production budget.
The comprehensive budget relating to financial statements indicates how a firm plans to get from one financial position (balance sheet) to another. The income statement detail show the firm changed internally from one balance sheet position to another in terms of revenue and expenses. The statement of cash flows indicates how the firm’s cash changed from one balance sheet to another.
A proposed comprehensive budget should be compared with financial ratios that have been agreed upon as part of the firm’s corporate objectives. For example, if corporate objectives include a current ratio of 2:1, a debt equity of 40%, and a return on equity of 15%, then the proposed comprehensive budget should be compared with these corporate objectives before accepting the budget as the firm’s overall game plan. If the proposed comprehensive budget will not result in the firm achieving its objectives, management should attempt to change the game plan in order to achieve its objectives. If management cannot change the proposed comprehensive budget satisfactorily to achieve the corporate objectives, they should know this when the comprehensive budget is accepted.
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FAQs on Management’s Use of Analysis - Expanded Analysis, Financial Analysis and Reporting - Financial Analysis and Reporting - B Com
| 1. What is expanded analysis and why is it important in management decision-making? |  |
Ans. Expanded analysis refers to the process of analyzing additional data and information beyond the basic analysis to gain a deeper understanding of a situation or problem. It is important in management decision-making because it provides more comprehensive insights, helps identify trends and patterns, and enables managers to make more informed and strategic decisions.
| 2. How does financial analysis contribute to effective decision-making in management? | |
Ans. Financial analysis involves assessing the financial health and performance of a business by examining financial statements, ratios, and other financial indicators. It contributes to effective decision-making in management by providing key insights into the company's profitability, liquidity, solvency, and overall financial stability. It helps managers assess the financial implications of different options and make decisions that align with the organization's goals.
| 3. What is the role of reporting in management decision-making? | |
Ans. Reporting plays a crucial role in management decision-making as it provides relevant and accurate information about the organization's performance, operations, and financial status. It allows managers to track progress, identify areas of improvement, and make data-driven decisions. Reporting also facilitates communication and transparency within the organization, enabling managers to effectively communicate their decisions to stakeholders.
| 4. How can managers effectively use financial analysis and reporting together? | |
Ans. Managers can effectively use financial analysis and reporting together by using financial analysis to identify key trends, patterns, and insights from the financial data, and then presenting these findings through reporting. Financial analysis helps managers understand the financial implications of different decisions, while reporting provides a clear and concise way to communicate these findings to stakeholders. By combining these two processes, managers can make informed decisions based on accurate and reliable financial information.
| 5. What are some challenges that managers may face when using analysis, financial analysis, and reporting for decision-making? | |
Ans. Some challenges that managers may face include:
- Data quality issues: Managers may encounter challenges in ensuring the accuracy and reliability of the data used for analysis and reporting.
- Time constraints: Gathering, analyzing, and reporting data can be time-consuming, especially when dealing with large volumes of information.
- Interpreting and presenting findings: Managers may face difficulties in interpreting complex financial analysis results and effectively communicating them through reporting.
- Limited resources: Lack of resources, such as skilled analysts or advanced tools, can hinder the ability to conduct thorough analysis and reporting.
- Changing business environment: Market conditions, regulations, and other external factors can impact the relevance and validity of analysis and reporting, requiring managers to adapt their decision-making approaches.
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