Question 2

Financial ratios are a useful tool to analyze financial statements of businesses. These analyses help users of financial information to satisfy their needs. As users have different objectives, they consider some aspects of financial information more important than others. For example, bondholders would focus on ratios that analyze the long-term cash flow of the firm.

Required:

i. What would be an important purpose of financial analysis for suppliers? In your answer state a financial aspect in which suppliers would be most interested and explain why they would be interested in that particular aspect.

ii. What would be an important purpose of financial analysis for the managers of the firm? In your answer state a financial aspect in which managers would be most interested and explain why they would be interested in that particular aspect.

iii. What would be an important purpose of financial analysis for shareholders? In your answer state a financial aspect in which shareholders would be most interested and explain why they would be interested in that particular aspect.

Question 3

[a] In the lecture on limitations of financial analysis your lecturer mentioned that inflation is a factor that hinders financial analysis.

Discuss why inflation may be an issue in financial analysis and suggest a remedy for this limitation.

[b] In the lecture on limitations of financial analysis your lecturer mentioned that differences in accounting policies when comparing two businesses is a factor that hinders financial analysis.

Discuss why differences in accounting policies may be an issue in financial analysis and suggest a remedy for this limitation.