Essays on Accounting Article

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IntroductionGowns of Envy Pty Ltd is a wholesale business which deals with imported Wedding Gowns and fabrics. They supply some of the leading Australia retailers. This business was started in 2008 and has now been operating for the past three years. To achieve its growth strategies, the business want to open up to new line of business-by supplying an alternative line of product. This project would require substantial modifications of the existing facilities- which inspired the owners to seek bank credit to finance the expansion (Vandyck 20). The purpose of this report is to analyze liquidity, profitability and financial stability of the business, with the aim of establishing whether its credit worthiness is does justify its credit application.

To achieve this purpose, an extensive analysis of financial information since the business was started has been undertaken. In particular, the report has analyzed financial ratios and percentages, and tried to establish the implications of the trends. The reliance on the information on the analysis is however limited due to some factors. It is difficult to categories the business in various industries due to diversification.

This makes the inter-business comparison very difficult. Also, different firms use different accounting policies and methods such as depreciation, provision and other estimates which again make comparison of the business with other in the industry a very difficulty affair. The other limitation is that ratios are used for short-term planning because they are compiled at a point in time and may be affected by shorter changes. Finally, ratios are computed from historical data and therefore are not very good future indicators. This report begins with analyses of the company’s profitability. This is achieved by comparison the firm’s profitability rations such as return on assets and price earnings.

This is followed by liquidity analysis which uses ratios such as quick ratio and current ratio among others. The last area of analysis is the financial stability which uses ratios such as the debt ratio and interests rates to establish the ability of the firm to remain financially stable in the future. Finally, the report ends by a conclusion and recommendations based on the findings of the report. ProfitabilityProfitability ratios measure the efficiency with which the firm uses various funds to generate profits or returns.

They also measure the management ability to control the various expenses in the firm. Return on assets has been increasing since 2009. Since this ratio measures the efficiency of assets in contributing towards the returns of the company, the increase is encouraging. It shows that the management has been improving on efficiency of assets in generating income since 2009. Similarly, return on shareholders equity which measure the efficiency in which the shareholders funds is being used in generating income has remarkably increased after 2008, and slightly after 2009.

This shows that the shareholders funds have been increasingly used to generate income. Being the owners of the firm, the shareholders would want this value to go up as it reflects a positive expectation on their returns. EPS has increased in 2008 but dropped in 2009. Since it is a sign of profitability, its declining is alarming as it could be reflecting the fact that the company is becoming less profitable. The management should strive to ensure that these ratios improve as they also reflect the overall performance of the firm.

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