FINANCIAL ANALYSIS

Financial Analysis and Management

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Answer 12

The regulatory framework - Financial Reporting2

Conclusion6

Answer 26

The Discounted Cash-Flow Approach - Capital Investment Decisions6

Net Present Value (NPV) method6

Internal Rate of Return (IRR)8

Discounted Payback9

Answer 39

Profitability of a firm9

Liquidity of a firm10

Management of cash11

Inventory management11

Management of debtor12

Short Term financing12

References13

Financial Analysis and Management

Answer 1

The regulatory framework - Financial Reporting

Financial reporting is an activity which is involved measuring, classifying and recording the economic transactions of an entity according to the established principles, accounting standards and legal requirements. It is part of the financial accounting.

Financial reporting provides the financial position and financial performance of an entity which is involved of communication to the external users regarding the financial statements. These all financial reporting are controlled and monitored by a regulatory framework that make sure all financial statements are prepared according to the particular framework which is prescribed (Alexander and Nober 2007, pp.01-14).

By the time passage, countries have developed their own regulatory frameworks according to their local accounting standards which are known as Generally Accepted Accounting Principles (US GAAP, UK GAAP etc.). GAAP provides a set of rules and guidelines which helps in the preparation of the financial statements. These standards of accounting are either principles-based or rules-based. According to the professional framework and legal of an individual country, financial statements are developed (Alexander and Nober 2007, pp.01-14).

In the UK, the regulatory framework is known as UK GAAP. It is a combination of three primarily sources of authority; the rules of stock exchange for listed companies on FSA, accounting standards and the Company law. UK GAAP provides a broad framework solely and based on the company law. Accounting guidelines are comprised by the regulation and enable the precision and high level of update data within the financial statements.

The regulatory framework is needed in a country as well as internationally. There are two reasons behind that; first reason is the irregular information in which managers of a firm are accountable for preparing financial statements and can access to information regarding the activities of a firm while the other members of the firm cannot. That is why managers within the firm, take an advantage for exploiting their positions to obtain their personal goals at the cost of others. The second reason is the financial reporting that should be reliable and relevant. As a result, it meets the needs of shareholders and other users but meeting the need of the regulatory framework is much important. In most situations, there is the only source of information i.e. financial statements which indicates the performance of a company (Collis and Hussey 2007, pp.08-12). Therefore, the financial statements reflect up-to-date and valid information which are ensured by the regulatory framework.

Currently, the way of accounting has been dealing of criticism regarding regulatory framework that popular rules-based accounting is more efficient or the principle-based accounting especially with responding to the scandals at the WorldCom and Enron. These scandals pressurized the regulatory framework to modify their standards because of the ...