ACCOUNTING FOR BUSINESS: REFER/DEFER COURSEWORK

Accounting for Business: Refer/Defer Coursework

Accounting for Business: Refer/Defer Coursework

Introduction

In order to run a successful business, it is highly recommended to do adequate financial planning and evaluate how well business is performing. Financial ratio analysis is considered as the most reliable financial tool to measure the performance of the business as it helps in determining the weakness and strengths of the business. It gives an overview of the financial patterns and turn overs for a year and determine key gauges of financial performance. As per the financial result, the managers make strategies to cater the financial issues and problems encountered for a year (Drake, P., n.d., pp. 1).

Variance analysis is also one of the useful techniques in finance and accounting in preparing budget and gauging financial performance of the company. Variance is referred to the difference between what actually incurs and what is expected by the analyst to incur. It can be both positive and negative figures. It highlights the area of concern for the company pertaining to higher costs and changes in revenues. It helps in determine the areas or issues faced by company in achieving the desired goal or the deficiency in meeting the expectation of the company (Riley, J., 2012, n.d.).

Liquidity Ratios

Liquidity ratios measure the company's capability to pay its debt commitment in time (Fraser. L. M. and Orimiston. A. 2007). We have measured two ratios of liquidity to evaluate Hertford Ltd. ability to fulfill its debt obligations.

Current ration is the measures the company's capacity to fulfill its short term commitments, it is computed by dividing current liabities to current assets (Fraser. L. M. and Orimiston. A. 2007). The current ratio of the company is calculated to be 3.29 in 2012, which exhibits a positive picture of he company's liquidit position to fulfil its obligations.

Quick Ratio

Quick Ratio is considered as an aggressive means of measuring company's short-term solvency as it excludes inventory from current assets because inventory is a less quick means of immediate cash availability (Fraser. L. M. and Orimiston. A. 2007). The Quick ratio of Hertford Ltd is estimated as 1.48 which confirms that the company has more than sufficcient liquid assets other than inventories to fulfil its obligations.

Activity Ratios

Activity ratios explain the efficiency of the company in managing assets.

Account Receivable Turnover

The account receivable turnover ratio measures in times, the company takes to converts its account receivables into sales. It measures the company's liquidity of account receivables; another interpretation of account receivable turnover is average collection period (Fraser. L. M. and Orimiston. A. 2007). Hertford ltd account receivables turnover is calculated as 15.9 times in 2012 as compare to 9.9 times as expected by the accounts manager as per the budget prepared for the year 2012.

Inventory Turnover

It exhibits the company's capability to convert its inventory into sales, its alternative representation can be days inventory held, the lower the days company takes to convert it into sales, more efficient it is ...