Competency 1 Reflection Rebecca Anderson

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1 Competency 1 Reflection Rebecca Anderson ORGCB/535: People and Organizations Prof. Karen Lascelle September 1, 2022

2 Managerial Accounting and Legal Aspects of Business Competency Ratio analysis is a quantitative method to rate a company's financial status. Ratio analysis cites to examine all financial statements in an institution; balance sheets, income statements, cash-flow statements, and many more. The information derived is used to make financial decisions in the firm. The ratios used to make financial decisions are divided into turnover, liquidity, profitability, and many more. Turnover ratio. Turnover ratios measure a firm's performance concerning sales (Patin, 2020). The working capital ratio falls in the category of turnover ratios. It links the profits made in the business and the liquidity of the same; it assesses the relationship between short-term liabilities and the company's assets. Analyzing working capital aids the organization's financial decision- making. The company can make rational decisions during a financial crisis to handle. For instance, when the company's debts rise, there is a likelihood of poor financial performance in the firm; therefore, the management resonates on ways to decrease the debts and increase profitability. Liquidity ratios. The quick ratio is categorized as the liquidity type of ratio. It is a financial measure of a firm's liquidity on a short-term basis; it rates a firm's ability to meet short-term financial commitments with the assistance of liquid nature. The liquidity of assets in a firm is determined by cash and cash equivalents, among others. The quick ratio in a firm aids the management in deciding on the current asset to sell so that the funds can meet a short-term liability. Organizations are at an advantage when the quick ratio is high (Choithramani, 2022).

3 Profitability ratios. In managerial accounting, profitability ratios are measures of the ability to gain profits concerning a firm's revenue. The management of the firms can easily make financial decisions such as the assets to sell or buy with an analysis of profitability ratios. Return on equity is an example of a profitability ratio that measures the profit generated by an asset in the firm (Bunea, 2019). Analytical Techniques Capital investment decisions are made based on the analytical techniques the managers decide to execute. Analytical decisions may include; net present value, internal rate of return, and payback method, among others. The above outlined analytical techniques have both advantages and disadvantages related to the same. Net present value (NPV) It refers to a measure of comparison between the current and initial investment based on the value of the cash flows executed at a certain rate of return. The ability to measure the value of cost and profitability of an investment is an advantage of using NPV (Knote, 2020). Incorporating NPV guarantees the determination of profitability or losses in a project. For instance, a security's cash flow should offer a higher NPV after the investment. However, NPV creates inconveniences during the comparison of large investments and smaller investments. Additionally, the results in applying NPV depend on the capture level; it is a disadvantage of using NPV. Internal rate of return (IRR)

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4 It is a capital investment analytical technique used to measure the potential attached to a project. This technique is advantageous since it does not tie to the time value of money compared to NPV; it ensures that future cash flows are incorporated. For instance, the management can reinvest the capital in IRR. Moreover, the IRR is simple to calculate and advantageous to the management. However, IRR is unreliable due to disregard for future costs in the business. IRR also causes inconveniences where decisions on unequal-sized projects are concerned. Payback period method It is a decision method used to measure the productivity of a project based on the time it takes to retrieve the amount invested. Additionally, the payback period is simple to calculate; divide the investment cost by the annual cash flow of the project. For instance, if $5000 is invested in a project and the cash flow of the same amounts to $500 annually, the payback period is 5.0, which is remarkable. However, the payback period does not consider the cash generated after the designated period. Executing the payback period method reduces the chances of risk occurrence; guarantees a clear picture of investment progress.

5 References Bunea, O., Corbos, R., & Popescu, R. (2019). Influence of some financial indicators on return on equity ratio in the Romanian energy sector - A competitive approach using a Dupont-based analysis. Energy , 189 , 116251. https://doi.org/10.1016/j.energy.2019.116251 Choithramani, N. (2022). Ratio analysis of Chhattisgarh State Power Distribution Company Ltd. , 14 (2), 7372. DOI:10.9756/INTJECSE/V14I2.851 ISSN: 1308-5581 Knoke, T., Gosling, E., & Paul, C. (2020). Use and misuse of the net present value in environmental studies. Ecological Economics , 174 , 106664. https://doi.org/10.1016/j.ecolecon.2020.106664 Patin, J., Rahman, M., & Mustafa, M. (2020). Impact of total asset turnover ratios on equity returns: Dynamic panel data analyses. Journal of Accounting, Business, and Management (JABM) , 27 (2), 19. https://doi.org/10.31966/jabminternational.v27i2.689

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