Analyzing Financial Position: Factors and Implications

School: Colorado State University, Global Campus - Course: ACT 555 - Subject: Accounting

Analyzing Financial Position Option 2 Tammy Weatherford Colorado State University Global ACT555 Dr. Dushyant Gosai November 13, 2022

2 Analyzing Financial Position Option 2 Financial statement analysis examines a company's financial statements to assess its strength and weaknesses. The process is crucial because it can help investors determine whether a company can pay back its debt or is likely to go bankrupt. Analysts also use it as an evaluation tool when deciding whether or not they want to purchase shares in a company. In this essay, I will analyze business items to determine whether the increased value of such items is generally associated with a stronger or weaker financial position. The essay will also discussfactors thatrating agencies use in determining bond ratings. I will end the paper by discussing what the GASB requires for financial statement reconciliations and why they are required. Part A: Items analysis Debt service: weaker; the higher the debt service, the greater the risk of a debt default. A high or increasing debt service can indicate that a company is struggling with its short-term obligations and may have difficulty meeting long-term obligations (Areas, 2018). Increasing debt service is generally associated with a weaker financial position. Unemployment rate: weaker. A high unemployment rate indicates that many people are without work, which lowers consumer buying power and reduces sales volume for companies. Revenues over expenditures: Stronger because a high or increasing item value is generally associated with a stronger financial position. Personal income per capita: Stronger. Personal income per capita reflects how much disposable income people have to spend on goods and services, and that is an essential source of revenue for most companies.

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3 Population growth: No effect because population growth does not affect the financial condition, or the direction of the effect cannot be predicted. Level of business activity: Stronger because a high or increasing item value is generally associated with a stronger financial position. Unfunded pension liability: Weaker because an unfunded pension liability would indicate insufficient funds to meet future obligations (Areas, 2018). this means there will be less money available for other uses in the future, so it would reflect negatively on present cash flows and financial condition if not resolved soon enough. Short-term borrowing: Stronger. Short-term borrowing allows a company to fund short-term assets (inventory, accounts receivable) from short-term liabilities (bank loans, commercial paper). This can give a company more flexibility in managing its cash flow since it does not have to rely solely on deposits or longer-term debt to finance temporary imbalances between assets and liabilities. Education level of citizens: stronger or no effect. An educated population generally makes better employees and consumers, which can benefit companies by increasing sales volume and market share over time. However, education does not always translate into higher wages or increased spending power; therefore, it may not affect financial conditions unless it increases GDP per capita or personal incomes. Property values: stronger property values indicate the value of the area's infrastructure, which is an essential factor in determining a company's ability to compete in its market. Factors that rating agencies use in determining bond ratings Rating agencies are the companies that assess a company's creditworthiness and, in turn, it is bond ratings. They look at factors such as interest rates, the size of the economy,