Finance & Accounting Essay Example | Topics and Well Written Essays - 1000 words

Finance & Accounting - Essay ExampleWallace defines Tests of Reasonableness as non-statistical models using operating or external data as well as fiscal data to predict an amount under examination (Wallace, 1994, partitioning on Evaluating analytic Procedures). As Wallace illustrates, Tests of Reasonableness include accounting and non-accounting variables in the model, with the aim of enhancing the reliability of a test of reasonableness compared to single variable and financial ratio analysis.On the companys purchases, the going-rate for the exchange rate between UK and the import country sources respective currencies, multiply by the average volume of uniform purchases, pot be used to evaluate the reasonableness of the current months purchases. For the companys sales, the average sales of a retail clothing company of similar size, multiplied by the companys average periodical sales volume, can be used to test the reasonableness of the current months sales. Lastly, the average locks (including commission) of employees who work in similar industries (of the same size) in England, multiplied by the companys total number of employees, can be used to check the reasonableness of the companys wage expenses.Wallace explains that Financial Ratio epitome tend... of a retail clothing company of similar size, multiplied by the companys average monthly sales volume, can be used to test the reasonableness of the current months sales. Lastly, the average salary (including commission) of employees who work in similar industries (of the same size) in England, multiplied by the companys total number of employees, can be used to check the reasonableness of the companys wage expenses.Financial Ratio AnalysisWallace explains that Financial Ratio Analysis tends to be more effective than single-component procedures because it explicitly considers interrelationships among financial variables (Wallace, 1994, Section on Evaluating Analytical Procedures). This mount entails co mparing one entry in the financial statements versus another entry, to draw implications regarding the companys financial or operational state. For example, a low net income-to-sales or make margin ratio can possibly suggest that the company is losing significant amounts of money in its operations, because its operating expenses cannot justify the sales and revenues that it is receiving. Comparing these ratios against industry benchmarks can suggest how well the company is faring, against the whole retail clothing industry. Moreover, the ratios days sales in receivables, days sales in inventory, and inventory turnover can give an idea of the efficiency of its order efforts on its receivables, as well as how fast it needs to replenish its inventory to keep up with periodic demands. Regression AnalysisRegression Analysis involves the creation of a model using operating and external data as well as financial data (Wallace, 1994, Section on Evaluating Analytical Procedures). This type of analysis, however, is more precise than the basic