Application of Discounted Cash Flow

Question: Discuss about the Application of Discounted Cash Flow. Answer: Introduction: As per the ratio analysis determined from the financial statements of TNO Limited, it can be said that the net profit ratio of the company declined in the current unaudited period compared to that of the previous year by around 9%. Similarly, return on assets of the company also declined by around 10%, which indicates that the capacity to generate revenue from the assets is not sufficient. Working capital ratio of the company reflected 1.91, which was higher in the previous audited financial year indicating that the value of assets has been declined in the current year to meet the current liabilities. According to the financial statements of the company, it can be said that the net income reflected declining trend in the current financial year. It has been observed that the revenue of the company also reflected 58% decline compared to that of the previous year 2009 indicating reduction in the overall expected rate of return. During the current financial year, it has been noticed that the solvency ratio of the company declined in the current year, which was 0.50 in the previous audited period that may lower the return on investment and increase the cost of capital structure (Knechel Salterio, 2016). On the contrary, liquidity ratio of the company reflected increased value in the current financial year, which reflects the ability of the company to convert resources in cash within short- term period (Lu, Wu Yu, 2017). Significant risks at specific account level Considering the non- current assets of the company, it can be said that the value of investments has been increased in the current year. Increase in value of investments has been measured through properties, which was valued by directors as per the basis of financial year 2010 (Kou, Peng Wang, 2014). Accordingly, it can be said that the investment valuation of the company reflected risk of decline in market value that may affect the true and fair view of the assets value. In addition, the account of intangible asset valuation reflects significant risk of correct valuation, appropriate amortization charges and value as per the current and fair market rates (Uechi et al., 2015). Explanation on indentifying the areas of significant risks While planning and performing analytical procedures, it is essential to measure the significant risk present in the financial statements to assess the materiality and relevance of the financial performance of the company. In the present case, the areas that have been considered for significant risks are investments and intangible assets other than overall income statement and balance sheet. The investment account has been identified for significant risk since it covers a significant area of companys asset and overall financial position. It is essential for a company to measure the appropriate and correct value of investments in accordance with the fair market value (Delen, Kuzey Uyar, 2013). In case of TNO Limited, investment of surplus funds and property market is principal business activities therefore it is essential to conduct appropriate audit test on the value of investments. It is important to conduct detailed valuation of the investment together with the current market value as well as interest rates along with the verification of accounting records of investment. On the other hand, valuation of intangible assets has been considered since it involves a significant area in the companys overall asset resources. Since, TNO limited has been involved in research and development of technologies, it is essential to consider appropriate value of intangible assets as per the current market structure. Reverence List and Bibliography Delen, D., Kuzey, C., Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach.Expert Systems with Applications,40(10), 3970-3983. Dudzi?ska-Bary?a, R., Michalska, E. (2015). Visualisations of the risk investment valuation and the level of inventory control using the GeoGebra software.Studia Ekonomiczne,247, 7-19. Knechel, W. R., Salterio, S. E. (2016).Auditing: assurance and risk. Routledge. Kou, G., Peng, Y., Wang, G. (2014). Evaluation of clustering algorithms for financial risk analysis using MCDM methods.Information Sciences,275, 1-12. Lu, L. Y., Wu, H., Yu, Y. (2017). Investment-related Pressure and Audit Risk.Auditing: A Journal of Practice and Theory. Mohammed, M. I., Omirin, M. M., Singhry, I. M., Auwal, U. (2016). Application of discounted cash-flow (DCF) models in the valuation of investment properties in Nigeria.International Journal of the Built Environment and Asset Management,2(1), 25-36. Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., Kenett, D. Y. (2015). Sector dominance ratio analysis of financial markets.Physica A: Statistical Mechanics and its Applications,421, 488-509.