Question:

Part A: Financial Statement Analysis

XYZ Company, a leading manufacturing firm, has recently released its financial statements for the fiscal year ending December 31, 2022. Analyze the company's financial statements and answer the following questions:

(i) Calculate the company's liquidity ratios, including the current ratio and quick ratio, based on the provided balance sheet. Explain the significance of these ratios in assessing the company's short-term financial health.

(ii) Perform a horizontal analysis of XYZ Company's income statement for the years 2021 and 2022. Identify and discuss any significant trends or fluctuations in revenues, expenses, and net income. Assess the overall financial performance of the company during this period.

Part B: Cost Accounting and Budgeting

XYZ Company is considering implementing activity-based costing (ABC) to improve its cost allocation process.

(i) Define activity-based costing and explain how it differs from traditional costing methods. Discuss the advantages of implementing ABC for XYZ Company, specifically addressing how it can lead to more accurate product costing and better decision-making.

(ii) XYZ Company is preparing its budget for the upcoming fiscal year. Describe the budgeting process, including the key steps involved, such as forecasting, budget formulation, and budget evaluation. Discuss the importance of budgeting in financial planning and controlling costs for the company.

Part C: Auditing and Ethical Considerations

XYZ Company is undergoing an audit by an external auditing firm.

(i) Explain the purpose of an external audit and the responsibilities of external auditors in evaluating the financial statements of a company. Discuss the importance of audit independence and objectivity in ensuring the credibility and reliability of financial statements.

(ii) Discuss a specific ethical dilemma that auditors might face during the audit process. Analyze the ethical implications of the dilemma and propose a course of action that the auditors can take to resolve the ethical issue while upholding their professional responsibilities and ethical standards.