Analysis of Accounts (Copy)
- We need analysis
- To determine if the business is performing better than previous years
- If it is performing better than the competitors
- Liquidity
- The ability of a business to meet its short-term obligations
- Profitability
- Measuring the profit against either total sales value or capital invested value
- Helps investors decide if they want to invest in the business
- Directors and managers can assess if they will become more success over time or not.
- Can make decisions to improve profitability likewise.
- Rations
- 100*Net Profit/ Capital Employed
- Capital Employed = Owner’s Equity + Long-term labilities
- Gross profit margin = 100*gross profit/ revenue
- Net Profit margin =Â 100*net profit/ revenue
- Liquidity Ratios
- Current ratios = 100* Current assets/ current liabilities
- Acid test ratio/ Quick Ratio/ Liquid ratio = 100*(Current Assets- Closing Inventories)/ Current liabilities
- Interpretation covered in accounting.
- How are business accounts used
- Managers to determine how well business doing
- Shareholders to see if investment growing and profit they can get dividends on
- Creditors to determine if they will get paid in time and should they give more credit
- Banks to determine the gearing of the business and determine whether to provide loans
- Government to determine how much tax should be imposed and if an industrial sector is performing well.
- Workers need to know their job safety
- Businesses in the same industry compare performance.
- Limitations
- Managers will have access to local accounts but external users may not have it
- Ratios are only based on past data
- Accounting data will be affected with inflation
- Different methods by different companies can make it difficult to compare
