Analysis Of Accounts: Why And How Accounts Are Used (Copy)
Cheat Sheet: 5.5.4 Why and How Accounts Are Used
Users of Accounts
| User | What They Need | How They Use It |
|---|---|---|
| Owners/Shareholders | Profitability, dividends, return on investment | Decide whether to reinvest or sell shares |
| Managers | Detailed financial data, ratios | Plan budgets, cut costs, set prices |
| Employees | Stability, profitability | Job security, wage negotiations |
| Banks/Lenders | Liquidity, profitability, repayment ability | Decide on loans or overdrafts |
| Investors | ROCE, profit margins | Decide whether to invest |
| Government | Taxable profits, compliance | Collect taxes, check legal obligations |
| Suppliers | Liquidity position | Decide whether to give trade credit |
| Customers | Stability of business | Ensure after-sales service availability |
| Community/Pressure Groups | Ethical/environmental info | Monitor social responsibility |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Ratio Analysis in Decision-Making
| Ratio | Who Uses It | How |
|---|---|---|
| Gross/Net Profit Margins | Owners, managers, investors | Assess profitability & competitiveness |
| ROCE | Investors, banks | Measures efficiency of capital use |
| Current Ratio | Banks, suppliers | Check short-term liquidity |
| Acid Test Ratio | Banks, suppliers | Assess ability to pay debts without selling stock |
Examples of Decisions Based on Accounts
| Situation | User | Decision |
|---|---|---|
| High profitability, strong liquidity | Investors | Buy shares, invest more |
| Weak liquidity (Current ratio < 1) | Bank | Refuse loan or ask for collateral |
| Falling profits year after year | Managers | Cut costs, change pricing |
| Strong ROCE | Shareholders | Hold shares for higher returns |
| Excessive debt levels | Lenders | Increase interest rates or reject loan |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Quick Revision Bullets
- Accounts are used by owners, managers, employees, banks, investors, government, suppliers, customers, community.
- Ratio analysis = helps compare profitability, liquidity, efficiency.
- Users base decisions on results: invest, lend, expand, cut costs, or ensure stability.
- Example: Bank checks current ratio before lending; Investor checks ROCE before buying shares.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course