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Chapter 26-1

This document outlines the analysis of accounts, focusing on profitability and liquidity ratios, and their importance for various stakeholders in assessing a business's financial performance. It defines key terms such as capital employed, liquidity, and profitability, and discusses how ratio analysis can aid in decision-making for lenders and investors. Additionally, it highlights common limitations of ratio analysis and provides examples of stakeholder interests in financial accounts.

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Arooj Abid
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10 views7 pages

Chapter 26-1

This document outlines the analysis of accounts, focusing on profitability and liquidity ratios, and their importance for various stakeholders in assessing a business's financial performance. It defines key terms such as capital employed, liquidity, and profitability, and discusses how ratio analysis can aid in decision-making for lenders and investors. Additionally, it highlights common limitations of ratio analysis and provides examples of stakeholder interests in financial accounts.

Uploaded by

Arooj Abid
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF or read online on Scribd
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26 Analysis of accounts Key objectives The objectives of this chapter are to revise: © the concept and importance of profitability and liquidity ‘© how to interpret the financial performance of a business by calculating and analysing profitability ratios and liquidity ratios: gross margin; [net] profit margin; return on capital employed; current ratio; acid test © the needs of different users of accounts and ratio analysis ¢ '® how users of accounts and ratio results might use information to help make decisions, for example, Whether to lend to or invest in the business. Key definitions Las zs Ty Capital employed. Thisis shareholders equity plus non-current lables and isthe total long-term and permanent «capital invested ina business. Liquidity ‘The ability ofa business to pay back its short-term debts. : Profitability The measurement of the prafit made relative to either the value of sales achieved or the capital, investedinthe business, i Ef Miguis This means that assets are not easily convertible into cash Ratio analysis of accounts @ >A@ES 212-220, EE | Used by shareholders creditors, and er eee “Managers use them for taking ‘governments to check on com : : decisons anc controling the ferfommance pea| |; Soveeion pears of abuses rrofiabity messes the oft iy a meas ofthe by Bieter pel vested acco this f Remnot ely nee bs ihe busmes hive meat of are used then ts said tbe gud and may Micoreyardisepecstoge need oop tact Tiibtir ofocane roth dt of acount or Starla (ther companies use them for fats based on pas data comparing performance 4 bcounting dat over te cere Siected by faton «ferent ecourting methods ‘sed by ferent compans analysis of accounts @ rwscssnan (Ging te nearest (Net) profit margin % = 7 thd tt i 99 nese then gos prot .was higher or expenses | Tener + impart prcusyeaso «100 + result of 1+ business has suffient ‘ife1 then ligusd #52 to0 much working capital ihe cotpanies om a Fea event nd balance sheet ‘(from the income statement) Re otal slot Gea pohnugh k= tre ptt 100% 7s pret ami 5 100 Se career ce | —~)iaraiat on] aon * Gther companies see business accounts +f GPM increases then ether pices a cert ont wocinouned orton! goss Srone promt eared fom capital (EEO yaar Sedicbuness Sonny (rom he ance set hom he Baunce ted Cuenta = Sees ade abo caret ne ‘ren oes ~ inert ‘arent ases to pay of curent ibis ~~ carent taiiies + similar to curent rato but can be Sgt

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