Chapter 4: Interpreting Published Accounts

Part 1 of Chapter 4

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  • Interpreting Published Accounts
    • Ratio Analysis
      • Stages in ratio analysis
        • 1. Identify reason for investigation
        • 2. Decide on relevant ratios
        • 3. Gather information required and calculate
        • 7. Apply above process to measure actions taken in stage 6
        • 4. Interpret the ratio
        • 5. Make appropriate comparisons
        • 6. Take action with the results
      • Users of ratio analysis
        • managers
          • identify efficiency of firm and functional areas
          • to plan ahead
          • to control operations
          • to assess effectiveness of policies
        • employees
          • find out whether firm can afford to pay higher wages
          • see if profits are being allocated fairly
        • government
          • review success of its economic policies
          • find ways of improving business efficiency overall
        • competitors
          • compare performance against rivals
          • discover strengths and weaknesses
        • suppliers
          • know sort of payment terms being offered to other firms
          • whether a firm can afford to pay
        • customers
          • know of future of the firm
          • see if guarantees / after sales service is secure
        • shareholders
          • compare financial benefits of investment with other alternatives
      • a method of assessing a firm's financial situation by comparing 2 sets of linked data
      • allows a business to compare itself with other firms, taking into account differences in size or circumstances
    • Profitability and Performance ratios
      • ROCE (%)
        • shows operating profit as a percentage of capital employed
        • operating profit or profit before tax / total equity + non-current liabilities x 100
    • Liquidity ratios
      • Current ratio
        • current asset / current liabilities
        • ideal current ratio is 1.5:1 to 2:1
      • Acid test ratio
        • liquid assets (current assets - inventories) / current liabilities
        • Untitled

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