WEEK 7 Analysis Interp.pptVIP

Accounting For Management Decisions WEEK 7 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS READING: TEXT CH 6 Learning Objectives Define what a ratio is Identify the key aspects of financial performance and financial position that are evaluated by the use of ratios Explain the terms profitability, efficiency, liquidity, gearing and investment Summarise the alternative bases of comparison for ratio analysis Present the ratio formulae for the basic ratios Calculate ratios to analyse the profitability, efficiency, liquidity, gearing and investment of a given entity’s financial statements over several periods Learning Objectives cont’d Interpret basic ratios for profitability, efficiency, liquidity, gearing and investment Discuss the limitations of ratios as a tool of financial analysis Understand index or percentage analysis as an alternative to ratios Financial Ratios Learning Objective: Define what a ratio is Ratios provide a quick and simple means of examining the financial health of a business A ratio simply expresses the relationship between one figure appearing in the financial statements with another eg net profit in relation to capital employed Ratios are simple enough to calculate, and a good picture can be built up with just a few, however, ratios can be difficult to interpret Can be expressed in various forms eg percentages, fractions, proportions, depending on the need and use for the information Financial Ratios cont’d Learning Objective: Identify the key aspects of financial performance and financial position that are evaluated by the use of ratios The key aspects of financial performance/position evaluated by the use of ratios are: Profitability Efficiency Liquidity Gearing Investment Financial Ratio Classification Learning Objective: Explain the terms profitability, efficiency, liquidity, gearing and investment Profitability - Measure of success in wealth creation Efficiency - Effectiveness of utilisation of resources Liquidity - The abili