It is a fascinating topic to study because it can teach us so much about account and business. When we use ration analysis we can know about how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy!!
Ration analysis can also help us to check whether a business is doing better this year that it was last year; and it can tell us if our business is doing better or worse that other businesses doing and selling the same thing. What does ration analysis will tell us??
We can use ration analysis to tell us whether the business
1. Is profitable
2. Has enough money to pay its bill
3. Could be paying its employees higher wages
4. Is paying its share of tax
5. Is using its assets efficiently
6. Has a gearing problem
7. Is a candidate for being bought by another company or investor Here in the above section we have talked about profits, having enough cash, efficiently using assets etc; we can put these ratios in the categories that are designed exactly to help us to answer many questions. The categories are 1. Profitability: Has the business made a good profit compared to its turnover? 2. Return Ratios: Compared to its assets and capital employed, has the business made a good profit? 3. Liquidity: Does the business has enough money to pay its bills? 4. Asset usage: How has the business used its fixed and current assets? 5. Gearing ratios: Does the company has lot of debt or is it financed mainly by shares? 6. Earnings per share: Measure of profitability. Used for comparing performance over time.
Users of Accounting Information
As we have already specified the ratios in to the groups, we should put reader of accounting information in to convenient groups. The list of the categories of readers and user of accounts includes the following people and group of people * Investors
* Managers of the organization
* Suppliers and other trade creditors
* Governments and their agencies
* Financial analysts
* Environmental groups
* Researchers : both academic and professionals
The users of accounts that we have listed will want to know the sorts of things we can see in the table below: Investors| To help them determine whether they should by the shares of the business, hold on to the shares they already own or sell the shares they already own. They also want to assess the ability of the business to pay dividends.| Lenders| To determine whether their loans and interest will be paid when due| Managers| Might need segmental and total information to see how they fit into the overall picture| Employees| Information about the stability and profitability of their employers to assess the ability of the business to provide remuneration, retirement benefits and employment opportunities| Suppliers and other trade creditors| Business supplying good and material to other business will read their accounts to see that they don’t have problems: after all, any supplier wants to know it his customers are going to pay their bills!| Customers| The continuance of a business, especially when they have a long term involvement with the business| Government and their agencies| The allocation of resources and therefore, the activity of business. To regulate the business, determine taxation policies and as the basis for national income and similar statistics| Local community| Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area| Financial analysts| They need to know, for example the accounting concepts employed for inventories, depreciation, bad debts and so on| Environmental groups| Many organizations now...