Ratio Analysis Paper
Ratios describe the various relationships among accounts in the balance sheet and income statement. Financial ratios are important and helpful gauges of how an organization is functioning. An organization’s financial health, potential revenue, and even possible bankruptcy can be garnered from financial ratios. Information derived from financial statements is used to calculate most ratios and make projections. “Ratios help investors and lenders determine the risk associated with lending or investing funds in an organization” (GE Financial Healthcare Services, 2003, para 1). According to Finkler and Ward (2006), “the key to interpretation of ratios is benchmarks. Without a basis for comparison, it is impossible to reasonably interpret the meaning of a ratio” (p. 110). Ratios are particularly significant to an organization’s Board or Chief Financial Officer because they reflect the financial shape of the organization to outsiders while allowing comparisons to be made among similar entities in the same industry. Many businesses and nonprofit organizations use financial ratios. They are well known financial instruments. Even though there are many ratios available for use, the majority of nonprofit organizations use a small number of ratios to learn more about their financial state. “To make the most of ratio calculations, start with some fundamental guidelines. Financial ratios are useful if they are: • Calculated using reliable, accurate financial reports (such as an annual audit or final report) • Calculated consistently from period to period
• Used in comparison to benchmarks or goals
• Viewed both at a single point in time and as a trend over time” (NonProfits Assistance Fund, 2011, p. 1) The 2008, 2009, and 2010 financial statements of The Children’s Home in Mount Holly, New Jersey have been researched. The information from the financial statements will be used to perform ratio calculations. The two...
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