Learning Outcomes - Analysis and Interpretation of Financial Statements
At the end of this unit students will be able to
Compute and explain the following ratios:
- Percentage of gross profit to sales;
- Percentage of net profit to sales:
- return on capital employed (ROCE) ;
- current ratio;
- quick ratio;
- Rate of stock turnover.
- collection period for debtors
- Payment period for creditors.
Interpretation of accounting ratios
- prepare and comment on simple statements showing comparison of results for different years;
- make recommendations and suggestions for improving profitability and working capital;
- understand the significance of the difference between the gross profit percentage and the
- Net profit percentage as an indicator of a business’s efficiency.
- understand the problems of inter-firm comparison due to factors such as differing accounting policies;
- Apply accounting ratios to inter-firm comparison.
Discuss the uses of accounting by the interested parties for decision-making:
- club members
- Other interested parties such as governments, tax authorities etc.
Limitations of accounting statements
Recognise the limitations of accounting statements due to such factors as:
- historic cost
- difficulties of definition
- Non-financial aspects.