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Analysis of Financial Statements

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.

Inter-firm comparison

  • understand the problems of inter-firm comparison due to factors such as differing accounting policies;
  • Apply accounting ratios to inter-firm comparison.

Interested parties

Discuss the uses of accounting by the interested parties for decision-making:

  • owners
  • managers
  • creditors
  • bank
  • investors
  • 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.


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