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.