Reporting on Accounts

Overview

• Why report on the accounts of a business?

• Who is interested in the accounts of a business?

• Types of ratios used

Why report on the accounts?

• It is important that accounts are interpreted for the benefit of interested parties

• Accounts are interpreted by using ratios which show the relationship between figures

• The results of these ratios are then compared with:– The results from the previous year– The results from other businesses in the same

industry

Parties interested in the accounts of a company• Bankers – can loans and overdrafts be repaid?• Creditors – can business pay for goods supplied on

credit?• Shareholders – how much profit does the business

make? What will the dividend per share be?• Employees – is their job secure? Is the business

making enough profit to afford a pay increase?• Investors – is the business a secure investment?• Management – is the business performing better or

worse than last year?• Revenue Commissioners – how much profit is the

business making for tax purposes?

Interpretation of Accounts

A company can be assessed by using the following ratio headings:

• Profitability

• Liquidity

• Activity

• Solvency

• Dividend Policy

Profitability Ratios

• The profitability ratios show how successful the management of the business was at making profit in the company

• Ratios:– Gross Profit Percentage/Margin– Net Profit Percentage/Margin– Return on Capital Employed

Liquidity Ratios

• Liquidity is the ability of a company to pay its debts when they are due

• Ratios:– Working Capital Ratio (Current Ratio)– Acid Test Ratio (Quick Ratio)

Solvency Ratio

• A firm is solvent if its total assets are greater than outside liabilities

• If this is the case, it can continue in business

• If the business is insolvent, it means that the total assets of a business are less than its outside liabilities

• In this case, the business must cease trading

Dividend Policy

• A dividend is the amount of profit that is given to the shareholders of a company

• The board of directors decides how much of a dividend will be paid to the shareholders

Activity Ratios

• The activity ratios tell us how active the company was during the year

• Ratios:– Rate of Stock Turnover– Debtors Days– Creditors Days

Test your knowledge…

• http://quiz.scoilnet.ie/Quiz.aspx?qid=1442

• Assessing a Business 2005.doc

• Assessing a Business 2007.doc

• Assessing a Business 2009.doc