Reporting on Accounts. Overview Why report on the accounts of a business? Who is interested in the...
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Transcript of Reporting on Accounts. Overview Why report on the accounts of a business? Who is interested in the...
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