Skip to main content

Unit III - Ratio Analysis


Meaning of Ratio Analysis:

Now, we have previously learned what ratios are. They are a comparison of two numbers with respect to each other. Similarly, in finance, ratios are a correlation between two numbers, or rather two accounts. So two numbers derived from the financial statement are compared to give us a more clear understanding of them. This is an accounting ratio.

Objectives of Ratio Analysis:

Interpreting the financial statements and other financial data is essential for all stakeholders of an entity. Ratio Analysis hence becomes a vital tool for financial analysis and financial management. Let us take a look at some objectives that ratio analysis fulfils.

Advantages of Ratio Analysis:

When employed correctly, ratio analysis throws light on many problems of the firm and also highlights some positives. Ratios are essentially whistle-blowers, they draw the managements attention towards issues needing attention. Let us take a look at some advantages of ratio analysis.
Ratio analysis will help validate or disprove the financing, investment and operating decisions of the firm. They summarize the financial statement into comparative figures, thus helping the management to compare and evaluate the financial position of the firm and the results of their decisions.
It simplifies complex accounting statements and financial data into simple ratios of operating efficiency, financial efficiency, solvency, long-term positions etc.
Ratio analysis help identify problem areas and bring the attention of the management to such areas. Some of the information is lost in the complex accounting statements, and ratios will help pinpoint such problems.
Allows the company to conduct comparisons with other firms, industry standards, intra-firm comparisons etc. This will help the organization better understand its fiscal position in the economy.

Limitations of Ratio Analysis:

While ratios are very important tools of financial analysis, they d have some limitations, such as
The firm can make some year-end changes to its financial statements, to improve their ratios. Then the ratios end up being nothing but window dressing.
Ratios ignore the price level changes due to inflation. Many ratios are calculated using historical costs, and they overlook the changes in price level between the periods. This does not reflect the correct financial situation.
Accounting ratios completely ignore the qualitative aspects of the firm. They only take into consideration the monetary aspects (quantitative)
There are no standard definitions of the ratios. So firms may be using different formulas for the ratios. One such example is Current Ratio, where some firms take into consideration all current liabilities but others ignore bank overdrafts from current liabilities while calculating current ratio
And finally, accounting ratios do not resolve any financial problems of the company. They are a means to the end, not the actual solution.
Video Lecture Links:

https://youtu.be/hMoOk6iI564
 


Contents   1   2   3   4   5

Labels:

Comments

Post a Comment

Popular posts from this blog

Unit II

2.1 What Are Web Directories? Web Directories  are also known as link directories which are very much concerned with the website’s listings in their index. In olden days, I mean in the past decade, web directories had a great value in the sense of search engines. Because whenever people type queries in search engines, these search engines often consult with the web directories for updated information. All Directories sites follow a layered approach while listing the website i.e, the first one is the main category then followed by the subcategory and then another subcategory until there came a suitable one. Various Features of Web Directories Listing There are various features while listing the websites which depends on the price and duration. These features include: Free submission  – these are free and nothing is charged for review and listing of the submitted links while it takes at least 3 to 6 months while getting listed Reciprocal link  – th...
Post a Comment
Read more

Unit III - B2B ONLINE MARKETING

What is Internet Based EDI? For most companies, the world of EDI is one that they have been exposed to for only the past five to ten years. EDI itself, however, is significantly older, going back to the days before the Internet was prevalent as a communication medium between businesses. During this time, EDI transactions were typically exchanged using third-party service providers known as Value Added Networks or VANs. Internet-based EDI has begun to grow at significant rates over the past few years, spurred in large part by the adoption of key Internet-based EDI technologies by companies like Walmart. Benefits of Internet-Based EDI Internet-based EDI can have a number of benefits over using VANs. The reason is simple - VAN based EDI and other "aggregators" of EDI data charge based on the amount of data that is used and transmitted over their lines. By employing Internet-based EDI you establish a direct link to your trading partners bypassing third part...
1 comment
Read more

PROSE 3 - Muhammad Yunus

SUMMARY Early life: Yunus was born on 28 June 1940 to a Muslim family in Hathazarai, Chittagong. In 1940, that was part of British-controlled India. But, after independence in 1947, became East Pakistan. (and later Bangladesh) Yunus was an excellent student, becoming one of the best students in the year at Chittagong Collegiate School, and later Chittagong College. He completed a BA degree in economics at Dhaka University in 1960, and his MA in 1961. After graduation, he taught economics at Chittagong College and served as a research assistant under Nurul Islam. In 1965 he gained a Fulbright scholarship to study in the UN. Later in 1971, he gained a PhD in economics from the Vanderbilt University Graduate Program in Economic Development. He also worked as an assistant professor of economics at Middle Tennessee State University. In 1970, he met Vera Forostenko a Russian immigrant to the US. They had one child, Monica Yunus, but Vera did not want to live in Bangladesh an...
Post a Comment
Read more