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Summary Financial accounting
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This provides information on how to analyse financial statements
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Unit 6: Analysis of Financial StatementsTechniques available to analyse financial statements
It is necessary for organisations to evaluate their financial statements to evaluate the financial
organisation based on its recent performance. The evaluation of financial statements is typically do
following types of comparisons:
Comparing with previous financial statements over a specified period of time e.g. 5 years
Using a financial statement from the past as a basis and indexing any future financial statements
expressed as a percentage
Expressing parts of the financial statements as a percentage of overall for comparison.
Using financial ratios for comparison such as cross-sectional analysis (comparing with
organisations) and time-series analysis (comparing ratios over time). In this module, the focu
financial ratios.
Financial ratios can be classified as profitability, liquidity, debt/solvency and resource utilisation ra
, Unit 6: Analysis of Financial Stateme
Financial Ratios
Profitability ratios Liquidity ratios Debt or solvency ratios Resource utilisa
1. Return on capital employed 1. Current ratio 1. Interest cover ratio 1. Inventory av
of days
2. Operating profit margin 2. Acid-test ratio 2. Debt to equity ratio 2. Trade receiva
number of da
3. Gross profit margin 3. Operating cash cycle/ 3. Trade payable
Cash conversion cycle number of days
, Unit 6: Analysis of Financial statements
Profitability ratios
Profitability ratios are used to evaluate profits by using a number of ratios i.e. return
employed, operating profit margin and gross profit margin.
Liquidity ratios
Liquidity ratios are used to evaluate current assets & liabilities by using a number o
current ratio, acid test ratio and operating cash cycle.
Debt or solvency ratios
Debt or solvency ratios are used to evaluate the ability of the organisation to serv
i.e. interest cover ratio and debt to equity ratio.
Resource utliisation ratios
Resource utilisation ratios are used to measure the ability of the organisation
inventory and trade payables/receivables i.e. inventory turnover period, trade
average number of days and trade receivables average number of days.
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