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Chapter 8 –
Partnerships:
Interpretation
of financial
statements
LEARNERS SHOULD BE ABLE TO:
Analyse and interpret financial statements and notes.
Revise the following:
• Gross profit on sales
• Gross profit on cost of sales
• Net profit on sales
• Operating expenses on sales
• Operating profit on sales
• Solvency ratio
• Current ratio
• Acid test ratio
Calculate and analyse the following:
• Stock turnover rate
• Stock holding period
• Average debtors’ collection period
• Average creditors’ payment period
• Debt equity ratio (gearing)
• Partners’ earnings
• Return on partners’ earnings
, Introduction
Financial reporting: Analysis and interpretation of
- focuses mainly on aspects financial statements:
reporting on the financial - is an evaluation process, aimed at
position and the financial results evaluating the current and previous
of the business. financial position and results of the
business.
Purpose of analysis and interpretation of financial statements
Make informed decisions
and estimates about future
position and results of the
business.
Limitations on financial information should be kept in mind when estimates about the
future are made. Some of these limitations are:
Financial statements are historical documents.
Inflation is not taken into account.
Other information such as technological changes, changes in consumer preferences,
economical environment, tendencies in the business sector and changes in the
business should also be taken into account.
Users of financial information
External users Internal users
• Investors: interested in the • Management: used to determine if all
profitability, financial position and sections were run effectively.
financial stability of the business. • Internal financial analysts: provide
• Short-term credit providers: information to management for
interested in the liquidity of the decision-making purposes.
business.
• Long-term credit providers:
interested in the solvency ratio of the
business.
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