1. Ratio Analysis.pptx - Ratio Analysis 1 Outline What is Ratio Analysis Ratio Analysis and Financial statement Window Dressing Uses of ratio analysis

1. Ratio Analysis.pptx - Ratio Analysis 1 Outline What is...

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Ratio Analysis 1
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Outline What is Ratio Analysis Ratio Analysis and Financial statement Window Dressing Uses of ratio analysis Classification of Ratios (A) According to Financial Statements (B) According to Purpose or Functional Classification 2
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Ratio Analysis and Financial statement Ratio analysis is an important and useful tool to check upon the efficiency with which working capital is being used in the enterprise. 3 The use of ratio analysis is not confined to the financial manager only. The credit supplier, bank, lending institutions and experienced investor all use ratio analysis as their initial tool in evaluating the company as a desirable borrower or as potential investment outlet. It functions as a sort of HEALTH TEST . With the help of ratio analysis financial executive can measure whether the company is at present financially healthy or not. The following are the important material uses of ratio analysis.
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Ratio analysis is the process of determining and interpreting numerical relationships based on financial statements. 4 A ratio is a statistical yard stick that provides a measure of the relationship between variables or figures. This relationship can be expressed as percent (cost of goods sold as a percent of sales) or as a quotient (current assets as a certain number of times the current liabilities).
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THE PARTIES INTERESTED : The persons interested in the analysis of financial statements can be grouped under three heads: 5 (i) Owners or investors; (i) Owners or investors; (ii) Creditors; and (ii) Creditors; and (iii) Financial executives. (iii) Financial executives.
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Uses of ratio analysis 6 Aid in Financial FORECASTING Aid in COMPARISON Aid in COST CONTROL COMMUNICATI ON value
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Window Dressing The term window dressing means manipulation of accounts in a way so as to conceal vital facts and present the financial statements in a way to show a better position than what it actually is. 7 On account of such a situation, presence of a particular ratio may not be a definite indicator of good or bad management. For example, a high stock turnover ratio is generally considered to be an indication of operational efficiency of the business. But this might have been achieved by unwarranted price reductions or failure to maintain proper stock of goods. For example, a high stock turnover ratio is generally considered to be an indication of operational efficiency of the business. But this might have been achieved by unwarranted price reductions or failure to maintain proper stock of goods.
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Advantages of Ratio Analysis 8 Liquidity and solvency To measure the liquidity position To know the solvency position To measure the liquidity position To know the solvency position Operating efficiency and profitability Operating efficiency or turnover of the firm To assess the profitability position of the firm Operating efficiency or turnover of the firm To assess the profitability position of the firm Comparison and Trend analysis
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