Ratios note 2019.pdf - SUNRISE PROFESSIONAL INSTITUTE 2.1 FINANCIAL REPORTING RATIO NOTE TEL 0543-476-192/0501-481-177 INTERPRETATION OF THE FINANCIAL

Ratios note 2019.pdf - SUNRISE PROFESSIONAL INSTITUTE 2.1...

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SUNRISE PROFESSIONAL INSTITUTE 2.1 FINANCIAL REPORTING RATIO NOTE TEL: 0543-476-192/0501-481-177 INTERPRETATION OF THE FINANCIAL STATEMENT According to the IFRS Board, financial statements normally shown in the annual corporate reports include the following Statement of Financial position Statement of profit or loss and other comprehensive Income Statement of Changes in equity Statement cash flow Notes to the accounts Value added statement etc. Ways of financial performance evaluation 1. Common size (Vertical analysis): this concentrate solely on a year’s financial statements rather than comparing one year to the other. Common size statement expresses the whole financial statement in percentage. The income statement uses the sales as the denominator whiles total asset is used as the denominator in the financial position. 2. Trend Analysis: it is in a form of an analysis that examines more than two year period. A base year is selected whose amounts are set equal to 100%. Trend percentage is computed for each item. Mathematically , ??? ?𝒆𝒂? 𝒂????? ?𝒂?𝒆 ?𝒆𝒂? 𝒂????? ? ???% 3. Horizontal Analysis: it is the form that takes the face values in the financial statement and compare to side by side year’s transactions by finding the chang e. For example sales in 2016 and 2015. Mathematically, ?𝒂?𝒆? 𝒊? ????−?𝒂?𝒆? 𝒊? ???? ?𝒂?𝒆? 𝒊? ???? ? ???% 4. Ratios Before looking at the ratios, let us understand that ratio is a fertile area that most examiners in our ages like to bring in the exams and must be learnt with care. Most at times, students are left to display their knowledge in the ratios, from calculation to interpretation and sometimes are given walls not to go beyond. Let us now look at this. LIMITATIONS OF RATIOS IN THE INTERPRETATION OF FINANCIAL STATEMENT Historical Cost: analysis of accounting statement are based on things that has already happened and good performance using ratios cannot promise future prospect Ratios only look at the financial performance and do not look at the performance other departments of the firm. For instance, the HR depart which help train the workforce It is very difficult to use ratios to say the company is improving during inflation times. For instance, inflation can cause sales to go high but maybe quantities sold last year will be better than this year. Accounting Estimates (IAS 8) used in the preparation makes it difficult in comparing one company’s performance to the other. Using ratios in comparing companies performance to their industry ratio may be unusual where the company is very voluminous due to the benefit in economies of scale It is sometimes misleading due to the inconsistencies in the formulas used in the computation some of the ratios. For example, gearing ratio: others use Debt/(debt + Equity) and others too use Debt/Equity Types of Ratios 1. Profitability Ratios (P & L Ratio): Profitability ratios compare income statement accounts and categories to show a company's ability to generate profits from its operations. Profitability ratios focus on a company's return on investment in inventory and other
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