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

This preview shows page 1 - 2 out of 28 pages.

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
Image of page 1

Subscribe to view the full document.

Image of page 2
  • Spring '16

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes