Accounting Ratio Analysis

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Accounting Ratios 5 F LEARNING OBJECTIVES After studying this chapter, you will be able to : • Explain the meaning, objectives and limitations of analysis using accounting ratios; • • Identify the various types of ratios commonly used ; Calculate various ratios to assess solvency, liquidity, efficiency and profitability of the firm; inancial statements aim at providing financial information about a business enterprise to meet the information needs of the decision-makers. Financial statements prepared by a business enterprise in the corporate sector are published and are available to the decision-makers. These statements provide financial data which require analysis, comparison and interpretation for taking decision by the external as well as internal users of accounting information. The act is termed as financial statement analysis. It is regarded as an integral and important part of accounting. As indicated in the previous chapter, the most commonly used techniques of financial statement, analysis are comparative statements, common size statements, trend analysis, accounting ratios and cash flow analysis. The first three have been discussed in detail in the previous chapter. This chapter covers the technique of accounting ratios for analysing the information contained in financial statements for assessing the solvency, efficiency and profitability of the firms. 5.1 Meaning of Accounting Ratios As stated earlier, accounting ratios are an important tool of financial statement analysis. A ratio is a mathematical number calculated as a reference to relationship of two or more numbers and can be • Interpret the various ratios calculated for expressed as a fraction, proportion, percentage, and intra-firm and intera number of times. When the number is calculated firm comparisons. by referring to two accounting numbers derived from Aman Sharma |

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