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Financial Ratios - Essay Example
Finance & Accounting
Pages 6 (1506 words)
Financial Ratios (College) Financial Ratios Introduction Financial ratios, often called accounting ratios are used in the financial analysis by comparing two financial items extracted from the financial statements. Financial ratio is defined as “The relationship between two accounting figures expressed mathematically”…
The financial statement prepared with the help of financial ratios is an aid to find out the efficient operation of the business for the share holders, competitors, and outsiders who are willing to invest in the firm. These ratios play a key role in calculating the dividend to shareholders, interest to debenture holders, as well as the tax payable to government. They also express the risk factor and bankruptcy chances of the firm. Theory of Financial Ratios There have been no convincing theories on financial ratios over the years. Horrigan (1965), writes on how the financial ratios were originated and how the theories were not. He says that a unique outcome of the accounting evolution in the United States was the development of financial ratios which helped in analyzing accounting statements. Such ratios were originally formulated for using as short-term credit analytical devices. The origin of such ratios can be traced out as far back as the late 19th century. A number of various financial ratios were developed by the analysts in the early decades of the century. ...
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