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Introduction to Business Accounting - Essay Example

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Secondly, there are different ways of calculating same ratios, which makes the comparison difficult, and interpretation is subjective too (Wiley 1998). This is important as comparison between companies and industries becomes difficult as they use different definitions of accounting items, which are part of the financial ratio analysis. Thirdly, when industry analysis is done using ratio analysis then it is often difficult to define the set of companies that may be considered to be in direct competition with the company and thus makes comparison quite subjective. Fourthly, there are some financial elements, which are based on estimations and thus can affect the outcome of ratio analysis. Finally, difference in accounting standards and policies of companies and country of origins makes the comparison difficult (Keown, et al. 2005).
The Income Statement provides information regarding the companys performance over an accounting period (Dodge 1997). It provides details of the revenues generated by business and cost of operations to generate those revenues. The different between revenue and cost of sales is referred to as gross profit. Moreover, it provides information regarding expenses incurred by the company over the period, which may be variable or fixed in relation to the revenues generated. After deduction of expenses from the gross profit from operations or profit before interest and tax is derived. The next information element that the income statement provides is the amount of interest paid by the company in lieu of its debt obligations. Then the tax amount is disclosed which is deducted from profit amount to arrive at profits from continuing operations. Any receipt or payment related to extraordinary items activities is added or subtracted to derive net profit attributable to common shareholders and minority shareholders. It also gives information related ...Show more
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Summary

Financial ratio analysis is one of the most commonly used method for evaluating and comparing companys performance over a period of time however it has major limitations which undermine its use and value of results produced by it (Moyer and McGuigan 2012). Firstly, the financial…
Introduction to Business Accounting
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