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Interpretation of Accounts - Assignment Example
Finance & Accounting
Pages 8 (2008 words)
Absolute raw data about the company such as revenue generated, profit earned, total capital employed or total debt involved cannot provide any meaningful information unless they are converted in the form that can help make necessary decisions…
It is here that the various financial ratios come handy in describing the status of the company. The company’s performance can be judged from several accounting and profitability ratios such as liquidity measurement ratios, profitability ratios, debt ratios. The ratios give information about the company’s health and help in decision making to investors, creditors, job seekers and other stakeholders. The company’s current status can also be judged by comparing them with previous years’ financial data or ratios to arrive at the conclusion how the company is faring. Advantages and Limitations of the Financial Ratios On advantage side, it helps read and simply the financial statements. The companies in the same group can be compared with each other. It also helps to understand the trend when compared with the previous years’ financial data. By going through a few numbers, one can quickly assess about the status of the company. On limitations side, it cannot explain the difference between two companies from two different industries or groups. It cannot provide correct information when two different accounting standards are followed, for example, USGAAP and UK accounting standards (Accounting Explained, 2012). Having realized the importance of various financial ratios, it would be now most appropriate to do some ratio analysis for Pompomi. ...
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