3 Accounts and finance

Table of Contents

1. Topic pack - Accounts and finance - introduction
2. 3.1 Sources of finance - notes
3. 3.1 Sources of finance - questions
4. 3.2 Investment appraisal - notes
5. Investment appraisal
6. 3.2 Investment appraisal - questions
7. 3.3 Working capital - notes
8. 3.3 Working capital - questions
9. 3.4 Budgeting - notes (HL only)
10. 3.4 Budgeting - questions
11. 3.5 Final accounts - notes
12. 3.5 Final accounts - questions
13. 3.5 Final accounts - simulations and activities
14. 3.6 Ratio analysis - notes
    1. Ratio analysis
    2. Profitability ratios
    3. Interpretation of profitability ratios
    4. Profitability - examples
    5. Liquidity ratios - introduction
    6. Current ratio
    7. Acid test ratio
    8. Efficiency ratios
    9. Efficiency ratios - ROCE
    10. Efficiency ratios - asset turnover ratio
    11. Efficiency ratios - stock turnover ratio
    12. Debtor days
    13. Creditor days
    14. Efficiency ratios - use and calculation
    15. Financial efficiency ratios - examples
    16. Shareholders' ratios
    17. Factors affecting share prices
    18. Gearing
    19. Ratio analysis - A summary
15. 3.6 Ratio analysis - questions
16. 3.6 Ratio analysis - simulations and activities
17. Printable version

Ratio analysis AO2, AO4

We have examined the purpose, layout and content of the balance sheet and profit and loss account.

We have said that these documents contain a story of the business but this story is sometimes difficult to reveal in detail.

We can do this through the use of financial ratios.

Single balance sheets and profit and loss accounts tell us very little. If we are told that sales this year were $20m and profit rose to $5m, this information has limited meaning expressed as it is in absolute terms. What we want is some way to provide a relative comparison, either between years (for progress or otherwise) or between similar companies in the same industry. For example comparing ratios of the local grocer's shop with multinational supermarkets will have little practical use.

What we are hoping to reveal are trends in performance or contrasts with similar organisations that may require further analysis.

To help us understand more about the firms we are studying, we will be examining two specific groups of ratios, namely:

• Profitability and Liquidity ratios (HL and SL) identify the ability of a firm to pay its current liabilities
• Efficiency ratios (HL Only) provide information on how effectively resource are used in the business