Accounting Ratios and Financial Reports Analysis

Accounting Ratios and Financial Reports Analysis

Introduction

Financial ratio analysis is the examination of the association amongst financial variables of a company or industry. For the purpose of analysis, financial ratios of more than one year of an organization are analyzed to find out the true picture of the company's financial position. Making a comparison in this manner would help in analyzing the particular problems of a firm. Following is the financial analysis of A4M1 Supplies for the years 2011 and 2012 based on the ratios calculated using the financial information in the financial statements.

Financial Analysis is the process of assessing the financial position of a company by analysing is stability, viability and profitability. One of the primary objectives of financial analysis is to recognize changes in financial trends, to help measure the progress made by an enterprise and identify a relationship to draw a logical conclusion on the performance of the company. Another major aspect of a financial analysis is comparing the performance of the company with its competitors (Laitinen, 2002, pp. 649-673).

Financial statement is a statement that provides valuable source of information for business managers and all who work within the business, also for potential investors and their business. The financial assets of a business merely represent claims on real estate and also the financial asset play a very crucial role in developed economy. This includes an income statement, a balance sheet and cash flow statements. They are usually compiled on a quarterly and annual basis. Therefore the general purpose of a financial statement is aimed to meet the need of a wide range of users.

The financial statement explains the financial position of an organization and normally the owners, managers, investors, bank, and the government is the main people interested in a business financial statement. They are likely to be various users grouping with an interest in organization in the sense of needing to make decision about the organization (Gibson, 2004, pp. 47-80).

Financial reporting is very important for every organization. It helps in keeping the finances of the company in line with the goals of the organization and keeps a check where the company's funds are going. Financial management is a fundamental aspect as it is responsible for the forecasting, budgeting and implementation of the financial plans. One aspect of poor financial management is poor credit control. Managers who are incapable of handling the company's finances cause poor credit control in the organization. Major consequences of poor credit control are that the company loses its funds, because now the money that has been lent has turned into bad debt (Altman & McGough, 1974, pp. 50-57).

Ratios and Reasons for Using Them

The interpretation of data is extremely important financial tool for each of the activities performed within the organization. The managers use various different ratios to create different policies for financing external as well as focusing on solving problems and specific issues afflicting the organizational performances. Through the interpretation of the data presented in the financial statements ...