Reporting on
Accounts
Overview
• Why report on the accounts of a
business?
• Who is interested in the accounts of a
business?
• Types of ratios used
Why report on the accounts?
• It is important that accounts are interpreted
for the benefit of interested parties
• Accounts are interpreted by using ratios
which show the relationship between figures
• The results of these ratios are then compared
with:
– The results from the previous year
– The results from other businesses in the same
industry
Parties interested in the
accounts of a company
• Bankers – can loans and overdrafts be repaid?
• Creditors – can business pay for goods supplied on
credit?
• Shareholders – how much profit does the business
make? What will the dividend per share be?
• Employees – is their job secure? Is the business
making enough profit to afford a pay increase?
• Investors – is the business a secure investment?
• Management – is the business performing better or
worse than last year?
• Revenue Commissioners – how much profit is the
business making for tax purposes?
Interpretation of Accounts
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A company can be assessed by using
the following ratio headings:
Profitability
Liquidity
Activity
Solvency
Dividend Policy
Profitability Ratios
• The profitability ratios show how
successful the management of the
business was at making profit in the
company
• Ratios:
– Gross Profit Percentage/Margin
– Net Profit Percentage/Margin
– Return on Capital Employed
Liquidity Ratios
• Liquidity is the ability of a company to
pay its debts when they are due
• Ratios:
– Working Capital Ratio (Current Ratio)
– Acid Test Ratio (Quick Ratio)
Solvency Ratio
• A firm is solvent if its total assets are
greater than outside liabilities
• If this is the case, it can continue in
business
• If the business is insolvent, it means
that the total assets of a business are
less than its outside liabilities
• In this case, the business must cease
trading
Dividend Policy
• A dividend is the amount of profit that is
given to the shareholders of a company
• The board of directors decides how
much of a dividend will be paid to the
shareholders
Activity Ratios
• The activity ratios tell us how active the
company was during the year
• Ratios:
– Rate of Stock Turnover
– Debtors Days
– Creditors Days
Test your knowledge…
• http://quiz.scoilnet.ie/Quiz.aspx?qid=14
42
• Assessing a Business 2005.doc
• Assessing a Business 2007.doc
• Assessing a Business 2009.doc