Ratio Analysis Flashcards
(10 cards)
Users
What is stewardship?
Name 8 users of financial information.
When managers of estate draw up accounts to report back to owners
Employees, investors, lenders, government, suppliers, general public, the press
Ratio analysis
What 3 things do users of financial reports compare them with to analyse and appraise them?
What is ratio analysis used for?(3)
What does ratio analysis suffer from?
Corresponding figures from another accounting period
Forecast or budgeted costs
Same figures in the accounts of a similar company
To determine which areas of the business need further investigation
Help explain figures in a set of accounts
Provide questions
The same deficiencies as the accounts they’re taken from
What concept are financial statements usually drawn up using?
What does this not take into account?
What does this lead to?
What do many companies not include on their financial statements?
What affect does this have on ratios that use nca?
Historical cost concept Inflation Undervaluation of assets Intangible assets Distorting
Seasonal fluctuations What fluctuates on a seasonal basis? When does SFP list assets and liabilities? What’s a drawback of this? What does this make difficult? Why?
Level of activity
One day at the end of the accounting period
May not be representative of the year as a whole
Comparing companies in the same line of work, because the accounting period would have to end on the same day
Time lag
What do most users of financial info rely on?
What is the problem with these accounts?
What do internal users have?
What is there a risk of with these?
Why is it essential that company’s have financial info quickly?
Published audited accounts
Available several months after years end so no longer reflect the current position
Detailed accurate accounts on a weekly/monthly basis
Inaccuracies
To make timely decisions
Aggregation
What does this mean?
What are published accounts in comparison to those used for internal use?
What does this make their interpretation?
Collection of related items of content
Summarised
Difficult
Window dressing
What is this?
How is this easily accomplished?
Accelerating or delaying information at year end to improve accounts
By recording a transaction on the last day of the year rather than the first day of the next year or vice-versa
Non standardisation of accounting policies
What is there still room for despite growing numbers of accounting policies?
What’s an example of this?
What does this make difficult?
Organisations to apply policies differently
Depreciation
Inter comparison of companies
Different patterns of asset ownership
What do some companies do and others do?
Some buy assets some rent
What are the seven limitations of ratio analysis?
HSTNWAD
Historical cost accounting Seasonal fluctuations Time lag Non standardisation of accounting concepts Window dressing Aggregation Different patterns of asset ownership
