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 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

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