D2: evaluate the adequacy of accounting ratios as a means of monitoring the state of the business
in a selected organisation, using examples.
In this report I will evaluate the adequacy of accounting ratios as a means of monitoring the state of
the business I have selected; Domestic Dog Homes, I will be evaluating their solvency, profitability
and performance ratios.
Why Financial Ratios are useful;
To Simplify Financial Statements, ratios give an overall standing of the financial statement, therefore
businesses such as Domestic Dog Homes do not have to refer to the financial statement each time,
and they can look at their calculated ratios and use ratios to make comparisons over different
trading periods.
Future planning, ratios are helpful to an extent where it can be understood whether a business is
performing well or not. Ratios can help out with the management of the business and help make
decisions, a ratio can help indicate whether the business would be able to cover all costs, if it is a low
ratio, the business will look to reduce costs for the future.
The importance of calculating Accounting ratios is varied between different businesses, it is vital for
a small business such as Domestic Dog Homes to calculate its accounting ratios, however for
businesses that operate on a much larger scale e.g. Tesco, accounting ratios may still be calculated
however they are not good enough to monitor the state of the business.
Why Financial Ratios are misleading;
Ratios can be interpreted carefully by Domestic Dog Homes Accountants as they are working on a
small scale, the value of the accounting values can illustrate their financial situation, however
singularly, an accounting ratio is not enough in order to understand whether a business is
performing good or bad. All ratios require financial qualitative data and calculations in order for an
informed analysis to be made.
The financial qualitative information used in order calculate these ratios may be outdated in the
financial statement, they are likely to be provided data for the past few months, therefore it will be
difficult to understand where the business is currently financially positioned.
Financial statements consist of summarised information, ratios are calculated based on the given
information. Due to the summarisation of statistics, some important pieces of data may be left out
that could have been relevant to the users of the accounts.
It is difficult to conclude whether a particular ratio is good or bad, for e.g. a high Current ratio may
indicate that Domestic Dog Homes are in a strong liquidity position, however it can also be
interpreted that the business is not using its currents assets efficiently, this may be because they are
not managing their working capital/assets well.
Most businesses in the private sector aim to earn a profit, therefore the profitability ratio is
accounted for and should be calculated by businesses in order to allow comparison of profits over
different trading periods. The profit ratios are calculated in order to determine if the business is able
to meets its objectives, for e.g. being able to finance a business expansion.
When determining the state of a business such as Domestic Dog Homes, profitability ratios don’t
really show the profits of a business, it is possible to calculate gross profit margin, however this
would only show the shareholder what Domestic Dog Homes profit is as a percentage, but does not
in a selected organisation, using examples.
In this report I will evaluate the adequacy of accounting ratios as a means of monitoring the state of
the business I have selected; Domestic Dog Homes, I will be evaluating their solvency, profitability
and performance ratios.
Why Financial Ratios are useful;
To Simplify Financial Statements, ratios give an overall standing of the financial statement, therefore
businesses such as Domestic Dog Homes do not have to refer to the financial statement each time,
and they can look at their calculated ratios and use ratios to make comparisons over different
trading periods.
Future planning, ratios are helpful to an extent where it can be understood whether a business is
performing well or not. Ratios can help out with the management of the business and help make
decisions, a ratio can help indicate whether the business would be able to cover all costs, if it is a low
ratio, the business will look to reduce costs for the future.
The importance of calculating Accounting ratios is varied between different businesses, it is vital for
a small business such as Domestic Dog Homes to calculate its accounting ratios, however for
businesses that operate on a much larger scale e.g. Tesco, accounting ratios may still be calculated
however they are not good enough to monitor the state of the business.
Why Financial Ratios are misleading;
Ratios can be interpreted carefully by Domestic Dog Homes Accountants as they are working on a
small scale, the value of the accounting values can illustrate their financial situation, however
singularly, an accounting ratio is not enough in order to understand whether a business is
performing good or bad. All ratios require financial qualitative data and calculations in order for an
informed analysis to be made.
The financial qualitative information used in order calculate these ratios may be outdated in the
financial statement, they are likely to be provided data for the past few months, therefore it will be
difficult to understand where the business is currently financially positioned.
Financial statements consist of summarised information, ratios are calculated based on the given
information. Due to the summarisation of statistics, some important pieces of data may be left out
that could have been relevant to the users of the accounts.
It is difficult to conclude whether a particular ratio is good or bad, for e.g. a high Current ratio may
indicate that Domestic Dog Homes are in a strong liquidity position, however it can also be
interpreted that the business is not using its currents assets efficiently, this may be because they are
not managing their working capital/assets well.
Most businesses in the private sector aim to earn a profit, therefore the profitability ratio is
accounted for and should be calculated by businesses in order to allow comparison of profits over
different trading periods. The profit ratios are calculated in order to determine if the business is able
to meets its objectives, for e.g. being able to finance a business expansion.
When determining the state of a business such as Domestic Dog Homes, profitability ratios don’t
really show the profits of a business, it is possible to calculate gross profit margin, however this
would only show the shareholder what Domestic Dog Homes profit is as a percentage, but does not
