Unit 2 P7,M3
Introduction
In this task, I am going to illustrate the financial state of Saira’s Computers through ratio
analysis by showing examples of accounting ratios including current, acid test, profitability &
liquidity ratios. Also I am going to interpret the contents of a trading profit and loss account and
balance sheet for Saira’s computers, explaining how accounting ratios can be used to monitor
the financial performances.
Ratio analysis
Ratio Analysis is a form of financial statement analysis that is used to obtain a quick indication
of a firm's financial performance in several key areas. The ratios are categorized as Short-term
solvency ratios, debt management ratios, asset management ratios, profitability ratios, and
market value ratios. Ratio analysis as a tool possesses several important features. The data,
which are provided by financial statements, are readily available. The computation of ratios
facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's
financial performance with industry averages. In addition, ratios can be used in a form of trend
analysis to identify areas where performance has improved or deteriorated over time. Ratio
analysis determines trends and exposes strengths or weaknesses of a firm.
Accounting ratios
Accounting ratios can offer an invaluable insight into a business's performance. An accounting
ratio compares two aspects of a financial statement, such as the ratio of current assets to
current liabilities. The ratios can be used to evaluate the financial condition of a company,
including the company's strengths and weaknesses. An example of an accounting ratio is the
price-to-earnings ratio of a stock. This measures the price paid per share in relation to the profit
earned by the company per share in a given year. Accounting ratios are used to form
conclusions regarding the liquidity, leverage, profitability, and working capital usage of a
business.
Profitability
The net profit ratio is the ultimate measure of profitability. It compares the net, after-tax earnings
of a business to its net sales. The purpose of the ratio is to see if a business is being efficient
with its expenditures to create products that can be sold at reasonable price points. Profitability
allows for a more wide-ranging assessment of the performance of the firm by comparing two
different firms together to get a comprehensive evaluation of the business profitability situation.
Current ratio
The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its
short-term liabilities with its current assets. The current ratio is an important measure of liquidity
because short-term liabilities are due within the next year. This means that a company has a
limited amount of time in order to raise the funds to pay for these liabilities. Current assets like
cash, cash equivalents, and marketable securities can easily be converted into cash in the short
term. This means that companies with larger amounts of current assets will more easily be able
to pay off current liabilities when they become due without having to sell off long-term, revenue
Introduction
In this task, I am going to illustrate the financial state of Saira’s Computers through ratio
analysis by showing examples of accounting ratios including current, acid test, profitability &
liquidity ratios. Also I am going to interpret the contents of a trading profit and loss account and
balance sheet for Saira’s computers, explaining how accounting ratios can be used to monitor
the financial performances.
Ratio analysis
Ratio Analysis is a form of financial statement analysis that is used to obtain a quick indication
of a firm's financial performance in several key areas. The ratios are categorized as Short-term
solvency ratios, debt management ratios, asset management ratios, profitability ratios, and
market value ratios. Ratio analysis as a tool possesses several important features. The data,
which are provided by financial statements, are readily available. The computation of ratios
facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's
financial performance with industry averages. In addition, ratios can be used in a form of trend
analysis to identify areas where performance has improved or deteriorated over time. Ratio
analysis determines trends and exposes strengths or weaknesses of a firm.
Accounting ratios
Accounting ratios can offer an invaluable insight into a business's performance. An accounting
ratio compares two aspects of a financial statement, such as the ratio of current assets to
current liabilities. The ratios can be used to evaluate the financial condition of a company,
including the company's strengths and weaknesses. An example of an accounting ratio is the
price-to-earnings ratio of a stock. This measures the price paid per share in relation to the profit
earned by the company per share in a given year. Accounting ratios are used to form
conclusions regarding the liquidity, leverage, profitability, and working capital usage of a
business.
Profitability
The net profit ratio is the ultimate measure of profitability. It compares the net, after-tax earnings
of a business to its net sales. The purpose of the ratio is to see if a business is being efficient
with its expenditures to create products that can be sold at reasonable price points. Profitability
allows for a more wide-ranging assessment of the performance of the firm by comparing two
different firms together to get a comprehensive evaluation of the business profitability situation.
Current ratio
The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its
short-term liabilities with its current assets. The current ratio is an important measure of liquidity
because short-term liabilities are due within the next year. This means that a company has a
limited amount of time in order to raise the funds to pay for these liabilities. Current assets like
cash, cash equivalents, and marketable securities can easily be converted into cash in the short
term. This means that companies with larger amounts of current assets will more easily be able
to pay off current liabilities when they become due without having to sell off long-term, revenue
