• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Evaluate the adequacy of accounting ratios as a means of monitoring business health in a selected organisation, using examples.

Extracts from this document...

Introduction

D2: Evaluate the adequacy of accounting ratios as a means of monitoring business health in a selected organisation, using examples. The importance of ratios in any business is vital because it gives the business a better understanding of the financial data. By using ratios we can compare data from the current year with the previous years, from this the business will identify if they are making more profit or a loss of if they just broke even. There are four types of ratios that a business has to calculate: * Investment ratio * Financial ratio * Profitability ratio * Utilisation ratio Investment ratio: This ratio is usually used when investors want to invest in an organisation. The ratio calculation that they find normally consists of the performances of the businesses and if investing is a good idea or not in that business. Then the shareholders fund the company, and it is likely that they will get more investors and grow bigger if the business is in profit. ...read more.

Middle

They would think of recruiting staff when they know that their sales are high and the time to do the job isn't enough. They run their business by according to situations if front of them and do not use ratios. Depending on how the assets are used profits can be affected, for example; if machinery equipments are only used for a few hours a day then it is not that much of a use to the business, then the outcome leads to less sales revenue and less profit for the business which could make the business into debt or make them in loss. Financial Ratio: This is also the working capital management ratio. This ratio evaluates the sufficiency of the working capital in the business and the useful use. There are funds that have working capital and fixed asset in the business. What the business has which is assessable to sell or that can be changed to money is a current asset, for example; debtor's cash or stock. ...read more.

Conclusion

Ratio's can only be judged by comparing the ratios to the previous year for example; for the first year of the business they won't be able to carry out any ratio calculations because that is the first year of their business and there wasn't a previous one. The prediction of the upcoming year may be wrong because due to factors that will put the business off, even if they do get a pervious account data. In order to have a good final answer which may be hard to decide you cannot just do one ratio you will have to do at least a few of them. Why you compare them over a period of time? It is likely that the price level can be different from what was seen before when time goes by, this may affect the validity of the ratio. The ratio analysis may not clearly point out the trend in solvency and the profitability of the business. So therefore it is important that the financial statement needs to be used to the correct price level. ?? ?? ?? ?? Abdul Rana ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. Marked by a teacher

    I have identified different types of ratios using financial information from the company named ...

    3 star(s)

    Therefore, this is better than putting in the bank. Profitability ratio Profitability ratio used to measure the business ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time First communication plc profitability ratio Return on owners equity = Net Profit after taxation (ROE)

  2. A2 Business CourseWork

    variety of different formats to help exploit every area and grow into it offering customers shopping for ever eventuality. To see the map in full visit: http://www.tescoplc.com/plc/about_us/map/ It also tells you that they now have 125 stores operating in the USA after only starting up in 2007.

  1. Btec Business Level 3 Year 1 - Introduction to Accounting

    * In which months will there be cash shortages? There may be cash shortages during the following months: July, August, September, October, November, December, March, April. * In which month will this problem be at its worst? The month that the problem will be at its worst is October as it has a minus figure of -�15,300.

  2. ASSIGNMENT P5, M2 & D2- RATIO ANALYSIS

    clearly proves that the business is spending too much on its expenses. The owners cannot neglect this fact and have to take actions immediately to prevent financial crisis. This could be done by controlling their expenses which will increase the net profit margin percentage.

  1. Evaluate the reliability of break-even analysis in estimating budgeted activity levels for selected ...

    Selling prices of the individual products may likewise change due to competition, popularity and saleability of the products, etc.

  2. Ratio Analysis. I am going to illustrate the financial state of Chester Private ...

    Calculation for asset turnover (YEAR 2006): SALES 700 = = 3.41 (3) ASSETS 205 Calculation for asset turnover (YEAR 2007): SALES 800 = = 4.44 (4) ASSETS 180 Asset turnover has risen by 1.03 and this means that the business has made an improvement of the assets usage.

  1. Use accounting data and statistical information to measure business performance

    There are many categories of ratios- all of which measure performance 1. Liquidity- which measures cash flow and solvency 2. Profitability and overheads ratios- which measure earnings compared with overheads 3. Use of assets and capital- which measures how well they use the money they employ to generate income 4.

  2. I am going to produce a report which assesses the working capital management of ...

    the number of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. But if the credit payment period is more than 71 days, e.g. 100 days instead, then M&S can wait for some more days to repay their debt as this will

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work