Cambridge University Press 978-0-521-68076-9 - NSSC Accounting Module 3 Hansie Hendricks Excerpt More information

Unit 1

Ratios and interpretation
As we learnt in our earlier studies, accounting information is used to answer two key questions about a business: • Is it making a profit? • Are its assets sufficient to meet its liabilities? We have also considered the form in which different types of businesses prepare their final accounts. Now we need to examine in more detail how these accounting statements can be used to assess a business’ performance and progress. There are two stages in this process: 1 Analysis This is the detailed examination of various aspects of a business’ performance. To make comparisons (with other businesses or for the same business over a period of time) easier and more meaningful, the results are expressed as percentages or ratios, e.g. the percentage of gross profit to sales, or the working capital ratio. 2 Interpretation Here the results of analysis are used to judge a business’ performance. This is done by making comparisons a with other similar businesses, usually within the same year, e.g. was the gross profit to sales percentage last year better or worse than the average for the trade or industry? b for the same business over a number of years, e.g. has the trend of the gross profit percentage to sales over the last five years been up or down? We will also examine the extent to which analysis and interpretation are useful tools for owners and others in making and assessing business decisions. This unit is divided into three sections: Section 1: Ratios Section 2: The uses of accounting statements Section 3: Cash flow statements (NSSCH)

Section 1 Ratios
By the end of this section you should be able to: • explain the meaning of the term accounting ratios • classify accounting ratios into profitability, liquidity, efficiency