Accounting Books Review from Financial Management

Thursday, March 5, 2009

This is the review of financial statement analysis from the chapter of financial and accounting book. The book review let you know the concept of financial concept in details. Below is full review:

"Is financial statement analysis is only the analysis of facts, figures and statistics? I think financial statement analysis is proceeding from ratio analysis. So, here we should decide some objectives of the chapter.

Objectives of Financial Statement Analysis:

Meaning of Ratio Analysis

Steps in Ratio Analysis

Classification of Ratio

Merits and Demerits of Ratio Analysis

Compute the Different Ratios

At 1st we will discuss about ratio analysis. Normally, ratio is known as the relationship between two or more variable expressed in:

1. Percentage
2. Rate
3. Proportion

In another word we can say that ratio analysis is the important technique of financial analysis.

There are some steps also which involves in the ratio analysis:

a. Collection of information, which are relevant from the financial statements and then to calculate different ratios accordingly.
b. Comparison of computed ratios of the same organization or with the industry ratios.
c. Interpretation, drawing of inference and report-writing.

There are some formulas of Balance Sheet Ratio Analysis:

1. Current Ratio

Current Ratio = Current Assets/Current Liabilities

2. Quick Ratio

It is also known as liquid ratio or acid test ratio

Liquid Ratio = Quick or Liquid Assets/Liquid or Current Liabilities

= Current Assets – (Stock and Prepaid Expenses)/Current Liabilities-Bank Overdraft

3. Net working capital Ratio

Net working capital is used to measure company’s liquid position.

Net working capital Ratio = Net Working Capital/Net Assets

4. Proprietary Ratio

Proprietary Ratio = Shareholder’s Funds/Total Assets or Total Resources

5. Capital Gearing Ratio

Capital Gearing = Fixed Interest Bearing Funds/Equity Share capital

6. Debt Equity Ratio

Debt-Equity Ratio is calculated as follows:

Debt-Equity Ratio = External Equities/Internal Equities

Debt-Equity Ratio = Outsiders’ Funds/Shareholder’s Funds

As a long-term financial ratio it may be calculated as follows:

Debt-Equity Ratio = Total Long-Term Debts/Total Long-Term Funds

Debt-Equity Ratio = Total Long – Term Debts/Shareholders’ Funds

Here I want to share some important terms which will define the ratio:

Net profit ratio is used to measure the overall profitability and hence it is very useful to proprietors.

A higher working capital turnover ratio shows that there is low investment in working capital and vice-versa.

Ratio analysis is a very important and useful tool for financial analysis.

It helps the management accounting of business concern in evaluating its financial position and efficiency of performance."

Data Source : Financial Statement Analysis from Financial Books

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