Reporting on Accounts Overview Why report on the

Reporting on Accounts

Overview • Why report on the accounts of a business? • Who is interested in the accounts of a business? • Types of ratios used

Why report on the accounts? • It is important that accounts are interpreted for the benefit of interested parties • Accounts are interpreted by using ratios which show the relationship between figures • The results of these ratios are then compared with: – The results from the previous year – The results from other businesses in the same industry

Parties interested in the accounts of a company • Bankers – can loans and overdrafts be repaid? • Creditors – can business pay for goods supplied on credit? • Shareholders – how much profit does the business make? What will the dividend per share be? • Employees – is their job secure? Is the business making enough profit to afford a pay increase? • Investors – is the business a secure investment? • Management – is the business performing better or worse than last year? • Revenue Commissioners – how much profit is the business making for tax purposes?

Interpretation of Accounts • • • A company can be assessed by using the following ratio headings: Profitability Liquidity Activity Solvency Dividend Policy

Profitability Ratios • The profitability ratios show successful the management of the business was at making profit in the company • Ratios: – Gross Profit Percentage/Margin – Net Profit Percentage/Margin – Return on Capital Employed

Liquidity Ratios • Liquidity is the ability of a company to pay its debts when they are due • Ratios: – Working Capital Ratio (Current Ratio) – Acid Test Ratio (Quick Ratio)

Solvency Ratio • A firm is solvent if its total assets are greater than outside liabilities • If this is the case, it can continue in business • If the business is insolvent, it means that the total assets of a business are less than its outside liabilities • In this case, the business must cease trading

Dividend Policy • A dividend is the amount of profit that is given to the shareholders of a company • The board of directors decides how much of a dividend will be paid to the shareholders

Activity Ratios • The activity ratios tell us how active the company was during the year • Ratios: – Rate of Stock Turnover – Debtors Days – Creditors Days

Test your knowledge… • http: //quiz. scoilnet. ie/Quiz. aspx? qid=14 42 • Assessing a Business 2005. doc • Assessing a Business 2007. doc • Assessing a Business 2009. doc