Reporting on Accounts

1
Reporting on Accounts
2
Overview

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

3
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

4
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?

5
Interpretation of Accounts

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

6
Profitability Ratios

• The profitability ratios show how 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

7
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)

8
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

9
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

10
Activity Ratios

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

11
Test your knowledge

• http//quiz.scoilnet.ie/Quiz.aspx?qid1442
• Assessing a Business 2005.doc
• Assessing a Business 2007.doc
• Assessing a Business 2009.doc