Analysis of accounts

Question 1

Analysis of accounts

Answer 1

It means using the data contained in the accounts to make some useful observations about the performance and financial strength of the business.

Question 2

Uses of analysis of accounts

Answer 2

to tell whether a business is:

• Performing better this year than last year
• Performing better than other business

Question 3

Capital employed

Answer 3

shareholders’ equity plus non-current liabilities and is the total long-term and permanent capital invested into a business.

Question 4

Liquidity

Answer 4

is the ability of a business to pay back it’s short term debts

Question 5

Profitqbility1

Answer 5

is the measurement of the profit made relative to either the value of sales achieved or the capital invested in the business

Question 6

illiquid

Answer 6

means that assets are not easily convertible into cash

Question 7

Limitations of using accounts and ratio analysis

Answer 7

• Managers will have access to all account data but external users are only able to use the published accounts
• Ratios are based on past accounting data and may not indicate how a business will perform in the future
• Accounting data over time would be affected by inflation thus comparisons between different years may be misleading