Chapter 5: Accounting Ratios and Analysis

"The relationship between two accounting figures, expressed mathematically, is known as financial ratio."

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The analysis of financial statements assists to understand the information disclosed in the financial statements of the business entity easily. This makes it easy for different stakeholders to make their investment decisions.

Ratio analysis is also a widely used tool for financial analysis. Ratios help to summarise the large quantities of financial data and to make a qualitative judgement about a firm's financial performance. In ratio analysis, comparison is done for a useful interpretation of financial statements.

Ratio analysis might be done for various purposes, for example to analyse financial statements, for simple presentation of accounting information, to know profitability status, liquidity status. long -term solvency or operating efficiency of business entity.


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