Wednesday, July 19, 2017

Study on ratio analysis project from heritage

Financial statements are prepared primarily for decision-making. They play a prominent role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in financial statements is of immense use in making decisions through analysis and interpretation of financial statements.

A firm communicates financial information to the users through financial statements, and reports the financial statement contains summarized information of the firm’s financial affairs. Organized and systematic preparation of the financial statement is the responsibility of top management. Financial forecasting is an integral part of financial planning.  Forecasting uses past data to estimate the future financial requirements.  Ratio analysis is a powerful tool of financial analysis.  A ratio is used as a benchmark for evaluating the financial position and performance of financial data and to make qualitative judgment about the firm’s financial performance.  

With the help of ratios, one can determine:

  • The ability of the firm to meet its current obligations.
  • The extent to which the firm has used its long-term solvency by borrowing funds.  
  • The efficiency with which the firms is utilizing its assets in generating sales revenue.
  • The overall operating efficiency and performance of the firms.

Analysis and interpretation of various accounting ratios gives a skilled and experienced analyst, a better understanding of financial condition and performance of the firm.

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