Accounting

Accounting covers the principles and practices of financial reporting, analysis, and management.

Introduction to AccountingFinancial StatementsDouble-Entry Bookkeeping
Financial Analysis and RatiosManagerial AccountingAccounting for Assets and Depreciation
Budgeting and ForecastingTax Preparation and ComplianceUsing Accounting Software
Exam-Ready Study HabitsTackling Accounting Problems
Introduction to Acco...Financial StatementsDouble-Entry Bookkee...Financial Analysis a...Managerial Accountin...Accounting for Asset...Budgeting and Foreca...Tax Preparation and ...Using Accounting Sof...Exam-Ready Study Hab...Tackling Accounting ...
Advanced Topics

Financial Analysis and Ratios

Making Sense of the Numbers

Financial analysis uses ratios to compare different parts of the financial statements. These ratios help you spot strengths, weaknesses, and trends in a business.

Key Ratios

  • Current Ratio: Measures if a company can pay its short-term debts. \( \frac{\text{Current Assets}}{\text{Current Liabilities}} \)
  • Gross Profit Margin: Shows the percentage of revenue left after the cost of goods sold. \( \frac{\text{Gross Profit}}{\text{Revenue}} \times 100 \)
  • Return on Equity (ROE): Reveals how much profit is made with the shareholders' money. \( \frac{\text{Net Income}}{\text{Owner's Equity}} \)

Why Analyze?

Ratios give insight into liquidity, profitability, and efficiency. This helps owners and investors make better decisions.

Real-World Use

Banks look at these ratios before giving loans, and investors compare them to pick the best companies.

Key Formula

\[\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}\]

Examples

  • A bank checks a company's current ratio before approving a business loan.

  • An investor compares gross profit margins to decide which company is more efficient.

In a Nutshell

Financial ratios help analyze a company's performance and financial health.

Key Terms

Liquidity
The ability of a company to meet its short-term obligations.
Profitability
The ability of a company to generate profit.
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Managerial Accounting