Accounting Ratio And The Financial Performance

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The purpose of Accounting Ratio is to measure the financial performance as this will help the business to determine whether they are making profit by analysing the progress. Business will also be able to manage their resources properly because this will indicate on whether they will be able to pay their Creditors as they have done the analysis of Accounting Ratio. Accounting Ratio gives the opportunity to compare their financial information with other business to see if they are performing better than their competitors. Accounting ratios can only be analysed if the business have the figures from Profit and Loss Account and Balance Sheet because all the calculation is calculated separately. There are three types of Accounting Ratio:…show more content…
Furthermore, financial information will be disclosable to the Manager, Investors, and Creditors as they have the ratio analysis. This is the most important analysis to the Investors because they will know the financial positon of the business and make decent decisions. Also, this is important for Creditors because they will get an idea on whether the business will be able to pay off the Debt. The disadvantages of Accounting Ratio, it does not provide overall business performance and it is only analysed in figures. Accounting Ratio is a least useful tools because it does not analyse the previous performance where the business is mainly concern about future information. Ratio Analysis is only made as a prediction to indicate on whether they are making the profit or loss as an overall business performance. Gross Profit is the amount of money left after the Cost of Goods sold have been. Gross Profit is when the business calculate before tax by taking away the Cost of Sales from the Net Sale. The formula for Gross Profit is (Gross Profit for the year divided it by Sales for the year times 100). This ratio shows the business how much profit they are making and it helps to compare the figures from the previous performance. However, the business should be aware that if the percentage decreases from the previous performance then they should investigate the reason behind it. If the Gross percentage decreases from one year to the
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