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Mastering Financial Performance Assessment with Accounting Ratios

Learn the importance of ratio analysis in financial performance evaluation, common accounting ratios, drawbacks, limitations, and detecting financial dangers. Gain insight into interpreting financial issues and making informed decisions.

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Mastering Financial Performance Assessment with Accounting Ratios

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  1. Buckingham College of London FINANCIAL ACCOUNTING ABE (Diploma in Business Management) • Lecturer : M. M. Ahsan Email : ahsan6960@gmail.com • Session : 01 Week : 08 & 09 • Lecture No : 08 & 09Date : 06/03/2012 & 13/03/2012

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  3. Assessing Financial Performance

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  5. Why Ratio Analysis? • To compare the performance of the business with previous years • To compare the actual performance of the business with the budgeted or planned performance • To compare results with the performance of similar businesses.

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  7. Common Accounting Ratios • Profitability • Efficiency • Liquidity • Capital structure • investment

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  9. Drawbacks and Limitations • Ratios deal mainly in numbers – they don’t address issues like product quality, customer service, employee morale and so on • Ratios largely look at the past, not the future.  However, investment analysts will make assumptions about future performance using ratios • Ratios are most useful when they are used to compare performance over a long period of time or against comparable businesses and an industry – this information is not always available • Financial information can be “massaged” in several ways to make the figures used for ratios more attractive. 

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  11. Issues in interpretation Financial dangers and their detection : • Declining sales • Excessive expenses • Shortage of working capital • Excessive inventories • Slow-paying debtors • Non-current assets needing replacement • Diminishing returns • Over trading

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