FINANCIAL RATIOS AS AN AID TO MANAGEMENT DECISION MAKING
Table of content
1.1 Financial statement analysis
1.2 Ratio analysis
1.3 Accounting information in decision making
Review of related literature
2.1 Effect of decision
2.2 Basic types of financial ratios
2.3 Profitability ratios
2.4 Activity ratios
2.5 Liquidity ratios
2.6 Leverage ratios
3.1 Summary of finding
Planning is one of the most important aspects in the management o a firm. It involves an appraisal of the past performance of the firm and a projection into the future. It is also related to existing strengths and weaknesses of the firm.
The strength must be understood if they are to be used for proper advantage and the weaknesses must be recognized if corrective action is to be taken. It is necessary for instance, to find whether inventories are adequate to support the projected level of sales or whether the existing level of investment in account receivable is an indication that the firm has lax collection policy.
Ratios analysis employs basic financial data taken from the analysis of financial statement (balance sheet and income statement which is the primary financial) reporting mechanism of an entity, both internally, and externally. An analysis of the financial information communicated by the statement should include the computation and interpretation of financial ratios.
Although emphasis is focused on outside users, such as credit and owners, management is aware, that their performance will be reviewed by those external partial and for other reason. For instance, the basic fianical statement are used to access the effectiveness of management in planning and controlling operations as well as for decision making.
Management also recognizes that the evaluation of past operation, as revealed by the analysis of the basic statement, represent a good starting pointing planning future operations and serves as important means of assessing past performance and in forecasting and planning future performance.
In other words, the aim of this term paper is to evaluate financial ratios as an aid to management decision – making, to find out if any, how financial ratios helps management in decision – making, to determine if accounting si actually of any use to management, to find the importance of financial ratios, to examine the extent to which management uses financial ratios information supplied to identify the problems inherent in the use of management information.
1.1 FINANICAL STATEMENT ANALYSIS
Financial statement analysis consists of applying analyst tools and techniques to financial statement and other relevant data to obtain to useful information. This information is shown as significant relationship between data and trends in those data assessing the company’s past performance and current position. The information shows the results or consequence of prior management decision. In addition, the information is used to make prediction that may have a direct effect on decision made by many users of financial statement.
Business entities may have objects and goals. However, the two primary objectives of every business are solvency and profitability, solvency is the ability to pay debts as the become due, profit ability is the ability to generate income unless a business can produce satisfactory income and pay its debts is they become due, other objective a business may have will never be realized simply because the business will not survive.
The financial statement that reflects a company solvency is the balance sheet the financial statement reflecting the company’s profitability is the income statement. The balance sheet, sometimes called the statement of financial position lists the company assets and liabilities and stockholders