Introduction to The Accounting Ratios

without the accounting ratios the financial statements of a business would be unhelpful and fake to those who use them I'm Thomas Harwood and welcome to the accounting student where we create free and short videos so that you can learn about accounting today's video is looking at the introduction to the accounting ratios the financial statements such as an income statement and the balance sheet would be very uninformative to all but the highly skilled professionals without the use of the accounting ratios the accounting ratios play such an important role that they can fulfill the needs of the users of the financial statements whereby these statements can be easily interpreted and be of beneficial use accounting ratios are used to analyze or compare financial data and this will allow the person to gain an insight into how a business is performing from one period to another or how a business is performing against another business ratios can help people across the business world answer many questions that they may have such as why is one business more or less profitable than another business does the business have good controls of its expenses what type of returns can I earn as a shareholder if I invest in this business does the business have the ability to pay its debts when they are due or how well does a business manage the assets it has ratio analysis can help in answering and solving all these questions there are normally four main stages with the ratio analysis firstly you collect the financial data from the financial statements then you calculate the ratios and once these have been calculated you then interpret and analyze outcomes from the ratios and finally take some action based on the analysis to improve or solve the situation for future periods they're counting ratios use of financial information mostly from the income statement and balance sheet from the income statement common information used will be the revenue cost and profit figures and from the balance sheet the typical information used will be the current assets and liabilities figures including infantry debtors creditors following on the accounting ratios can be categorized into three main groups and may our profitability liquidity and efficiency profitability ratios look by the profits and returns of the business this is normally shown as a percentage of the revenue of the business liquidity ratios focus on the business's ability to pay back the best it has and the efficiency ratios look at the time scale of when the business receives payments from its customers and when it pays its suppliers and also how quickly does it take it's a turnover is inventory within the business similar to the video on the user's of the accounting information there are some groups of interests that we can categorize you may be interested with each of these ratio groups for the profitability ratios users such as shareholders the government competitors and employees may be interested in how profitable the business is the shareholders lenders and suppliers will be interested in the liquidity ratios to see if the business has a financial capability to pay its debts and loans and lastly for the efficiency ratios the shareholders lenders and competitors may be of interest in terms of how efficient the business is within all areas of the business so that was the introduction to the accounting ratios if you enjoyed it press the like button if you have a question you want answered leave it in the comments below when we try our best to answer it and if you're not already subscribed make sure you click on the red subscribe buttons keep updated with the accounting student thanks for watching we'll see you next time

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