Final Accounts are prepared at the end of a financial period (typically a year) to determine the profitability and financial position of a business. These accounts include:
The process of interpreting these accounts involves analyzing the data to understand the company's financial health, profitability, and efficiency. Investors, creditors, management, and other stakeholders use this analysis for decision-making. π
Shows the profitability of the business. Divided into two parts:
A snapshot of the companyβs financial position at the end of the accounting period. Divided into two sections:
Shows the flow of cash in and out of the business. Divided into:
| Ratio | Formula | Interpretation |
|---|---|---|
| Gross Profit Margin | (Gross Profit Γ· Revenue) Γ 100 | Indicates how efficiently the company is producing goods. π |
| Net Profit Margin | (Net Profit Γ· Revenue) Γ 100 | Shows the percentage of profit generated from total revenue. π΅ |
| Return on Capital Employed | (Net Profit Γ· Capital Employed) Γ 100 | Measures profitability related to capital investments. π° |
| Ratio | Formula | Interpretation |
|---|---|---|
| Current Ratio | Current Assets Γ· Current Liabilities | Shows the companyβs ability to pay short-term debts. π³ |
| Quick Ratio | (Current Assets - Inventory) Γ· Current Liabilities | Measures liquidity without relying on inventory. π |
| Ratio | Formula | Interpretation |
|---|---|---|
| Debt-to-Equity Ratio | Total Debt Γ· Equity | Indicates the degree of financial leverage used by the business. βοΈ |
| Interest Coverage Ratio | EBIT Γ· Interest Expense | Measures the companyβs ability to meet interest payments. πΈ |
| Particulars | Amount ($) |
|---|---|
| Sales Revenue | 100,000 π΅ |
| Less: Cost of Goods Sold | (60,000) π° |
| Gross Profit | 40,000 π΅ |
| Less: Operating Expenses | (15,000) πΈ |
| Net Profit | 25,000 π΅ |
| Assets | Amount ($) | Liabilities & Equity | Amount ($) |
|---|---|---|---|
| Cash | 10,000 π΅ | Accounts Payable | 15,000 π³ |
| Accounts Receivable | 20,000 π΅ | Loan | 20,000 π³ |
| Inventory | 15,000 π¦ | Share Capital | 30,000 π° |
| Land | 50,000 π’ | Retained Earnings | 55,000 π΅ |
| Equipment | 25,000 π οΈ |
These ratios assess how efficiently a company is using its assets and liabilities in its operations. βοΈ
| Ratio | Formula | Interpretation |
|---|---|---|
| Asset Turnover Ratio | Revenue Γ· Total Assets | Shows how efficiently a company uses its assets to generate revenue. π |
| Inventory Turnover Ratio | Cost of Goods Sold Γ· Average Inventory | Indicates how often inventory is sold and replaced over a period. π¦ |
| Receivables Turnover Ratio | Net Credit Sales Γ· Average Accounts Receivable | Measures how efficiently a company collects its receivables. π³ |
These ratios provide insights into the performance of a company's stock or its attractiveness to investors. π
| Ratio | Formula | Interpretation |
|---|---|---|
| Earnings Per Share (EPS) | (Net Profit - Dividends on Preferred Stock) Γ· Average Outstanding Shares | Indicates the profitability available to each share of common stock. π΅ |
| Price-to-Earnings (P/E) Ratio | Market Price per Share Γ· Earnings Per Share (EPS) | Measures the company's current share price relative to its per-share earnings. π |
| Dividend Yield | Annual Dividends Per Share Γ· Market Price Per Share | Shows the return on investment in the form of dividends. π° |
Interpreting final accounts provides valuable insights into a companyβs profitability, liquidity, solvency, and efficiency. Stakeholders like investors, creditors, and management use these insights to make informed decisions. By analyzing various financial ratios, stakeholders can assess the overall financial health of a business and its performance relative to industry benchmarks. π