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Purpose of Financial Statement Analysis

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To assist management in evaluating business performance and making financial decisions.

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Ratio Analysis

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A method for interpreting financial data in financial statements.

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Liquidity Ratio

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Measures a business's ability to make various types of payments to external parties.

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Relationship of Net Profit

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Shows the relationship between Net Profit and Initial Capital.

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Relationship in Acid Test Ratio

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Shows the relationship between Current Assets (excluding Ending Inventory) and Current Liabilities.

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Relationship in Inventory Turnover Rate

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Shows the relationship between Cost of Sales and Average Inventory.

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Importance of Inventory Turnover

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Measures a business's ability to sell goods, preventing capital from being tied up in unsold inventory.

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Measures the ability or efficiency of a business

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is crucial for understanding financial health.

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Average time taken by a business to pay its debts to suppliers

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is essential for maintaining supplier relationships.

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Knowing the strengths and weaknesses of a business.

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Understanding the strengths and weaknesses helps in strategic planning and decision-making.