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Ch.26 MM (2) - Coggle Diagram
Ch.26 MM (2)
Limitations of using accounts and ratio analysis
Managers will have access to all accounts data - but external users will only be able to use the published accounts, which contain only data required by law
Ratios are based on past accounting data and may not indicate how a business will perform in the future
Accounting data over time will be affected by inflation (rising prices) and comparisons between years may be misleading
Different companies may use slightly different accounting methods, for example in valuing their fixed assets. These different methods could lead to different ratio results, therefore making comparisons difficult
Why and How Accounts are used
Managers: have a much more detailed & frequent accounting information than other groups
help keep control over the performance of each product or division of the business
accounting data help in decision making i.e. expansion, price level changes, close down product or division that is not doing well
managers calculate accounting ratios too --> ratios is a quick way for managers to compare company's performance & liquidity
Shareholders: limited companies are owned by them and they have the right to receive the published accounts each year
want to know from income statements how big a profit or loss the company made
profitability ratio results will be compared with last year's
higher the profitability results are --> more likely shareholders are to invest by buying more shares
want to know from statement of financial position if the business is worth more at the end of the year than it was in the beginning
want to asses the liquidity of the business --> do not want to invest in a company with serious cash or liquidity problems
Creditors: other businesses which have supplied goods to the company without yet receiving payment
statement of financial position will indicate to creditors the total value of debts that the company has to pay back and the cash position of the company
Liquidity ratios will indicate the ability of the company to pay back all of its creditors on time
if these results suggest the company has a liquidity problem, suppliers may refuse to supply goods on credit
Banks: these may have lent money to the company on a short or long-term basis
They will use the accounts in a similar way to creditors, if the business seems to be at risk of becoming illiquid, it is unlikely that a bank will be willing to lend more
Government
The government and the tax office will want to check on the profit tax paid by the company
If the company is making a loss, this might be bad news for the government's control of the whole economy, especially if it means that workers' jobs may be lost
Workers and trade unions
Workers and trade unions will want to asses whether the future of the company is secure or not
In addition, if managers are saying that 'they cannot afford to give workers a pay rise,' it would be useful for workers and unions to asses whether the profits of the company are increasing or not
Other businesses
the managers of other companies may be considering a bid to take over the company or they may just wish to compare the performance of the business with that of their own
Businesses will compare their performance and profitability with others in the same industry