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5.5 Analysis of Accounts (3. Limitations (External Users don't get all…
5.5 Analysis of Accounts
1. Performance Ratios
Gross Profit Margin
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- Needs to be compared
- Higher the better
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(Net) Profit Margin
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- Needs to be compared
- Higher the better
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2. Liquidity
Current Ratio
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:pencil2: Shows if business can pay back current liabilities w/ their current assets (under 12 months)
- Between 1.5 ~ 2
- Inefficient if above 2
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Acid Test / Liquid Ratio
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- Between 1 ~ 1.5
- Inefficient if above 1.5
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3. How Accounts Are Used
Managers
- Helps with making decisions
- Used to control performance/operations
Shareholders
Creditors
Government
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3. Limitations
External Users don't get all info, only the ones required by law.
Based on past data, may not indicate future performance
Data will be affected by inflation, won't be accurate between years
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