2016 BPP PASSCARD F3

Incomplete Accounting and Credit sales, purchases Stolen or Cash Accruals, prepayments and drawings records questions business equations and cost of sales destroyed goods book Types of question An incomplete records question may require competence in dealing with one or more of the following. Preparation of accounts from information in the question Theft of cash (balance on the cash in hand account is unknown) Theft or destruction of inventory (closing inventory is the unknown) Estimated figures, eg 'drawings are between $15 and $20 per week' Calculation of capital by means of net assets Calculation of profit by P = increase in net assets plus drawings minus increase in capital Calculation of year end inventory when the inventory count was done after the year end

Incomplete Accounting and Credit sales, purchases Stolen or Cash Accruals, prepayments and drawings records questions business equations and cost of sales destroyed goods book Accounting equation Business equation An examination question may provide If you have opening and closing net information about the assets and assets, you can calculate profit for the liabilities of an entity at the beginning of a year by the use of the business equation: period, leaving you to calculate capital as Profit/(loss) = increase in net assets + the balancing figure. drawings – capital introduced Remember: P = I + D – Ci Assets – liabilities = Proprietor's capital Page 95 18: Incomplete records

Incomplete Accounting and Credit sales, purchases Stolen or Cash Accruals, prepayments and drawings records questions business equations and cost of sales destroyed goods book Credit sales and receivables Purchases and trade accounts payables The key lies in the formula linking sales, cash Similarly you need a formula for linking receipts and receivables. purchases, cash payments and payables. Remember: Opening payables + purchases – cash payments Opening receivables + sales – cash receipts = closing payables = closing receivables Use a control account. Alternatively put all the workings into a control account to calculate the figure you want. RECEIVABLES CONTROL ACCOUNT PAYABLES CONTROL ACCOUNT Opening receivables $ $ $ $ Sales X Cash receipts X Cash payments X Opening payables X X Closing receivables X Closing payables X Purchases X X X X X

Gross margins and mark-ups Other incomplete records problems revolve around Mark-up is profit as a % of cost eg 331/3% mark-up the relationship between sales, cost of sales and gross profit. Bear in mind the crucial formula: $ 80 $ Sales 1331/3% (60) 100% 20 Sales 100 COS 331/3% Gross profit $ Less Cost of sales 25 80 (60) Equals Gross profit 75 20 Margin is profit as a % of sales eg 25% margin Sales 100% COS 75% Gross profit 25% Page 97 18: Incomplete records

Incomplete Accounting and Credit sales, purchases Stolen or Cash Accruals, prepayments and drawings records questions business equations and cost of sales destroyed goods book Stolen goods or goods destroyed The cost of goods stolen/destroyed can be calculated as follows. Cost of goods sold based on gross profit margin or mark-up $ Cost of goods sold calculated using standard formula A (ie opening inventory plus purchases less closing inventory) (_B_) __C__ Difference (lost/stolen inventory) If no goods have been lost, A and B should be the same and therefore C should be nil If goods have been lost, B will be larger than A, because some goods which have been purchased were neither sold nor remaining in inventory, ie they have been lost Stolen or lost inventory is accounted for in two ways depending on whether the goods were insured If insured: If not insured: DEBIT Insurance claim account (receivable) DEBIT Expenses (eg Admin) CREDIT Cost of sales CREDIT Cost of sales

Incomplete Accounting and Credit sales, purchases Stolen or Cash Accruals, prepayments and drawings records questions business equations and cost of sales destroyed goods book Cash book Don't forget that movements between cash and bank need to be recorded by contra entries. This will Incomplete records problems often concern small retail usually be cash receipts lodged in the bank (debit entities where sales are mainly for cash. A two-column bank column, credit cash column), but could also be cash book is often the key to preparing final accounts. withdrawals of cash from the bank to top up the till (debit cash column, credit bank column). The bank column records cheques drawn on the business bank account and cheques received Again, incomplete records problems will often feature from customers and other sources an unknown figure to be derived. Enter in the credit of the cash column all amounts known to have been The cash column records till receipts and any paid from till receipts: expenses, withdrawals, expenses or drawings paid out of till receipts lodgements into bank. Enter in the debit of the cash before banking column all receipts from cash customers or other cash sources. Debits (receipts) Credits (payments) The balancing figure may then be a large debit, Cash Bank Cash Bank representing the value of cash sales if that is the $$ $$ unknown figure Page 99 Alternatively it may be a credit entry that is needed to balance, representing the amount of cash withdrawals or of cash stolen 18: Incomplete records

Incomplete Accounting and Credit sales, purchases Stolen or Cash Accruals, prepayments records questions business equations and cost of sales destroyed goods book and drawings Accruals and prepayments Drawings When there is an accrued expense or prepayment, Note three tricky points about drawings. the SPL charge can be calculated from the opening balance, the cash movement and the closing balance. Owner pays personal income into business bank account Sometimes it helps to use a 'T' account, eg as follows (for a rent payment). DEBIT Cash CREDIT Drawings RENT Owner pays personal expenses out of business Prepayment: bal b/f $ SPL (bal fig) $ bank account or takes goods for personal use Cash Prepayment: bal c/f 700 9,000 DEBIT Drawings 9,300 1,000 CREDIT Cash/Purchases 10,000 10,000 Wording of an exam question – 'Drawings approximately $40 per week' ... Drawings for year = $40 × 52 = $2,080 – 'Drawings between $35 and $45 per week' ... Drawings are a missing number to be calculated

19: Introduction to company accounting Topic List This section looks at the basics of limited liability companies and how they differ from sole traders. Limited liability companies Shares Reserves Bonus and rights issues

Limited liability Shares Reserves Bonus and rights companies issues Features Owners = shareholders or members Limited liability companies offer limited liability to their Large number of owners owners (shareholders). If the company becomes insolvent, the maximum amount that an owner stands Owner/manager split to lose is his share of the capital of the business. This is an attractive prospect to investors. Limited liability Owners appoint directors to run companies may be private or public. IAS 1 sets out a business on their behalf suggested format for financial statements. Owners receive share of profits in form of dividends Disadvantages Funding Compliance with national legislation Companies are funded in the following ways: Compliance with national accounting Retained profits Share capital standards and/or IFRS Short term liabilities Loan notes Any formation or annual registration costs (trade accounts payable etc)

Limited liability Shares Reserves Bonus and rights companies issues Shares The proprietors' capital in a limited liability company consists of share capital. When a company is set up for the first time it issues shares, which are paid for by investors, who then become shareholders of the company. Shares are denominated in units of 25 cents, 50 cents, $1 or whatever seems appropriate. This is referred to as their nominal value. Preferred shares are characterised Ordinary shares have the following as follows characteristics Rights depend on articles No right to fixed dividend Right to fixed dividend with priority over ordinary shares Entitled to remaining profits after preferred dividend Do not usually carry voting rights Generally priority for capital in winding up Entitled to surplus on repayment of capital May be redeemable (loan) or irredeemable (equity) Page 103 19: Introduction to company accounting

Limited liability Shares Reserves Bonus and rights companies issues Share capital The following are the main types of share issue: New issue at par or at a premium Authorised. The maximum amount of share Bonus/scrip/capitalisation issue capital that a company is empowered to issue. Rights issue Issued. The amount of share capital that has Loan notes been issued to shareholders. The amount of issued capital cannot exceed the amount of Companies may issue loan notes. These are long authorised capital. term liabilities not capital. They differ from shares as follows: Called up. When shares are issued or allotted, a company does not always expect to be paid the Shareholder = owner; noteholder = payable full amount of the issue price at once. it might Loan note interest must be paid; not so dividends instead call up only a part of the issue price, and Loan notes often secured on company assets call up the remainder later. Paid-up. Called up capital that has been paid. Market value. This is the price at which someone is prepared to purchase the share value from an existing shareholder. It is different from nominal value.

Limited liability Shares Reserves Bonus and rights companies issues Reserves Revenue reserves consist of distributable profits and can be paid out as dividends. Retained earnings Others, as the directors decide, eg general reserve Capital reserves are not available for distribution. They include the following: Share premium. Whenever shares are issued for a consideration in excess of their nominal value, such a premium shall be credited to a share premium account. Share premium account can be used to: – Issue bonus shares – Write off formation expenses and premium on the redemption of shares and loan notes – Write off the expenses on a new issue of shares/loan notes and the discount on the issue of loan notes Revaluation surplus. Created when a company revalues one or more of its non-current assets. Statutory reserves. The law requires the company to set up these. Page 105 19: Introduction to company accounting

Limited liability Shares Reserves Bonus and rights companies issues Bonus issue Example $5,000 $5,000 A bonus (or capitalisation) issue uses Issue of 5,000 new $1 shares reserves to pay for the issue of share capital. Debit Reserves (share premium or retained earnings) Credit Share capital Rights issue Example A rights issue enables existing Issue of 5,000 new $1 shares at $1.50 per share shareholders to acquire further shares. Debit Cash $7,500 Credit Share capital $5,000 Credit Share premium $2,500

20: Preparation of financial statements for companies Topic List This section looks at limited liability company accounts. IAS 1 Limited liability company accounts are more comprehensive IAS 18 as there are more stakeholders who wish to know how the business is doing.

IAS 18 ABC CO 20X2 20X1 STATEMENT OF FINANCIAL POSITION $$ $$ IAS 1 AS AT 31 DECEMBER 20X2 X X Assets X X Non-current assets X X Property, plant and equipment __ __ Goodwill X X Other intangible assets X X Current assets X X Inventories X X Trade receivables _X_ _X_ Other current assets Cash and cash equivalents _X_ _X_ __X__ __X__ Total assets X X Equity and liabilities X X Equity _X_ _X_ Share capital X X Retained earnings/(losses) Other components of equity Total equity Non-current liabilities X X Long-term borrowings X X Long-term provisions X X Current liabilities Trade and other payables X X Short-term borrowings X X Current portion of long-term X X borrowings _X_ _X_ Current tax payable _X_ _X_ Total equity and liabilities __X__ __X__

ABC CO 20: Preparation of financial statements for companies STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X2 Revenue 20X2 20X1 Cost of sales $$ Gross profit XX Other income (_X_) (_X_) Distribution costs XX Administrative expenses XX Other expenses (X) (X) Finance cost (X) (X) (X) (X) Profit before tax (_X_) (_X_) Income tax expense XX (_X_) (_X_) Profit for the year __X__ __X__ Other comprehensive income: XX Gains on property revaluation __ __ Total comprehensive income __X__ __X__ for the year Page 109

IAS 1 IAS 18 ABC CO STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20X2 Balance at 1 January 20X2 Share capital Retained earnings Revaluation surplus Total $ $$ $ X XX X X Changes in equity for 20X2 X (X) _X_ (X) Issue of share capital __X__ Dividends __ _X_ _X_ Total comprehensive income __X__ __X__ __X__ for the year Balance at 31 December 20X2

IAS 1 IAS 18 IAS 18 Revenue Recognition IAS 18 covers revenue from Measurement Recognition occurs when it is Sale of goods The amount of revenue is usually probable that future economic decided by the agreement of benefits will flow to the entity and Rendering of services buyer and seller. However, the when these benefits can be revenue is measured as the fair measured reliably. Use by others of entity assets value of the consideration yielding interest, royalties and received, ie after trade and bulk dividends discounts. Page 111 20: Preparation of financial statements for companies

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21: Events after the reporting period Topic List This standard is a key area of the syllabus. Learn how to apply it. IAS 10

IAS 10 Events after the reporting period Occur between the reporting date and the date on which the financial statements are authorised for issue. Adjusting events Non-adjusting events Provide additional evidence Concern conditions of conditions existing at the which did not exist at the reporting date. reporting date. Standard accounting Standard accounting Change the figures in the Disclose an event in a financial statements if note if it is material and is a the event is material and non-adjusting event. either it is an adjusting event or the going concern concept is no longer appropriate. Events after authorisation of the accounts The directors should consider publishing these if material.

Examples Adjusting events Non adjusting events Non-current assets. Determination of purchase Issues of shares. price or proceeds of sale. Purchases/sales of non-current assets and investments. Inventories. Evidence of NRV. Loss or drop in value of non-current assets or inventories occurring after the year end. Receivables. Renegotiation by or insolvency of Expansion or contraction of trade. trade accounts receivable. Government action or strikes. Dividends declared after the reporting date. Settlement of insurance claims. Discoveries of error or fraud. Page 115 21: Events after the reporting period

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22: Statements of cash flows Topic List Profit is not the same as cash. The statement of cash flows allows us to assess the quality of profit. How IAS 7 Statement of cash flows quickly does the profit figure get translated into a healthy cash balance? It is possible for a profitable firm to collapse due to poor cash flows.

IAS 7 Statement of cash flows Purpose Format A statement of cash flows shows the effect of an IAS 7 Statement of cash flows splits cash flows into entity’s commercial transactions on its cash balance. the following headings: It is thought that users of accounts can readily Cash flows from operating activities understand cash flows, as opposed to statements of Cash flows from investing activities profit or loss and statements of financial position, Cash flows from financing activities which are subject to manipulation by the use of different accounting policies. The IAS requires a reconciliation of cash and cash equivalents.

STATEMENT OF CASH FLOWS 23: Statements of cash flows YEAR ENDED 20X7 (INDIRECT METHOD) $m $m Cash flows from operating activities 3,390 Net profit before taxation Adjustments for: 450 Depreciation (500) Investment income 400 Interest expense 3,740 Operating profit before working capital changes (500) Increase in trade and other receivables 1,050 Decrease in inventories (1,740) Decrease in trade payables 2,550 Cash generated from operations (270) Interest paid (720) Income taxes paid Net cash from operating activities 1,560 Cash flows from investing activities (900) Purchase of property, plant and equipment 20 Proceeds from sale of equipment 200 Interest received 200 Dividends received (480) Net cash used in investing activities Cash flows from financing activities 250 Proceeds from issuance of share capital 250 Proceeds from long-term borrowings (1,290) Dividends paid * Net cash used in financing activities (790) Net increase in cash and cash equivalents 290 Cash and cash equivalents at beginning of period (Note) 120 Cash and cash equivalents at end of period (Note) 410 * This could also be shown as an operating cash flow Page 119

IAS 7 Statement Note. Cash and cash equivalents consist of cash on of cash flows hand and balances with banks, and investments in money marketing instruments. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts. Cash on hand and balances with banks 20X7 20X8 Short-term investments $m $m Cash and cash equivalents 40 25 370 95 410 120 The company has undrawn borrowing facilities of $2,000, of which only $700 may be used for future expansion. This proforma is for the indirect method. The direct method proforma is the same except for the first part which appears as follows. $$ Cash receipts from customers X Cash paid to suppliers and employees (_X_) Cash generated from operations X Interest paid (X) Income taxes paid (_X_) Net cash from operating activities __X__ Examination questions will probably require the indirect method. If the direct method is required, the necessary information will be given to you.

Advantages Disadvantages  Business survival needs cash # The disadvantages of cash flow accounting are  Cash flow is more objective than profit basically the opposite of advantages of accruals  Trade accounts payable need to know if they accounting, will be paid # For example, cash flow does not match income  More comparability between entities and expenditure in the statement of profit or  Better basis for decision making loss.  Easy to understand, prepare and audit Criticisms of IAS 7 Inclusion of cash equivalents does not reflect the way businesses are managed The requirement that a cash equivalent has to be within three months of maturity is unrealistic Management of cash equivalents is not distinguished from other investment decisions Page 121 23: Statements of cash flows

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23: Introduction to consolidated financial statements Topic List If a company has a subsidiary at its year end, it must prepare group accounts which must be in the form of Overview consolidated accounts. Definitions Associates

Overview Definitions Associates Overview Consolidation means presenting the results, assets and liabilities of a group of companies as if they were one company. Basic principles 1 Consolidation means adding together 2 Consolidation means cancellation of like items internal to the group 3 Consolidate as if you owned everything then show the extent to which you do not own everything

Overview Definitions Associates A subsidiary is an undertaking in which Further definitions per IFRS 10 Consolidated the parent has control financial statements Control is presumed to exist when the parent Control An investor controls an investee when owns > 50% of the voting power (eg voting the investor is exposed, or has rights, equity shares). Even when parent owns < 50%, to variable returns from its involvement some situations were control exists with the investee and has the ability to Parent has power to govern the financial and affect those returns through its power operating policies of the entity by statute or an over the investee agreement Parent has power to appoint or remove a Subsidiary An entity that is controlled by another majority of members of the board of directors entity (known as the parent) Parent has power to cast a majority of votes at meetings of the board of directors Parent An entity that controls one or more Parent has power over > 50% voting rights by entities agreement with other investors Group A parent and its subsidiaries Page 125 Non-controlling The equity in a subsidiary not interest attributable, directly or indirectly to a parent 23: Introduction to consolidated financial statements

Overview Definitions Associates Associate: an entity over which the investor has significant influence Significant The power to participate, but not to control influence: Assumed if hold > 20% of voting rights Associates are accounted for in consolidated accounts using the equity method. Statement of profit or loss SOFP X X Show group share of associate's PAT before group Investment in associate: X profit before tax Cost of investment Share of retained earnings/losses Include in assets

24: The consolidated statement of financial position Topic List This chapter introduces the basic techniques you will need to prepare a consolidated statement of financial Cancellation and part-cancellation position. Goodwill Non-controlling interests Intra-group trading

Cancellation and Goodwill Non-controlling Intra-group part-cancellation interests trading Cancellation Part cancellation When preparing a simple consolidated statement of An item may appear at differing amounts in the financial position: parent's and subsidiary's balance sheets. Take the individual accounts of the parent The subsidiary's shares may have been acquired company and the subsidiary and cancel out items at a price other than nominal value, raising the which appear as an asset in one company and a issue of goodwill. liability in another. The parent may not have acquired all of the Add together all the uncancelled assets and shares of the subsidiary, raising the issue of liabilities throughout the group. non-controlling interests.

Cancellation and Goodwill Non-controlling Intra-group part-cancellation interests trading Goodwill Goodwill working $ $ X Goodwill arises when the parent pays more Fair value of consideration transferred X X for their investment than the par value of the Fair value of NCI at aquisition X shares they acquire. Less net acquisition-date fair value of indentifiable X (X) Any preacquisition reserves of a subsidiary assets acquired and liabilities assumed: X X company are not aggregated with the parent company's reserves in the consolidated Ordinary share capital statement of financial position. Share premium Retained earnings at acquisition Goodwill is recognised as an intangible asset in the consolidated SOFP. Fair value adjustments at acquisition Goodwill Page 129 24: The consolidated statement of financial position

Cancellation and Goodwill Non-controlling Intra-group part-cancellation interests trading Non-controlling interest $ Retained earnings PCo SCo X $$ Shows the extent to which net assets X Per question XX controlled by the group are owned by other X Adjustments (unrealised profit parties. (X) attributable to PCo) (X) SOFP – equity Pre-acq'n ret'd earnings Y Fair value of NCI at acq'n Group share of post-acq'n ret'd X Plus NCI's share of post acq'n ret'd earnings earnings S Co (Y × %) X NCI at reporting date Group ret'd earnings

Cancellation and Goodwill Non-controlling Intra-group part-cancellation interests trading Intra-group trading If P sells to S, the unrealised profit lies in P's books: Unrealised profit will arise on intra-group transactions DEBIT Consolidated SPL (whole profit loading) where the inventory is still held at the reporting date: CREDIT Group inventory 1 Work out which company made the profit If S sells to P, the unrealised profit lies in S's books and must be shared between P and the NCI: 2 Calculate the provision for unrealised profit DEBIT Consolidated SPL (P's share) (PUP) DEBIT Non-controlling interest (NCI's share) CREDIT Group inventory 3 For consolidation purposes, eliminate the profit from inventory, consolidated retained earnings and NCI Page 131 24: The consolidated statement of financial position

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25: The consolidated statement of profit or loss and other comprehensive income Topic List Generally, the consolidated statement of profit or loss and other comprehensive income is more straightforward Consolidated statement of profit or than the consolidated statement of financial position. loss Consolidated statement of profit or loss and other comprehensive income

Consolidated statement Consolidated statement of profit or of profit or loss loss and other comprehensive income Purpose To show the results of the group for an accounting period as if it were a single entity. 100% P + 100% S (excluding adjustments for intra-group transactions). Sales revenue to profit for year To show the results of the group which were controlled by the parent company. Reason Strip out intra-group activity from both sales revenue and cost of sales. Intra-group sales (a) Goods sold by P. Increase cost of sales by unrealised profit. Unrealised profit (b) Goods sold by S. Increase cost of sales by full amount of unrealised on intra-group profit and decrease non-controlling interest by their share of unrealised profit. sales S's profit after tax X Non-controlling Less * unrealised profit (X) interests NCI% X X * Only applicable if sales of goods made by subsidiary.

Reason To show the extent to which profits generated through P's control are in fact owned by other parties. Reserves carried forward As per the calculations for the statement of financial position. Page 135 25: The consolidated statement of profit or loss and other comprehensive income

Consolidated statement Consolidated statement of profit or of profit or loss loss and other comprehensive income Consolidated statement of profit or loss and other comprehensive income If there is a revaluation gain or loss in the parent or subsidiary you will prepare a consolidated statement of profit or loss and other comprehensive income. This will only require a few additions to the consolidated statement of profit or loss. Revaluation gain in parent $'000 Revaluation gain in subsidiary (80%) $'000 8,000* 8,000* Profit for the year Profit for the year Other comprehensive income 2,000 Other comprehensive income 2,000 Gains on property revaluation 10,000 Gains on property revaluation 10,000 Total comprehensive income for the year Total comprehensive income for the year Total comprehensive income 7,000 Total comprehensive income 6,600 attributable to 3,000 attributable to 3,400 Owners of the parent (5,000 + 2,000) 10,000 Owners of the parent (5,000 + (2,000 × 80%)) 10,000 Non-controlling interest Non-controlling interest (3,000 + (2,000 × 20%)) *3,000 attributable to NCI

26: Interpretation of financial statements Topic List This section looks at how we can read and interpret the financial statements. Information required by users Profitability Ratios are a tool which allow us to assess the figures Liquidity presented. Gearing Limitations of ratio analysis

Information Profitability Liquidity Gearing Limitations of required by users ratio analysis Purpose Financial statements can be assessed using ratio analysis. Analysis of a company's financial statements is performed by the following: Past trends of the same business (analysis through time) and compare to budget Interested parties outside the business who are seeking to know more about the company Comparative information for similar businesses (potential investors) (analysis by competitors) Management wishing to interpret their company's past performance in order to make improvements for the future As well as: Employees – will I get paid? Governments – tax, regulations compliance Suppliers/lenders – will we get paid? Customers – can we rely on this company?

Information Profitability Liquidity Gearing Limitations of ratio required by users analysis Return on capital employed Return on equity ROCE = PBIT = Total assets PBIT liabilities ROE = PAT and pref div % Capital employed less current Ord share capital + reserves Measures overall efficiency of company in employing More restricted view of capital than ROCE, but resources available to it. same principles Examine Profit margin Change year to year Profit margin = PBIT % Gross profit = Gross profit Comparison to similar entities Sales Sales Comparison with current market borrowing rates margin Profit margin × Asset turnover = ROCE Useful to compare profit margin to profit % to investigate movements which do not match Asset turnover Asset turnover = Sales Total assets less current liabilities Measures efficiency of use of assets Page 139 26: Interpretation of financial statements

Information Profitability Liquidity Gearing Limitations of required by users ratio analysis Current ratio Inventory turnover period Current ratio = Current assets Inventory turnover period = Inventory × 365 Current liabilities Cost of sales 2:1 acceptable? 1.5:1? Depends on industry Higher the better? But remember: Quick ratio Lead times Quick ratio (acid test) = Current assets – Inventory Seasonal fluctuations in orders Current liabilities Alternative uses of warehouse space Eliminates illiquid and subjectively valued inventory Could be high if overtrading with rec'bles, but no cash Bulk buying discounts 1:1 OK? But supermarkets etc on 0.3 (no rec'bles) Likelihood of inventory perishing or A/cs receivable collection period becoming obsolete A/cs payable payment period Trade receivables × 365 Trade accounts payable × 365 Credit sales Purchases Consistent with quick/current ratio? If not, investigate Use cost of sales if purchases not disclosed

Information Profitability Liquidity Gearing Limitations of ratio required by users analysis Debt ratio Debt ratio = Total debts % Total assets (> 50% = high) Gearing Gearing ratio = Total long term debt term debt % Shareholders' equity + Total long Interest cover Interest cover = PBIT Interest payable Company must generate enough profit to cover interest Is 3+ safe? Consider relevance of profit vs cash Page 141 26: Interpretation of financial statements

Information Profitability Liquidity Gearing Limitations of required by users ratio analysis Limitations The limitations of ratio analysis are as follows: Comparative information is not always available They sometimes use out of date information Interpretation requires thought and analysis. Ratios should not be considered in isolation The exercise is subjective, for example not all companies use the same accounting policies Ratios are not defined in standard form

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