D2 Evaluate the Adequacy of Accounting Ratios as a Means of Monitoring the State of the Business in a Selected Organisation, Using Examples:

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D2 evaluate the adequacy of accounting ratios as a means of monitoring the state of the business in a selected organisation, using examples:

The importance of ratios in any business is very important because it gives the business a better understanding of the financial data. By using ratios the business is able to compare data from the current year with the previous years. From this the business will know and be able to identify if they are making more profit or a loss or if they just broke even.

There are four types of ratios that a business has to calculate. These are things like investment ratio, financial ratio, profitability ratio and utilization ratio.
From the results shown you can see if the business profits are increasing which is a positive thing and shows the company is on a rise and they are making money, this is a steady rise in the company’s money. If the results show a decrease it means that the company is making a loss. another one you can evaluate is the net profit margin as this is helpful as it shows how profitable the company has been throughout the years and whether it is increasing in profit or not.
Current ratio is the most effective because it shows you whether you can have enough money to pay back your debts. The ratio shows that they have more liabilities it means they would struggle to pay off their debts. A figure below one means that the business does not have enough current assets to pay off its debts, a figure between 1 and 1.5 means that they have just enough assets at the moment to pay off their debts and a figure that is above 1.5 means that the business has enough current assets to pay off its debts. however for the acid test it basically is slightly useful but because it only looks at cash only , it doesn’t take into consideration the external factors such as the assets and the liabilities and only looks at the cash so it…...

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