Page 75 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Figure 4.4: DUPONT Chart

4.8 Relevance of Ratio Analysis

Ratio analysis has a lot of utility which may be understood by the following discussion:

1. Easy to understand the financial position of the fi rm: The ratio analysis facilitates the

parties to read the changes taken place in the fi nancial performance of the fi rm from one
time period to another.

2. Measure of expressing the financial performance and position: It acts as a measure of
financial position through Liquidity ratios and Leverage ratios and also a measure of

financial performance through Profitability ratios and Turnover Ratios.

3. Intra-firm analysis on the financial information over many number of years: The fi nancial

performance and position of the firm can be analysed and interpreted with in the fi rm

in between the available financial information of many number of years; which portrays
either increase or decrease in the fi nancial performance.

4. Inter-firm analysis on the financial information within the industry: The fi nancial

performance of the firm is studied and interpreted along with the similar firms in the

industry to identify the presence and status of the respective firm among others.

5. Possibility for financial planning and control: It not only guides the firm to earn in

accordance with the financial forecasting but also facilitates the firm to identify the major

source of expense which drastically has greater influence on the earnings.

Self Assessment
Fill in the blanks:
17. The ratio analysis facilitates the parties to read the changes taken place in the

…………………… of the firm from one time period to another.
18. Ratio analysis acts as a measure of financial position through Liquidity ratios and

………………

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