Finance and Accounts 2: Ratio Analysis - Activity

The aim of this Activity is to give some background to the use of ratio analysis to help interpret the performance of businesses. It may be worth checking back to the first Activity and Presentation on Finance and Accounts to remind you of the nature and purpose of accounts. This Activity also makes use of Biz/ed's extensive Ratio Analysis resource.

Firms produce financial information for two main reasons:

1. To provide information to stakeholders in the business
2. To provide information that helps the business plan ahead

In examinations, you will be expected to recognise appropriate accounting information - most notably the profit and loss account and the balance sheet, and to use the information in these documents to comment on the performance of the business. It is most likely you will be expected to highlight key strengths and weaknesses suggested by the information at your disposal and therefore offer suggestions about the possible solutions to the problems identified. Such a task involves Knowledge (recognising the key ratios), Application (being able to apply them to the business case study given), Analysis (breaking down the financial performance of the business into smaller parts) and Evaluation (offering judgements about the success, failure, strengths, weaknesses of the business concerned). In so doing, it covers all four of the key assessment objectives you will be expected to demonstrate.

Image copyright: Darren Shaw

Ratio analysis is the key way in which this is carried out. Traditionally, ratio analysis has been an Achilles heel for students; a seemingly mental block occurs when asked to manipulate financial data. The use of this data can be confusing, there appears to be a number of similar things each of which tell you something very slightly different! In addition, the actual accounts of companies invariably do not resemble anything that seems to be produced in textbooks! In reality of course, they are very similar but sometimes the terminology differs slightly.

The aim of this Activity, therefore, is to try to guide you through the important skill of ratio analysis and to help build your confidence in dealing with financial information. The associated Presentation(http://www.bized.co.uk/educators/16-19/business/accounting/presentation/finance2.ppt) will provide you with the background and give you access to all the definitions of the relevant ratios.

Image copyright: Nick Benjaminsz

The Activity is based on the Ratio Analysis section of Biz/ed(http://www.bized.co.uk/compfact/ratios/index.htm). The resource is divided into seven main sections. Each has an explanation, examples and tasks for you to follow. There are opportunities to take the analysis further in the 'advanced' section and you can also use the Financial Ratios database(http://www.bized.co.uk/cgi-bin/ratios/ratiodata.pl) to select different businesses to provide further practice and hone your skills.

The section map(http://www.bized.co.uk/compfact/ratios/sectionmap.htm) can be used to give you an overview of all the pages in this resource, allowing easy navigation between the different sections.