Resources | Subject Notes | Accounting
This section focuses on interpreting accounting ratios to compare financial performance over different periods. We will learn how to calculate and analyze simple statements showing comparisons of results for different years.
Accounting ratios are calculated using information from a company's financial statements (primarily the income statement and balance sheet). They provide a way to analyze and interpret these statements, highlighting trends and relationships between different figures. Comparing ratios over time allows us to assess a company's performance and identify potential areas of improvement or concern.
We will focus on calculating and interpreting a few key comparison statements. These statements typically involve comparing figures from two or more different years.
This statement compares the total revenue generated by a company over different periods.
Calculation: Simply take the revenue figure for each year and present them side-by-side.
| Year | Revenue (£) |
|---|---|
| 2022 | $150,000 |
| 2023 | $180,000 |
| 2024 | $200,000 |
Interpretation: The revenue has increased from $150,000 in 2022 to $180,000 in 2023 and further to $200,000 in 2024. This indicates a positive trend in sales and customer demand.
This statement compares the profit a company makes before deducting income tax over different periods.
Calculation: Similar to revenue, present the profit before tax figures for each year.
| Year | Profit Before Tax (£) |
|---|---|
| 2022 | $25,000 |
| 2023 | $30,000 |
| 2024 | $35,000 |
Interpretation: The profit before tax has steadily increased from $25,000 in 2022 to $35,000 in 2024. This suggests improved profitability for the company.
This statement compares the profit a company makes after deducting all expenses, including income tax, over different periods.
Calculation: Present the net profit figures for each year.
| Year | Net Profit (£) |
|---|---|
| 2022 | $20,000 |
| 2023 | $25,000 |
| 2024 | $30,000 |
Interpretation: The net profit has grown from $20,000 in 2022 to $30,000 in 2024. This indicates that the company is becoming more profitable after all costs are considered.
When comparing statements over different years, it's important to look for trends and make informed comments. Consider the following:
Example Comment: "The company's revenue has shown a consistent upward trend over the past three years, increasing from $150,000 in 2022 to $200,000 in 2024. This suggests strong growth in sales. The profit before tax has also increased, indicating improved operational efficiency. However, it's important to consider external factors such as economic conditions and competitor activity that may have influenced these results."
Comparing financial statements over different periods using simple statements like these is a fundamental skill in accounting. By analyzing trends and making informed comments, we can gain valuable insights into a company's performance and financial health.