The student's statement is incorrect. While ratio analysis is a useful tool, it's not a completely reliable way to assess a company's financial health. Ratio analysis relies on accounting data, which inherently has limitations. Here are three limitations:

• Industry Differences: Ratios are most meaningful when compared to industry averages. However, different industries have different typical ratios. A high profit margin might be excellent for a grocery store but poor for a utility company. Therefore, comparing ratios across industries can be misleading.
• Manipulation of Accounts: As mentioned before, accounting methods allow for some degree of manipulation. A company might use aggressive depreciation or overly optimistic inventory valuation to artificially improve its ratios. This can create a false impression of financial strength.
• Lack of Context: Ratios provide a snapshot but lack context. A high current ratio might seem good, but if the company has significant debt, it might still be in financial difficulty. Ratios don't tell the whole story; they need to be interpreted within the broader economic and business environment.

Financial statements provide crucial information for various external stakeholders. Here's how each user group might utilize them:

a) Suppliers: Suppliers are primarily interested in the business's ability to pay its debts. They want to assess the creditworthiness of the company before extending credit. They would be particularly interested in:

• Profitability (Profit & Loss Account): To see if the business is generating enough profit to comfortably meet its obligations.
• Liquidity (Balance Sheet): Specifically, current assets and current liabilities. Suppliers want to ensure the business has sufficient liquid assets to pay short-term debts.
• Solvency (Balance Sheet): To assess the long-term financial stability and ability to meet long-term obligations.
• Cash Flow (Statement of Changes in Equity/Cash Flow Statement): To understand the business's ability to generate cash to pay suppliers.

b) Banks/Lenders: Banks and lenders assess the risk of providing loans to a business. They need to determine if the business is likely to repay the loan with interest. They will focus on:

• Profitability (Profit & Loss Account): A strong profit history indicates a higher likelihood of repayment.
• Solvency (Balance Sheet): The ratio of assets to liabilities is key. Lenders want to see a healthy level of assets compared to liabilities.
• Liquidity (Balance Sheet): Sufficient current assets to cover current liabilities are essential for short-term repayment.
• Cash Flow (Statement of Changes in Equity/Cash Flow Statement): A positive and consistent cash flow demonstrates the business's ability to service debt.
• Ratio Analysis: Banks will use various ratios (e.g., current ratio, debt-to-equity ratio) to assess the overall financial health and risk.

c) Government (e.g., HMRC): HMRC (Her Majesty's Revenue and Customs) and other government bodies are interested in a business's financial performance for tax purposes and regulatory compliance. They will examine:

• Profitability (Profit & Loss Account): To determine the business's taxable profit.
• Tax Liability (Statement of Changes in Equity/Profit & Loss Account): To assess the amount of tax owed.
• Solvency (Balance Sheet): To ensure the business is financially stable and can continue operating and contributing to the economy.
• Compliance with accounting standards: To ensure the financial statements are prepared in accordance with relevant regulations.

Internal users are individuals who work within the business. They have direct access to the business's operations and are directly affected by its performance. External users are individuals or organizations outside the business who have no direct involvement in its operations. They rely on the accounts to assess the business's performance and financial health.

Here's a breakdown: