Comprehension and Interpretation of Accounts

We have so far been concerned with the preparation of final accounts without any examination of those accounts and without asking ourselves what those accounts mean or what they are telling us. In order to remedy this situation, we need to calculate some ratios from the figures in the final accounts. In addition to the calculation of ratios, we really need a yardstick or something else with which to compare our figures. For this purpose we may use any or all of the following: (a) previous year’s figures; (b) competitors’ figures; (c) average figures for the type of business which we are running. We shall now look at some accounting ratios in detail.