chapter  9
42 Pages

– Interpretation of accounts

Introduction All users of fi nancial statements need to be able to interpret accounting data and information to help them make decisions. An initial look at an income statement and balance sheet will provide you with some interesting data, but the accounts will require some interpretation in order to fully understand the data and convert it into meaningful information. One of the fi rst things you need to do when interpreting accounts is to calculate the relevant ratios. Accounting ratios are mathematical comparisons used to highlight the relationships that exist between different fi gures on the income statement and balance sheet. Once you have calculated the ratios you either need to compare them to previous ratios of the same business in order to establish trends, or compare them to the ratios of other organisations to see how the business is performing, in comparison to its competitors.