ABSTRACT
This chapter contains financial ratios analysis; the principles on which it is based; underlying assumptions; guidance on application, and relevant issues; and related models. The model describes several key financial and accounting ratios. Ratios are useful assessment and comparative tools when appraising and comparing results of different organizations or business units. This is a stricter test of liquidity than the current ratio because it compares money and potential money assets to current liabilities. The higher the ratio, the less risk is involved as interest paid becomes a small proportion of profit. The ratios facilitate comparisons between the results of different organizations or business units. With knowledge of what the ideal range of ratio results should be for a given industry organizations and business units can target improvements. The ratios are a valuable tool for auditors who can use them to compare expected results with actual results and investigate differences.
