Discuss a financial ratio, its primary users (i.e., management, creditors, investors, etc.) and what the financial...

Discuss a financial ratio, its primary users (i.e., management, creditors, investors, etc.) and what the financial ratio indicates

Expert Solution

Ratio analysis is a useful management tool that will improve understanding of financial results and trends over time, by performing simple calculations on the items of income statements, balance sheet and cash flow statements.

With these ratios we can know the companies operational efficiency, liquidity, profitability and users of the financial statements can have a quick understanding about the company position.

Investors and analysts can gain profitable advantage in the stock market by using these ratios.

Performance of the companies in a particular field can be assessed/judged with ratios, irrespective of their size, volume or market share. And also for creating benchmarks, ratios can be more helpful to reveal trends in the particular industries.

Ratios can provide guidance to Entrepreneurs for creating business plans, presentations for lenders and investors. Managers can also have to assess the company financial weaknesses and opportunities.

Ratios manipulated by managers:

The primary reason to manipulate the ratios is due to the compensation to corporate executives is directly tied to the financial performance of the company. If they shown the performance in way to benefit the self interest, ratios are manipulated.

Financial manipulation will be detected by the investors due to the relationship between independent auditor and the corporate client. Auditors to conduct the audit to cover the window dressing than these can be manipulated by the managers.

keosha answered 2 years ago

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