Question

How is ratio and trend analysis used by the controller? Need answer this question for 10 points please

Answer 1

Ratio and trend analysis are the financial statement analysis techniques used by firm to analyse and understand the results. Below are the some of the ways it is used by controller which helps the firm.

· It is useful tool for financial statement analysis widely accepted in the industry. It helps in developing relationship between numbers of financial statements and understanding performance of the firm in a better way.

· It helps in understanding and interpreting the various key performance indicators of the firm. For example : Gross profit margin, operating margin, net profit margin

· It helps in comparing the performance of the firm with other firms and there by benchmark the performance and improve the same

· It helps in comparing the performance of the firm with other periods and thereby analyse trends to see how revenues and costs are trending

· It helps in comparing the performance with the industry median and improves the performance to attain industry standards.

· It helps in managing the working capital of the firm with various ratios like Current ratio, Average inventory period, average collection period ,etc

· It helps in managing the assets of the firm efficiently to generate more returns

· It helps in managing the liabilities and debts of the firm by constantly monitoring the ratios to total assets and total equity. Managing debts is important from solvency point of view

· It helps in obtaining funds from bank. Banks need ratios as part of their policy to grant additional funds to the firm

· It helps in forecasting business results for future periods.