Question

Discuss how a business's economic activities and industry fundamentals necessitates the use of financial ratios to eliminate accounting distortions arising from how the company operates successfully today and into the future.

Answer 1

Use of financial ratios is always advisable to eliminate accounting distortion because financial ratios are highly quantitative in nature and it can lead to identification of a particular trend as well as identification of strength and weakness of the company in terms of performance related to various segments of business.

there are various types of ratios for different types of economic scenarios in order to ascertain the performance of the company and the risk associated with the overall performance of the company which can help the business in forecasting its business expected performance in the future and it can help itself to proactively manage the risk associated with adverse economic scenarios which can impact the business profits on a negative side.

financial ratios like solvency ratios can help the business in deciding about the bankruptcy related risk and the liquidity related risk so that a company can prepare itself in advance in order to negate those risk and gain from those Adverse scenarios also.

Business can also use profitability ratio as well as efficiency ratio in order to efficiently use the resources which are available to the business in order to maximize its return and profitability .

So businesses can use financial ratios to maximum advantage in order to project its future, and better it's present scenario.