Observation

 

Majority of the candidates attempted the question and defined control account but failed to explain the uses and the limitations of accounting ratios. The expected answers include:

(a)        A Control Account is a self-balancing ledger/memorandum account that serves as a summary/total of individual accounts maintained in a ledger.

            (b)        Uses of control accounts.

                        -           Assist in locating or detecting errors/frauds in the ledgers;
-           Provides a basis for preparing interim accounts;
-           Used to ascertain credit sales for a period;
-           Used to ascertain credit purchases for a period;
-           Serves as an internal check on ledger clerks;
-           It is used to ascertain closing debtors balances;
-           It is used to ascertain closing creditors balances;
-           It is used in grouping homogeneous accounts.

            (c)        (i)         Uses of accounting ratios

-           It is used to assess the value of an organisation;
-           It is used in analysing financial statements;
-           It provides the tools necessary to forecast the future prospects of an organisation;
-           Ratios give a quick view of the financial stability of an organisation;
-           It is used to determine the credit worthiness of an organization
-           Ratios provide information for comparison between organisations;
-           It is used to determine the profitability of an organization.

(ii)        Limitations of accounting ratios

-           The use of different accounting policies and methods by firms make comparison   difficult;

-           Some firms window-dress their financial statements resulting in misleading information to  users;

-           The use of different definitions to certain terms makes it difficult to use ratios to take     decisions;

-           Using ratios as a basis of comparison between firms become unfair as firms operate underdifferent conditions;

-           Inflation renders accounting ratios ineffective because of the frequent price level changes;

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-           Financial statements may be prepared several months before their use; by which time values therein might have changed;
-           Summarized nature of accounting information may lead to omission of vital-information rendering the use of the ratios derived from such deficiencies misleading;

-           Changes in accounting standardsbrings about distortions in financial reporting, making comparison difficult;

-           Non-quantifiable or qualitative information would not be disclosed by accounting ratios.