Observation

Their attempts in 4(a) were just fair as only few candidates could explain accounting ratio and identify one example of liquidity ratio. However, in 4(b), candidates failed to point out clearly the uses of accounting ratios and in question 4(c) majority of the candidates that attempted the question scored good marks.

Some of the suggested answers are:

4(a)   Accounting Ratio: is the quantitative relationship between two or more accounting values in the financial statement.
OR
Is the quantitative relationship between two or more figures from financial
statements.
OR       They are mathematical measures of the relationship between two or more figures extracted from financial statements.
OR       They are comparisons of figures derived from financial statements for decision making purposes.

         Examples of Liquidity Ratio:

1. Current ratio or working capital ratio;
2. Quick ratio or acid test ratio.

4(b)      Uses of Accounting Ratios:
                                    Accounting ratios are used:

1. to shows trends of business activities over a period of time;
2. in forecasting;
3. in inter-company comparisons;
4. in intra-company comparisons;
5. for interpreting the financial statements;
6. to measure the ability of the business to meet its financial obligations;
7. to determine the profitability of the business;
8. to ascertain the liquidity position of an entity;
9. to assess the value or worth of a business;
10. to measure the gearing of a firm;
11. to determine the credit worthiness of a business;
12. to determine slow and fast-moving inventories;
13. to identify the problem areas of a firm’s finances;
14. to assess the efficiency of management;
15. to provide information for planning the activities of an entity;
16. to provide information for control purposes;
17. to provide information about the solvency of a firm;
18. to provide information for control purposes.

4(c)      Limitations of Accounting Ratios    

1. Accounting ratios deals in quantitative information only.
2. Accounting ratios can be easily manipulated.
3. It is not a good indicator for future planning because ratios are computed based on past data.
4. The use of different accounting policies and methods by firms makes comparison difficult.
5. Some firms window-dress their financial statements resulting in misleading information to users.
6. The use of different definitions to certain terms makes it difficult to use ratios to take decisions.
7. Using ratios as a basis of comparison between firms becomes unfair as firms operate under different conditions.
8. Inflation renders accounting ratios ineffective because of the frequent price level changes.
9. Financial statements may be prepared several months before their use, by which time values therein might have changed.
10. Summarized nature of accounting information may lead to omissions of vital information rendering the use of the ratios derived from such deficiencies misleading.
11. Changes in accounting standards bring about distortions in financial reporting, making comparison difficult.