Financial Statements are prepared by the accountant with its staff working under accountant in order to provide fair true picture of a company so that company can make decisions according to the statements provided by the accountant.
Keeping in view the mangers or the management of the company such as board of directors set the framework for the company and issue their policies and procedure in order to accomplish specific goal.
Financial statements are considered as the fair and true picture but it is not an end of itself no conclusion can be drawn only looking at the statements alone, decisions are taken by the analyzing or comparing the statements, it is the process in which company tries to identify the strength and weakness.
There are so many methods for measuring the financial statement of any firm such as comparative statement and other can be schedule of changes in working capital, common size percentage, funds analysis , tried analysis and ratio analysis. These financial analysis ratios are found to be most authentic tool of financial analysis.
By the term ratio we mean that one number expressed in terms of another meaning a number is given and after interpreting or analyzing it can be opinioned in another way. It is the relationship between two or various figures that can be compared or measured.
Mr J. Batty has defined the term accounting ratio as that it is used to describe significant relationship between figures shown on a balance sheet, in a profit and loss account. Ratio is founded as the one number is divided with another .
Ratio analysis are an important technique for the companies it is adopted by the ancient generation still it is continued. These ratios simplifies the analyzing of statements ratios tell the completed story of any change in the financial condition of the company.
The data is provided for inter-firm compression, the ratios indicate the factors associated with successful and unsuccessful firm, these ratios also point out the strong and weak firms, sometimes things are overvalued and undervalued the ratios help to measure and provide the actual story of the firm.
Ratios also helps in the investment and decisions regarding the investments, it aid in investment decision in the case of investor and lending decisions in the case of bankers etc. The consequences provided by the ratios helps in order to forecast and anticipation. Though some demerits are also of these ratios as well.