Financial Ratios Used in the Financial Statements and Policies Coursework

Financial Ratios Used in the Financial Statements and Policies - Coursework Example The financial statement prepared with the help of financial ratios is an aid to find out the efficient operation of the business for the share holders, competitors, and outsiders who are willing to invest in the firm. These ratios play a key role in calculating the dividend to shareholders, interest to debenture holders, as well as the tax payable to the government. They also express the risk factor and bankruptcy chances of the firm. There have been no convincing theories on financial ratios over the years. Horrigan (1965), writes on how the financial ratios were originated and how the theories were not. He says that a unique outcome of the accounting evolution in the United States was the development of financial ratios which helped in analyzing accounting statements. Such ratios were originally formulated for using short-term credit analytical devices. The origin of such ratios can be traced out as far back as the late 19th century. A number of various financial ratios were developed by the analysts in the early decades of the century. The next step after the formulation of such ratios was the development of the body of empirical generalization about such financial ratios which later turn out to be the hypothesis for drawing out a theory of financial ratio analysis. However, the materialization of a system of empirical generalization never happened, much less a theory (Horrigan, 1965). There are a number of sources for the collection of information for financial ratio analysis. The Profit and Loss Account and the Balance Sheet serves as the main source for information.