What is meant by ratio analysis ? Explain its significance in the analysis and interpretation of financial statements.
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Explanation:
Ratio analysis is the comparison of line items in the financial statements of a business. Ratio analysis is used to evaluate a number of issues with an entity, such as its liquidity, efficiency of operations, and profitability. ... Trend lines can also be used to estimate the direction of future ratio performance.
The significance of ratio analysis. ... Ratio analysis helps us to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability and solvency. The trend of these ratios over time can be used to check whether they are improving or deteriorating.
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Usage. The purpose of a trial balanceis to prove that the value of all the debit value balances equals the total of all the credit value balances. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts.