Acca financial Accounting (FA) Study Text ac ca (FA)

3 Ratio 

analysis 

Ratios use simple calculations based upon the interactions in sets of data. For 

example, changes in costs of sale are directly linked to changes in sales 

activity. Changes in sales activity also have an effect upon wages and salaries, 

receivables, inventory levels etc. Ratios allow us to see those interactions in a 

simple, concise format. 

Ratios are of limited use on their own, thus, the following points should serve as 

a useful checklist if you need to analyse data and comment on it: 

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What does the ratio literally mean? 

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What does a change in the ratio mean? 

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What is the norm? 

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What are the limitations of the ratio?