Accountant: OK. Norma has asked me to go over some of the ratios I used in the report which I sent you last week. The first of these is on page 3 – working capital. Everyone got it? OK. Working capital is quite simple – It’s the current assets divided by the current liabilities. Any questions?
Accountant: Well, it basically tells us whether we have enough short-term assets to cover our short term debt. If we don’t, we could be in trouble. OK? Good. Next is return on assets. This is net income plus interest expense divided by total assets.
Before you ask, it allows us to evaluate the way we use our assets. It can help us decide whether or not we should start a new project, for example, by comparing the return expected against the normal borrowing costs. Is that clear?
Susan: I have a question. What’s debt/asset ratio?
Accountant: I was just coming to that. It tells us what proportion of the enterprise’s assets are being financed through the use of debt. If this ratio is high in a market with increasing interest rates, creditors are going to get worried.
The debt/asset ratio determines the funding leverage of the enterprise. OK, if there are no questions, I’d like to …
Trader: I agree that the accounts of the companies have a lot ò information, but it’s very hard to understand it all. In my job, I need to know the financial situation of a company. People interested in the stock exchanges rely on experts like me. But there are also many other sources of information. As for the accounting rules, they don’t interest me, or anyone else, at all. that’s stuff for the accountants.
Accountant: The financial statements of a company are the most important documents that a company produces. Investors, credictors, banks, customers, everybody reads the statements. The accounts show what a company does with its money, how profitable it is, and also how rish- worthy it is. And you can see warning signs for the future. Our stock exchanges depend on properly prepared accounts.
Investor: All those numbers, and I haven’t got a clue what they all mean. Pages and pages of them, and apparently they are often only ‘estimates’ or they can be interpreted in one of many ways. What’s the point when the accountant themselves can’t agree on how to show the numbers? Most of us need a lot more information and knowledge about a company than what we get in the accounts.
Layman: Is it all really that hard? Can’t we just look at the profit or loss of the company to find out how it’s doing? I don’t see all the fuss. Accountants are there to tell us about the numbers, and I thought that’s what they do. They are trained to report these numbers, and it can’t be that hard to count up everything that’s happened.
Managing Director: This is exactly the problem. There are many ways to change the numbers to give a better picture. Some of my peers have been guilty of doing just that. The accountants and auditors have to take responsibility for the way that numbers are reported. Accountants and their work are extremely important, they just need to make it all alittle easier to understand.