Examining Accounts: Business Ratios: General
When reviewing a set of accounts, some ratios will be part of the standard intelligence package. It is important to consider all relevant business ratios. You should look out for
- individual ratios which are out of line with similar businesses, or with the pattern of earlier years, or
- ratios which seem to conflict with one another, or which taken together raise questions about the credibility of the accounts.
Certain low or high ratios are indicators of particular sorts of evasion, and may provide some guide as to what to look out for during the enquiry, especially during the records examination.
In a simple case, with very straightforward accounts, the gross profit rate might be the only ratio worth considering. However, in more complex cases, a wider range of commercial ratios will be worth looking at.