ACCA Financial Accounting (F3) Exam Practice 2025 – Complete Prep Resource

Financial ratios are essential tools used in financial accounting to evaluate a company's performance and assess its financial health. They provide a way to interpret financial statements, enabling stakeholders, such as investors, management, and creditors, to gain insights into profitability, liquidity, efficiency, and solvency.

By comparing ratios across different periods or against industry benchmarks, analysts can identify trends in a company's financial performance and make informed decisions. For instance, a higher current ratio might indicate stronger liquidity, while a lower debt-to-equity ratio could suggest a safer capital structure.

The other options do not accurately describe the primary purpose of financial ratios. Calculating income tax liabilities is a separate function of accounting that focuses on taxable income rather than performance analysis. Determining the book value of assets pertains to asset valuation methods rather than relative performance measurements. Predicting future market trends involves forecasting and economic analysis, which is not directly achieved through the use of financial ratios.

Thus, financial ratios serve as critical indicators that help in the comprehensive examination of a company's financial situation.