Subject: Principles of Accounts Title: Accounting Ratio and Interpretation of Accounts.

Slides:



Advertisements
Similar presentations
1 Reference: Chapter 1 and 11 ( Book 2 ) Accounting Ratio 17.
Advertisements

Resources for lesson This is a two lesson resource
Ratio Analysis GCSE Business Studies tutor2u™
Session 7 Case studies and Solutions Nursery Management Understanding and Managing Finance.
Profitability Ratios Other Terms Review Potpourri $100100$100100$ $200200$200200$ $300300$300300$ $400400$400400$ $ Solvency.
Financial Statement Analysis
Ratio Analysis.
Interpreting the Accounts (Ratio Analysis). What is ratio analysis? A set of accounting ratios often used to help interested parties interpret ( make.
Analyzing Financial Statements
Strategic Management Financial Ratios
Interpretation of Accounts
Managing Finance and Budgets Presentation 7 Financial Ratios.
ELEC2804 Engineering Economics and Finance
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Analyzing Financial Statements Analyzing Financial Statements.
8 - 1 © 2005 Accounting 1/e, Terrell/Terrell Analyzing Financial Statements for Profitability, Liquidity, and Solvency Chapter 8.
Monitoring the Business
Ratio Analysis of Accounts. Lesson Objectives for Today: Differentiate between profitability & liquidity ratios. Calculate the main financial Ratios.
FINANCIAL STATEMENT ANALYSIS
MSE608C – Engineering and Financial Cost Analysis
Ryan Williams. Learning Objectives Prepare common-sized Income Statements and Balance Sheets. Compute financial ratios listed in Table 4.1. Discuss uses.
Ratio Analysis A2 Accounting.
This week its Accounting Theory
Financial Ratio Analysis
Part 7: Chapter 47 An introduction to the analysis and interpretation of accounting statement By: Nenae 11gs.
Ratio Analysis.
Unit 3 Accounts & Finance Ratio Analysis. Learning Objectives To be able to calculate ratios To be able to use ratios to interpret and analyse financial.
Special Accounting Procedures
- Brijesh Pitroda. The analysis of a Business' Health starts with Financial Statement Analysis.
1 Benefits of Ratios Summary statistic Enable comparison of: one company’s performance over time different companies in same industry sector different.
Financial/Ratio Analysis
Chapter 8 Financial Plan Copyright 2006 Prentice Hall Publishing Company 1 Creating a Solid Financial Plan.
FINANCIAL PERFORMANCE ACCOUNTING RATIOS. Accounting Ratio Analysis Information contained in financial statements is of major significant to internal and.
Creating a Solid Financial Plan CHAPTER 6 BBE2313 FUNDAMENTAL OF ENTREPRENUERSHIP.
Key Financial Ratios 1. Profitability Ratios Key ratios – Return on shareholders’ equity (ROE) – Return on assets (ROA) – Return on sales (ROS) – Gross.
IB Business and Management
 Efficiency ratios evaluate how well a firm’s financial resources are being used. There are four main efficiency ratios: stock turnover, return on capital.
Chapter 18-1 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Illustration.
Chapter 9: Financial Statement Analysis
Chapter 10: Financial Plan 1 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Creating a Successful Financial Plan.
USING THE INFORMATION IN THE FINANCIAL STATEMENTS Financial ratios are calculated to evaluate the short-term liquidity of a company. These ratios include.
1 Chapter 9 Analysis of Financial Statements. 2 VII. Ratio Analysis  Builds on firm's financial statements  Easy to understand  Used by both equity.
Previous Lecture Purpose of Analysis; Financial statement analysis helps users make better decisions Financial Statements Are Designed for Analysis Tools.
Chapter 9: Financial Plan 1 Copyright 2002 Prentice Hall Publishing Company Creating a Successful Financial Plan.
Analyzing Financial Statements Chapter 23.
Analysis and Interpretation of Financial Statements
Analysis and Interpretation of Accounting Statements Ratios.
Analyzing Financial Statements Chapter 13 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
Analyzing Financial Statements
Financial Statement Analysis
3.4 Ratio Analysis Aims to judge a firm’s financial performance. Based on assumption that firms want to make a profit.
V. STOCKS. L. RATIO ANALYSIS 1.Ratios That Measure Liquidity (the firm’s ability to convert assets into cash) a.Current Ratio = Current Assets Current.
Summary Of Previous Lecture  basic financial statements and their contents.  financial statement analysis and its importance to the firm and to outside.
T HE I NTERPRETATION OF FINANCIAL STATEMENTS Profitability, liquidity, efficiency, gearing ratios.
Ratio Analysis. Purpose: To identify aspects of a business’s performance to aid decision making Quantitative process – may need to be supplemented by.
IGCSE Business studies Accounting and finance
Chapter 9: Financial Plan 1 Copyright 2002 Prentice Hall Publishing Company Creating a Successful Financial Plan.
Financial Statements and Ratios Look up your stock portfolio at Howthemarketworks.com.
HIGHER BUSINESS MANAGEMENT Finance. Content Sources of Finance Cash Budgeting  Analysis  Issues & Solutions Final Accounts  Trading Profit & Loss 
 The more you use these ratios and the more you practice using them the easier it will be to remember the calculations, apply them in your exam and.
Chapter Nine Financial Statement Analysis © 2015 McGraw-Hill Education.
Ratio Analysis. Use of Ratio Analysis To analyse Performance Liquidity Shareholder Investment.
Ratio Analysis…. Types of ratios…  Performance Ratios: Return on capital employed. (Income Statement and Balance Sheet) Gross profit margin (Income Statement)
Of Financial Accounting, 3e CORNERSTONES. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part,
Ratio Analysis Business and Management, SL. U56 – Ratio Analysis.
Ratio analysis  Is a method or process by which the relationship of items or groups of items in the financial statements are computed, and presented.
Financial Ratios.
Unit 2 Financial & Management Accounting
Ratio Analysis A2 Accounting.
Ratio Analysis.
Ratio Analysis - Overview
Presentation transcript:

Subject: Principles of Accounts Title: Accounting Ratio and Interpretation of Accounts

Author : Fok Pui Yan Student No: Student No:

Target Audience Target Audience : Form 5 students Purposes of using the slides Purposes of using the slides : for lecturing

Content 1. Introduction 2. Profitability ratios -- Gross Profit Margin -- Net Profit Margin -- Return on Capital Employed 3. Liquidity ratios -- Current Ratio -- Acid test Ratio 4. Activity ratios -- Stock Turnover -- Credit Period Allowed to Debtors-- Credit Period Received from Creditors IntroductionProfitability ratiosGross Profit MarginNet Profit MarginReturn on Capital EmployedLiquidity ratiosCurrent RatioAcid test RatioActivity ratiosStock TurnoverCredit Period Allowed to DebtorsCredit Period Received from CreditorsIntroductionProfitability ratiosGross Profit MarginNet Profit MarginReturn on Capital EmployedLiquidity ratiosCurrent RatioAcid test RatioActivity ratiosStock TurnoverCredit Period Allowed to DebtorsCredit Period Received from Creditors

The Evaluation Of Financial Performance involves a series of techniques that can be used to help identify the strengths and weaknesses of a firm. Accounting Ratios AND The Interpretation Of Accounts

Financial Ratios:- w which use data from a firm’s balance sheet, income statement, and certain market data, often are used when evaluating the financial performance of a firm.

Financial Ratios A. Profitability ratios B. Liquidity ratios C. Activity ratios measure how effectively a firm’s management generates profits. indicate a firm’s ability to meet its short-term financial obligations. indicate how efficiently a firm is using its assets to generate sales

Profitability ratios w Profitability is the ability of an entity to earn profits. This ability to earn profits depends upon the effectiveness and efficiency of operations as well as resources available to the enterprise. Content

(I) Gross Profit Margin/Gross Profit to Sales Ratio It shows how much gross profit has been made for every $100 of sales Sales margins vary widely between different industries but tend to be similar within industries

**Gross Profit = Sales- Cost of Goods Sold **Cost of Goods Sold = (Opening Stock + Purchases - closing Stock)

(II) Net Profit Margin/Net Profit to Sales It shows how much net profit has been made for every $100 of sales It indicate the relative efficiency of the business after taking into account all revenues and expenses. The difference between gross profit margin and net profit margin would indicate the efficiency of expenses control.

** Net Profit = Gross Profit + Revenue -Expenses

(II) Return on Capital Employed (ROCE) / Return on Assets Employed It is an important ratio and is often known as the primary ratio It is a measure of the overall profitability of the business It shows the percentage return on the capital invested in the business. It shows how much profit has been earned for every $100 invested

(II) Return on Capital Employed (ROCE) / Return on Assets Employed It indicates how efficiently management is using the business resources to earn profits There is a variety of methods used to calculate ROCE. It is important, in order that the results can be used for comparative purposes, that the same method of calculation is used over time or when comparing the results of different businesses.

** Average Capital = (Opening Capital + Closing Capital)/2 I. For Sole Proprietorship and Partnerships Company

** Total Share Capital = (Ordinary Shares + Preference shares + Reserves) II. For Limited Company

Liquidity ratios w These are the ratios which can help to assess the ability of a firm to meet its current liabilities. Content

(I) Current Ratio / Working Capital Ratio This ratio indicates the ability of a business to meet its short-term liabilities out of its current assets The The idea behind the current ratio is that a company should have enough current assets to generate sufficient cash to meet its future commitments and pay off its current liabilities. A Ratio of 2 is the norm for most companies.

(I) Current Ratio / Working Capital Ratio If the ratio is too high (e.g. 5:1), the company may be holding too many idle short-term assets. (e.g. debtors and stocks that earn little or no income) If the ratio is too low (e.g. 0.5:1, which is less than 1), it may indicate that the company may face liquidity problems and may not able to meet its debts when they fall due.

(II) Acid Test Ratio / Quick Ratio / Liquidity Ratio This ratio indicates the ability of a business to meet its short-term liabilities out of its quick assets. Quick assets can be converted into cash quickly. They consist of all the current assets except "STOCK”. The rule of thumb for the Quick Ratio is 1:1

(I) Current Ratio / Working Capital Ratio If the ratio is too high, the company may be holding excessive liquid assets. If the ratio is too low, the company may have a liquidity problem.

Activity ratios w These are the ratios which can help to assess the management efficiency of a company. Content

(I) Stock Turnover Ratio This ratio shows the number of time the average stock is being sold in a period. This measures the efficiency of the sales and stock levels of a company. A high ratio means high sales, fast stock turnover and a low stock level. A low stock turnover ratio means the business is slowing down or with a high stock level. On the other hand, it may involve more storage expenses and stock insurance.

(I) Stock Turnover Ratio Differences across stocks, companies, and industries are too great to allow a general statement as to what is a good stock turnover. For example, a firm selling food should have a higher turnover than a firm selling furniture or jewelry. However for each business or each department within a business, there is a reasonable turnover rate. A turnover lower than this rate could mean that stock is not being managed properly. In such cases, an investigation should be undertaken to determine the causes of the lower turnover rate.

** Cost of goods sold = (Opening stock + Purchases - Closing Stock) **Average Stock = (Opening stock + Closing Stock)/2

(I) Credit Periods Allowed to Debtors This ratio is used to appraise the company performance in its debt collection ability. It is a rough measure of the average length of time it takes for a company to collect trade debts from debtors.

(I) Credit Periods Allowed to Debtors The shorter the collection period the better. If debtor days are increasing year on year, this is indicative of a poorly managed credit control function. The longer a debt is owed, the more likely it will become bad debts.

OR

(III) Credit Period Received from Creditors This ratio shows how long it takes a firm on average to pay its creditors. Within reason, where cash discounts are not offered, it is better to extent the settlement period for as long as possible. In this way, the business benefits from the cheapest form of finance.

(III) Credit Period Received from Creditors Most of the companies want to obtain a long credit period from their creditors because their creditors would not charge them interest during the credit period. (Its seems the longer the period, the better.) But you should bear in mind that the company needs to keep good relations with its suppliers or otherwise, suppliers may refuse to supply again.

OR

w When evaluating a firm's performance based on its balance sheet, income statement, and a series of financial ratios, a good financial analyst must be aware of the accounting techniques used by the firm and mindful of the quality of the firm's earnings and its balance sheet. -END-