Home shows the relationships between significant figures in financial statements.

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Presentation transcript:

Home shows the relationships between significant figures in financial statements.

Home Different Types of Ratios: (1)Liquidity Ratios: - Current Ratio - Quick Ratio (2)Profitability Ratios: - Gross Profit ratio - Net Profit Ratio - ROCE (3)Efficiency Ratios: - Stock Turnover - Debtors’ Ratio - Creditors’ Ratio

Home (1)Liquidity (Solvency) Ratios: Test for short-term financial stability: Current (Working Capital) Ratio Current asset Current liabilities Current Ratio = it indicates: (i) the ability of the business to meet immediate obligations. (ii) the capacity of the business to carry on effective operations.

Home Quick Asset / Liquid Asset / Acid Test Ratio: Current asset - Stock Current liabilities Quick Ratio = it shows the amount of cash or near-cash assets (e.g. Debtors, Bills receivable) available for meeting immediate payments.

Home (2)Profitability Ratios: Test for profit-earning capacity of a business: (a)Gross profit ratio (i) Mark-up / Gross profit as a percentage of cost it shows the relationship between gross profit and cost of goods sold. Gross profit Cost of goods sold Mark-up =

Home Mark-upGross profitCost of goods sold $10,000$100,000 25%$25,000 20%$550,000 10% $100,000 $110,000 Activity 1:

Home Gross profit Sales Margin = it shows the relationship between gross profit and net sales. (ii)Margin / Gross profit as a percentage of Sales

Home MarginGross profitSales $24,000$480,000 15%$18,000 20%$380,000 $120,000 5% $76,000 Activity 2:

Home (iii) The relationship between Mark-up / Margin Cost of goods sold + Gross profit = Sales = 3 Fill in the following tables: Cost of goods sold Gross profitSalesMark-upMargin $525%20% $233% $450% 25% 33% Activity 3:

Home (b) Net profit ratio Net profit Sales Net profit ratio = it shows the relationship between net profit and sales.

Home (c) Return on capital employed it indicates the profit earning capacity of funds invested in the business by the owners. Net profit Capital Employed Return on Capital Employed =

Home (3) Efficiency Ratios: Test for financial management: Cost of goods sold Average stock Stock Turnover = (a)Stock Turnover it indicates the number of times the stock is turned over during a given accounting period.

Home (b)Debtors’ Ratio / Debtors’ Collection Period it shows the credit period allowed which means the length of time debtors take to pay. Debtors x 12 (months) Credit Sales Debtors’ Ratio =

Home (c)Creditors’ Ratio / Creditors’ Payment Period Creditors x 12 (months) Credit Purchases Creditors’ Ratio = it shows the credit taken period which means the length of time we take to pay our creditors.

Home References:  Go to  Go to  Go to  Go to  Go to  Go to http//:  Go to  any other web sites …etc.

Home  Link to Microsoft Word ClassworkClasswork  Link to Microsoft Word HomeworkHomework Supplementary Exercises:

Home Presented By Grace Lui Kam Yin Reference Books: Frank Wood’s Principles of Accounts (Vol. 1) 5th Edition KF Li, S Clifford’s Accounting Study Guide (Vol.1) 2nd Edition Ching Woon Chee Principles of Accounts (Vol.2) 1st Edition