Transcript Accounting Ratios

shows the relationships between significant
figures in financial statements.
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Different Types of Ratios:
(1) Liquidity Ratios:
- Current Ratio
(2) Profitability Ratios:
- Quick Ratio
- Gross Profit ratio
(3) Efficiency Ratios:
- Net Profit Ratio
- Stock Turnover
- ROCE
- Debtors’ Ratio
- Creditors’ Ratio
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(1) Liquidity (Solvency) Ratios:
Test for short-term financial stability:
Current (Working Capital) Ratio
it indicates:
(i) the ability of the business to meet
immediate obligations.
(ii) the capacity of the business to carry on
effective operations.
Current Ratio =
Current asset
Current liabilities
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Quick Asset / Liquid Asset / Acid Test Ratio:
it shows the amount of cash or near-cash assets (e.g.
Debtors, Bills receivable) available for meeting
immediate payments.
Quick Ratio =
Current asset - Stock
Current liabilities
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(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.
Mark-up =
Gross profit
Cost of goods sold
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Activity 1:
Mark-up
Gross profit
Cost of goods sold
10%
$10,000
$100,000
25%
$25,000
$100,000
20%
$110,000
$550,000
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(ii) Margin / Gross profit as a percentage of Sales
it shows the relationship between gross
profit and net sales.
Gross profit
Margin =
Sales
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Activity 2:
Margin
Gross profit
Sales
5%
$24,000
$480,000
15%
$18,000
$120,000
20%
$76,000
$380,000
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(iii) The relationship between Mark-up / Margin
Cost of goods sold + Gross profit = Sales
1
+
2
= 3
Activity 3:
Fill in the following tables:
Cost of
goods sold
Gross profit
Sales
4
1
$2
$5
2
6
6
$4
8
Mark-up
25%
33%
50%
Margin
20%
25%
33%
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(b) Net profit ratio
it shows the relationship between net profit and sales.
Net profit ratio =
Net profit
Sales
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(c) Return on capital employed
it indicates the profit earning capacity of funds invested
in the business by the owners.
Return on Capital Employed =
Net profit
Capital Employed
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(3) Efficiency Ratios:
Test for financial management:
(a) Stock Turnover
it indicates the number of times the stock is turned
over during a given accounting period.
Cost of goods sold
Stock Turnover =
Average stock
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(b)Debtors’ Ratio / Debtors’ Collection Period
it shows the credit period allowed which means the
length of time debtors take to pay.
Debtors’ Ratio =
Debtors x 12 (months)
Credit Sales
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(c)Creditors’ Ratio / Creditors’ Payment Period
it shows the credit taken period which means the
length of time we take to pay our creditors.
Creditors’ Ratio =
Creditors x 12 (months)
Credit Purchases
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References:
 Go to http://www.geocities.com/accounts_grace
 Go to http://www.i-cable.com/money/mnews/
 Go to http://finance.hongkong.com/zh_tw/
 Go to http://hk.finance.yahoo.com/
 Go to http://www.hutchison-whampoa.com/
 Go to http//:www.singtao.com/frames/f_t_fin.html
 Go to http://www.netvigator.com/fina/index.html
 any other web sites …etc.
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Supplementary Exercises:
 Link to Microsoft Word Classwork
 Link to Microsoft Word Homework
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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
Presented By Grace Lui Kam Yin
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