3.5 Accounts Analysis

Question 1

What are the account ratios?

Answer 1

1. Current Ratio
2. Acid Test Ratio
3. Gross Profit Margin
4. Operating Margin
5. Profit Margin
6. Return of Capital Employed

Question 2

What is the Current Ratio?

Answer 2

Current Assets/ Current Liabilities

It shows the businesses’ liquidity. A ratio above one means that there are enough assets to pay all liabilities.

Question 3

What is the Acid Test Ratio?

Answer 3

current assets - inventory / current liabilities

It performs the same purpose as the current ratio, but some businesses have high levels of inventory - this ratio allows the most liquid assets to be used instead. Being a better measure

Question 4

What is GPM?

Answer 4

gross profit/ revenue x 100

This shows gross profit as a percentage of revenue, it shows how much GP is earned per dollar of revenue.

Question 5

What is OPM

Answer 5

Operating profit (Gross Profit - Operating Expenses) / revenue x 100

This shows how much money is made after operations are paid for.

Question 6

What is ROCE?

Answer 6

Profit / Capital Employed x 100

This shows profit before tax as a percentage of capital employed. It measures efficiency of how investment is used. How much money is earned per dollar of investment.