4.18 The calculation and Intrepretation of Accounting Rations

Question 1

What is liquidity?

Answer 1

• the level of funds available to pay trade payables.

Question 2

What is profitability?

Answer 2

• the ability to make a profit.

Question 3

What are the 2 types of accounting ratios?

Answer 3

• liquidity ratio.
• profitability ratio.

Question 4

What are the liquidity ratios?

Answer 4

• current ratios. (working capital ratio)
• Liquid ratio (acid test ratio).

Question 5

What are the profitability ratios?

Answer 5

• gross profit percentage.
  -profit for the year as a percentage of revenue,
• return on capital employed ratio.

Question 6

What are the 5 limitations ratios?

Answer 6

• they are based on historical data.
• companies use different methods to value their assets.
• Published accounts only focus on the financial aspects of the business.
• it is difficult to compare with other companies with the same status.
• ratios only show a year-end figure, which could be adjusted to show a favorable position.