Accounting 2.2 Flashcards
Profitability
Compares the profit the business earns to a base figure such as sales, Capital or assets
Tools to assess profitability
trends, variances, benchmarks and profitability indicators.
profit
Profit is calculated by deducting expenses incurred from revenues earned in the current reporting Period and is expressed as a dollar amount.
The Return on Owner’s Investment (ROI)
indicates how effectively a business has used the owner’s capital to earn profit.
The Debt Ratio
A stability indicator that measures the percentage of a firm’s assets that are financed by liabilities.
Asset Turnover (ATO)
indicates how productively a business has used its assets to earn revenue.
Liquidity
The ability of a business to meet its short-term debts as they fall due.
The Working Capital Ratio and Quick Asset Ratio
assess the level of liquidity and should be at least 1:1.
The Working Capital Ratio (WCR)
assess the firm’s ability to meet its short-term debts.
The Quick Asset Ratio (QAR)
assess the firm’s ability to meet its immediate debts.
Inventory management strategies
determining an appropriate level of inventory on hand
maintaining an appropriate inventory mix
rotating inventory
ensuring inventory is up-to-date
Accounts Receivable management strategies
the use of discounts for quick settlement
reminder notices
threats of legal action
threats of not providing credit in the future.
Accounts Payable management strategies
Develop a strong relationship with each suppliers
Pay within, but as close as possible to, the credit term
Appoint account payable officer
Non financial information
any information that cannot be found in the financial statement, and is not expressed in dollars and cents. Eg customer complaint
Efficiency
The ability of the business to manage its asset and liabilities
Stability
the ability of the business to meet its debt and continue its operation in the long term
The Return on Owner’s Investment (ROI)
a profitability indicator that indicates how effectively a business has used the owner’s capital to earn profit.
Net profit margin
measure the percentage of sales revenue and that is retained as net profit
Gross profit margin
assess the adequacy of the firm’s markup.
The Working Capital Ratio (WCR)
, to assess the firm’s ability to meet its short-term debts
The Quick Asset Ratio (QAR)
a liquidity indicator that measures the ratio of quick assets to quick liabilities, to assess the firm’s ability to meet its immediate debts.
Cash flow cover ratio
assesses liquidity using the actual cash that the business generates from its operation activities to meet its financial obligations.
Inventory turnover
refers to the average number of days it take for the firm to sell its inventory
Account receivable turnover
how effectively a firm to collect cash from its account receivable by calculating the average numbers of days it takes a firm to collect cash from its account receivable
Account payable turnover
measure the average numbers of days taken to pay account payable indicating the effectiveness of the firm in managing its account payable
Profitability indicators
ROI, DR, ROA, ATO, NPM, GPM
Liquidity indicators
WCR, QAR, CFC, ITO, ARTO, APTO
Indicators that express as percentage
GPM, NPM, ROA, DR
Indicators that express as time period
ATO, CFC,
Indicators that express as ratio asset: 1
WCR, QAR
Indicators that express as numbers of days
ITO, ARTO, APTO
