Accounting Ratios Flashcards
What is an Accounting Ratio?
A technique commonly used to analyse an entity’s financial position and performance.
Accounting ratios are essential for assessing financial statements to achieve informed decision-making.
What do Liquidity Ratios assess?
The business’ ability to cover its short-term debt as they become due.
These ratios focus on the availability of cash to manage day-to-day operations.
What does the Current Ratio indicate?
A quick way to look at a company’s current assets and current liabilities, ideally nearly equal to one another.
Also known as the ‘Working Capital Ratio’.
How is the Current Ratio expressed?
As the number of times current assets can cover the current liabilities in the accounting period.
A ratio close to 1 indicates a balanced financial position.
What is the Acid Test Ratio also known as?
Quick Ratio.
This ratio measures the number of times quick assets can cover current liabilities.
What do Profitability Ratios assess?
The business’ overall efficiency and performance during a specific period.
They measure the degree of accounting profits.
What does Gross Profit as a Percentage of Sales represent?
The percentage amount of sales that results in gross profit.
It indicates how efficiently a company produces goods relative to its sales.
What does Net Profit as a Percentage of Sales measure?
The percentage amount of sales that a business keeps as profits after cost of sales and expenses.
This ratio shows profitability after all expenses are deducted.
What is Net Profit as a Percentage of Capital Employed also known as?
Return on Capital Employed (ROCE).
This ratio measures returns from resources supplied by owners and sometimes creditors.
What do Efficiency Ratios indicate?
How well a business uses resources, including inventory turnover and revenue generation from assets.
Efficiency ratios help assess operational performance.
What is the Rate of Turnover or Stock Turnover?
The number of times per annum stock is sold or turned over.
A higher turnover rate indicates effective inventory management.
What is the formula for the current ratio?
current ratio = total current assets / total current liabilities
The current ratio indicates a company’s ability to pay short-term obligations.
What is the formula for the acid test ratio?
acid test ratio = (current assets - stock) / current liabilities
The acid test ratio assesses a company’s immediate liquidity without inventory.
How is the gross profit margin calculated?
gross profit margin = (gross profit / net sales) x 100
This metric shows the percentage of revenue that exceeds the cost of goods sold.
What is the formula of net profit as a percentage of sales?
net profit as a percentage of sales = (net profit / net sales) x 100
This indicates the profitability of a company relative to its sales.
How is the return on capital employed calculated?
return on capital employed = net profit / capital employed x 100
This ratio measures the efficiency of a company in generating profits from its capital.
What is the formula for capital employed?
capital employed = (opening capital + closing capital) / 2
This represents the total capital used for the acquisition of profits.
What is the formula for rate of turnover or stock turnover ?
stock turnover = cost of goods sold / average stock
This ratio measures how many times a company’s inventory is sold and replaced over a period.
What is the formula for mark-up?
mark-up = (gross profit / cost of sales) x 100
Mark-up reflects the amount added to the cost price to determine the selling price.
What is the formula for margin?
margin = gross profit / selling price
This indicates the proportion of sales revenue that represents profit.
What is the formula for expenses calculated as a percentage of revenue?
expenses as a percentage of revenue = (expenses / sales) x 100
This ratio shows how much of the revenue is consumed by expenses.
What is the receivables collection period?
receivables collection period = (accounts receivables / credit sales) x 365
This metric indicates the average number of days it takes to collect payment from customers.
How is the payables payment period calculated?
payables payment period = (accounts payable / credit purchases) x 365
This indicates the average number of days a company takes to pay its suppliers.
