Analysis + Interpretation/ Profit Ratios Flashcards
What is the purpose of analysis and interpretation in accounting?
ssist stakeholders in decision-making by analyzing financial information, often using ratios to highlight relationships between figures.
Who are the main stakeholders that benefit from financial analysis?
Shareholders, investors, owners, and managers.
What are the three main categories of financial ratios?
Profitability ratios, liquidity ratios, and leverage (gearing) ratios.
What does the Profit ratio measure?
The percentage of profit in each dollar of sales.
What increases profit ratio
Selling more high-profit items, decreased cost of sales, or reduced expenses.
What does the Gross Profit ratio assess?
The level of profit available after cost of sales, to cover other business expenses.
What might cause a decrease in the Gross Profit ratio?
Higher purchase price of inventory than sale price, or price cuts due to competition.
What indicates a positive trend in the Expense ratio?
Lower expenses or increased net sales.
What does the Rate of Return on Assets (ROA) ratio indicate?
The earning power of assets before payments to debt/equity providers.
Q: What are some ways to improve profitability ratios?
Locating cheaper suppliers, raising prices, and cutting operating
What does the Working Capital (Current) ratio assess?
A business’s ability to pay short-term debts.
What is the ideal Working Capital ratio?
2:1, meaning $2 in assets for every $1 in liabilities.
What might a Working Capital ratio above 2:1 indicate?
The business may be missing investment opportunities.
How is the Quick Asset ratio different from Working Capital?
It excludes inventory and prepayments, focusing on the most liquid assets.
What is the ideal Quick Asset ratio?
1:1, meaning the business should be able to pay immediate debts in an emergency.
