Efficiency

Question 1

State the five terms that the accounting ratios come under.

Answer 1

Profitability: How much wealth is created

Efficiency: How efficient is the use of resources

Short-term liquidity: are there enough liquid resources to meet maturing obligations?

Leverage: How much financing is contributed by creditors (i.e how much financial risk is there?)

Investment Return: How much do shareholders benefit?

Question 2

Inventories(stock) turnover

Answer 2

Inventories Turnover = Cost of sales/Average inventories

-> The number of times inventories are sold and replaced during the year.

Question 3

Receivables Turnover

Answer 3

Receivables Turnover = Sales/Average receivables

-> The number of times receivables are collected

Question 4

Payables Turnover

Answer 4

Payables Turnover = Cost of goods sold/Average payables

-> The number of times payables are paid.

Question 5

Inventory days

Answer 5

Inventory days = 365/Inventories turnover

-> Measures how long the average inventory is in stock.

Question 6

Receivable days

Answer 6

Receivable days = 365/Receivables turnover

Question 7

Payables days

Answer 7

Payable days = 365/Payables turnover

-> Measures the average time it takes for creditors to be payed.

Question 8

Assest Turnover

Answer 8

Asset Turnover = Sales/Average assets

-> The efficiency of asset usage to generate revenue

Question 9

Revenue per employee

Answer 9

Revenue per employee = Sales/Average#of employees