Ratios Paragraph

Question 1

Define Financial Reports

Answer 1

Financial reports are one means of communicating information, and the use of the ratios greatly assists with the analysis and interpretation of these reports.

Question 2

State the three areas

Answer 2

There are three main areas that assist with analysing and interpreting the financial position of the firm. These are financial stability, earning capacity and effectiveness of management policies.

Question 3

State how each of these will be addressed in this report

Answer 3

Each of these will be addressed independently in this report with recommendations provided throughout the report.

Question 4

Define Financial Stability

Answer 4

The financial stability ratios give an indication of the short-term liquidity and the long-term solvency of the enterprise.

Question 5

Define Current Ratio

Answer 5

This ratio indicates the ability of an enterprise to meet its short-term financial obligations.

Question 6

Define Quick Ratio

Answer 6

The quick ratio which measures the ability of a business to meet its immediate financial obligations.

Question 7

Define Equity Ratio

Answer 7

The equity ratio indicates the extent to which the owner has financed the business’s assets as opposed to using an alternative source of financing.

Question 8

Define Debt Ratio

Answer 8

The debt ratio indicates the way in which the business is financed and the extent of the business’s borrowings in relation to its assets.

Question 9

Define Gross Profit Ratio

Answer 9

The gross profit ratio indicates the ability of an enterprise to generate an acceptable net profit, return on owner’s investment and whether it can meet its other operating expenses.

Question 10

Define Net Profit Ratio

Answer 10

The net profit ratio is to show the effectiveness of managers to minimise expenses per dollar of sales.

Question 11

Define The Rate of Return on Owner’s Equity Ratio

Answer 11

The rate of return on owner’s equity ratio indicates the return on the owner’s investment in the business

Question 12

Define the Rate of Return on Total Assets Ratio

Answer 12

The rate of return on total assets ratio indicates the ability of an enterprise to generate profits using its assets.

Question 13

The Rate of Turnover of Inventories Ratio

Answer 13

The rate of turnover of inventories ratio details how many times initial inventory are replaced. (times)

Question 14

Define Profitability

Answer 14

Profitability is the ability to earn income within the current financial structure capacity

Question 15

Define Management Effectiveness

Answer 15

The effectiveness of management policies is the measurement of how proficient managers, have been directing and maintaining set policies.

Question 16

The Rate of Turnover of Accounts Receivable Ratio

Answer 16

The rate of turnover of accounts receivable indicates the period of collection of accounts receivable.(days)