Topic 3 and 4 Sem 2 Flashcards
Gross profit ratio
Gross profit/net sales
- Indicates a firms ability to generate gross profit from sales
Profit ratio
Profit/net sales
-Indicates a firms ability to generate profit from sales
Expense ratio
general expenses/net sales
-Indicates amount of the sales dollars in % must be allocated to cover expenses
Return on assets ratio
Profit/Average assets of the last two years
-Indicates relationship between operating profit and assets.
Profitability ratios
Ratios that evaluate a businesses ability to control expenses
Working capital ratio
current assets/current liabilities
- Ratios ability to meet short term deadlines
Quick asset ratio
current assets -(inventory + prepayments)/current liabilities - overdrafts
- Indicates a firms ability to make immediate deadlines
Liquidity ratios
Indicates a firms short term solvency
Debt to Equity ratio
Total liabilities/equity
- Indicates firms financial risk of outside investing compared to its internal equity.
Gearing ratios
Measures a firms long term solvency
Limits of ratios
- mean nothing by themselves (require comparison)
- Easily manipulated
- Do identify the cause only, the symptoms
Matching principle
the principle that transactions should be recorded as they are earned not as cash is transferred
Integrity
- Straightforwardness
- Honesty
- Fair dealings
- Truthfulness
Objectivity
- bias
- conflict of others
- Undue influence
Professional compliance and due care
Maintain professional:
- skill
- diligence
- standards
