Week 3&4 - Accounting Ratio Analysis Equations

Question 1

What is Accounting

Answer 1

The process of identifying, measuring and communicating economic information, which is reliable, relevant and comparable, to make informed judgments and decisions by users of that information

Question 2

Accounting equation

Answer 2

Capital = Assets- liabilities

Question 3

Liquid capital ratio

Answer 3

((Current assets-inventory)/current liabilities)

Question 4

How to work out mark up

Answer 4

(Gross profit/cost of sales) x 100

Question 5

How to work out Return on capital employed

Answer 5

(Profit for year/capital employed) x 100

Question 6

How to work out Inventory turnover

Answer 6

(Average inventory/cost of sales) x 365

Question 7

How to work out trade receivables

Answer 7

(Trade receivables/credit sales) x 365

Question 8

How to work out current ratio

Answer 8

Current assets : current liabilities

(Has to be in a ratio)

Question 9

How to work out trade payable days

Answer 9

(Trade payable days/credit purchases)

Question 10

How to work out gross profit margin

Answer 10

(Gross profit/sales) x 100

Question 11

How to work out profit margins

Answer 11

(Profit for year/ sales )x 100

Question 12

How to work out Net profit margin- the net profit as a % of sales?

Answer 12

Net profit (before tax) / turnover (sales) x 100

Question 13

How to work out Gross profit margin- gross profit as a percentage of sales?

Answer 13

Net profit / turnover (sales) x 100

Question 14

How to work out Return on capital employed (ROCE)-efficiency with which the firm generates profits from funds invested.

Answer 14

(Operating profit / capital employed) x 100

Question 15

How to work out stock turnover rate (per year)-number of times a year a company sells and replaces its stock

Answer 15

(Cost of goods sold / average stock)

Question 16

How to work out Stock turnover- Average number of days that stock is held(no of days we have it until sold)

Answer 16

365 / no. Of times a business sells and replaces stock (average stock)

Question 17

How to work out Debtors (trade receivables) collection period- (how many days does it take our co. to collect its debts from debtors?)

Answer 17

(Debtors / sales turnover) x 365

Question 18

How to work out Asset turnover ratio-(how many pounds worth of sales can generate from an assets base? (number of times per year).)

Answer 18

(Sales turnover / total assets employed)

Question 19

How to work out acid test ratio (quick ratio)?

Answer 19

current assets – stock : current liabilities
(Has to be in a ratio)

Question 20

How to work out current ratio? ( working capital ratio)

Answer 20

Current assets : current liabilities

Question 21

How to work out gearing ratio

Answer 21

Non current liabilities (long term loans e.g bank loans, debentures) x100 / capital employed

Question 22

How to work out earnings per share?

Answer 22

(Net profit after tax / no. Of ordinary shares )

Question 23

How to work out price earning ratios (P/E)

Answer 23

Market price (in pence) / Earnings per share (in pence)

Question 24

How to work out dividend yield

Answer 24

(Ordinary share dividend / market price (in pence)) x 100

Question 25

How to work out operating profit?

Answer 25

Gross profit - expenses

Question 26

Alternative equation to work out ROCE

Answer 26

(Net profit ( before interest and tax) / total capital employed) x 100

Question 27

Operating profit margin

Answer 27

(Operating profit / sales revenue) x 100

Question 28

Working capital

Answer 28

Current assets - current liabilities

Question 29

How to work out average stock

Answer 29

(Opening stock ( inventory)+ closing stock(inventory ) ) / 2

Question 30

How to work out creditors (trade payables ) collection period

Answer 30

(Creditors / cost of goods sold ) x 365