Reference: Chapter 1 and 11 （ Book 2 ）

1. 17 Accounting Ratio Reference: Chapter 1 and 11（Book 2）

2. A Profitability Ratios (盈利能力比率) • Profitability refers to the ability to make profit.

3. 1 Mark-up (加成) Mark-up ＝Gross profit ÷ Cost of sales X 100% e.g.：Cost of sales ＝ $4 Gross profit ＝ $1 Ans.：Mark-up ＝ $1 ÷ $4 ＝ ¼ or 25% Explanation： Every $4 cost has $1 profit

4. 2 Gross profit margin (毛利率) Gross-profit margin＝Gross profit ÷ Sales X 100% e.g.: Sales ＝ $5 Gross profit＝ $1 Ans.: Gross profit margin ＝ $1 ÷ $5 ＝ 1/5 or 20% Explanation: Every $5 sales has $1 profit.

5. The relationship between mark-up and margin Mark-up changes to gross profit margin If mark-up is ¼ Denominator (分母)＋1 Gross profit margin is 1/5 Gross profit margin changes to mark-up If gross profit margin is 1/3 Denominator (分母)－1 Mark-up is 1/2

6. 3 Net profit margin (純利率) Net profit margin ＝ Net profit ÷ Sales X 100% e.g.：Sales ＝ $100 Net profit ＝ $40 Ans.：Net profit margin ＝ $40 ÷ $100 X 100% ＝ 40% Explanation：Every $100 sales has $40 net profit.

7. 4Expenses–sales ratios • shows how much of expenses spends on every $100 of sales Expenses-sales ratios ＝（Operating expenses ÷Sales）× 100% e.g.：Operating expenses ＝ $400 Sales ＝ $1000 Ans：Expenses–sales ratios ＝ （$400 ÷ $1000）× 100% ＝ 40% Explanation：Every $100 Sales spends $40 expenses。

8. 5     Rate of returns on capital employed • Rate of returns on capital employed gives an overall picture of the profitability of the company. Rate of returns on capital employed ＝（Net profit ÷ Capital employed*）× 100% *Capital employed: can be average capital e.g.：Capital ＝ $1000 Net profit ＝ $200 Ans.：Rate of returns on capital employed ＝ （$200 ÷ $1000）× 100% ＝ 20% Explanation：Every $100 capital earned $20 net profit.

9. B Liquidity Ratios • Liquidity ratios measure the ability to meet the company’s debts.

10.  1 Current ratio / Working capital ratio • Current ratio measures current assets against current liabilities. Current ratio＝Current assets÷Current liabilities Or Current ratio＝Current assets ： Current liabilities ＝ Z ： 1

11. e.g.：Current assets ＝ $200 Current liabilities ＝ $100 Ans.：Current ratio＝ $200 ： $100 ＝ 2 ： 1 Explanation：Current assets are double to current liabilities. • If the current ratio is too high (Normal level is 2：1), the firm may have excessive current assets。 • If the current ratio is too low, the firm may have insufficient current assets to meet its short-term liabilities.

12. 2 Quick ratio / Acid test ratio • Quick ratio is a stricter measure of liquidity . • Current asset, can be converted into cash quickly, compares with the current liabilities. Current ＝（Current －Stock）÷ Current ratio assets Liabilities or Current ＝（Current －Stock） ： Current ratio assets Liabilities ＝ Y ： 1

13. e.g.：Current assets ＝ $200 Current liabilities ＝ $100 Stock ＝ $50 Ans：Current ratio＝ $200 － $50 ： $100 ＝ 1.5 ： 1 Explanation：The current assets excluding stock is 1.5 times to the current liabilities. • High quick ratio shows the ineffective use of current assets of the the company. • Quick ratio is less than 1：1 means there is not enough current assets to pay current liabilities.

14. C Efficiency Ratios • Efficiency ratios check whether the company utilises the assets efficiently (manages efficiently).

15. Stock turnover rate ＝ Cost of goods sold ÷ Average stock ＝ Y times 1 Stock turnover rate • Stock turnover rate measures the efficiency of the stock management. or Stock turnover rate ＝（Average stock ÷ Cost of goods sold）× 365 days* ＝ Y days Average stock ＝ （Opening stock＋Closing stock）÷ 2 *365 days or 56 weeks or 12 months

16. e.g.：Cost of goods sold＝ $100 Opening stock＝ $10 Closing stock ＝ $30 Ans.：Average stock ＝ （$10 ＋ $30）÷ 2 ＝ $20 Stock turnover＝ $100 ÷ $20 ＝ 5 times or Stock turnover＝（$20 ÷ $100）×365 days ＝ 73 days Explanation：The higher the stock turnover, the more profit we make. • The lower the stock level , the higher the stock turnover rate.

17. 2Debtors collection period / Debtors days / Credit period allowed to trade debtors • Debtors collection period shows how long on average our debtors pay us. Debtors collection period ＝（Debtors ÷ Sales）× 365 days* ＝ Y days *365 days or 56 weeks or 12 months

18. e.g.：Debtors＝ $100 Sales＝ $1000 Ans.：Debtors collection period ＝（$100 ÷ $1000） × 365 days ＝ 36.5 days Explanation：The debtors need 36.5 days to pay the debts. The shorter the period, the better the liquidity of the company.

19. 3  Creditors repayment period / Creditors days/ Credit period received from trade creditors • Creditors repayment period shows how long we pay our creditors. Creditors repayment period ＝（Creditors ÷ Purchases）× 365 days * ＝ W days *365 days or 56 weeks or 12 months

20. e.g.：Creditors＝ $100 Purchases＝ $800 Ans.：Creditors repayment period ＝（$100 ÷ $800） × 365 days ＝ 45.6 days Explanation：The company needs 45.6 days to pay the debts. • The longer to pay the debts, the company losses the possible cash discounts. • Too early payment affects the financial status of the company.

21. D Steps on ratios analysis • Explain the type of ratios it belongs to , e.g. Profitability ratio. • Compare the changes of each ratio, i.e. increase or decrease. • Explain the effect of the increase or decrease of each ratio on different aspects, e.g. profitability. • Check whether there is any effect on other ratios.