Subject: Principles of Accounts Title: Accounting Ratio and Interpretation of Accounts Author : Fok Pui Yan Student No: 98114640 Target Audience : Form 5 students Purposes of using the slides : for lecturing
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Title:Accounting Ratio and Interpretation of Accounts
Student No: 98114640
Purposes of using the slides : for lecturing
Content1.Introduction 2. Profitability ratios-- Gross Profit Margin -- Net Profit Margin -- Return on Capital Employed3. Liquidity ratios-- Current Ratio -- Acid test Ratio4. Activity ratios-- Stock Turnover -- Credit Period Allowed to Debtors -- Credit Period Received from Creditors
The Interpretation Of Accounts
The Evaluation Of Financial Performanceinvolves a series of techniques that can be used to help identify the strengths and weaknesses of a firm.
measure how effectively a firm’s management generates profits.
A. Profitability ratios
indicate a firm’s ability to meet its short-term financial obligations.
B. Liquidity ratios
indicate how efficiently a firm is using its assets to generate sales
C. Activity ratios
= Sales- Cost of Goods Sold
**Cost of Goods Sold
= (Opening Stock + Purchases - closing Stock)
** Net Profit
= Gross Profit + Revenue -Expenses
I. For Sole Proprietorship and Partnerships Company
** Average Capital
= (Opening Capital + Closing Capital)/2
II. For Limited Company
** Total Share Capital
= (Ordinary Shares + Preference shares + Reserves)
For example, a firm selling food should have a higher turnover than a firm selling furniture or jewelry. However for each business or each department within a business, there is a reasonable turnover rate. A turnover lower than this rate could mean that stock is not being managed properly. In such cases, an investigation should be undertaken to determine the causes of the lower turnover rate.
** Cost of goods sold
= (Opening stock + Purchases - Closing Stock)
= (Opening stock + Closing Stock)/2