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shows the relationships between significant figures in financial statements.
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Different Types of Ratios:
(1) Liquidity Ratios:
- Current Ratio
- Quick Ratio
(2) Profitability Ratios:
- Gross Profit ratio
- Net Profit Ratio
- ROCE
(3) Efficiency Ratios:
- Stock Turnover
- Debtors’ Ratio
- Creditors’ Ratio
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(1) Liquidity (Solvency) Ratios: Test for short-term financial stability:
Current (Working Capital) Ratio
Current asset
Current liabilitiesCurrent Ratio =
it indicates:
(i) the ability of the business to meet immediate obligations.
(ii) the capacity of the business to carry on effective operations.
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Quick Asset / Liquid Asset / Acid Test Ratio:
Current asset - Stock
Current liabilities Quick Ratio =
it shows the amount of cash or near-cash assets (e.g. Debtors, Bills receivable) available for meeting immediate payments.
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(2) Profitability Ratios:
Test for profit-earning capacity of a business:
(a) Gross profit ratio
(i) Mark-up / Gross profit as a percentage of cost
it shows the relationship between gross profit and cost of goods sold.
Gross profit
Cost of goods soldMark-up =
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Mark-up Gross profit Cost of goods sold
$10,000 $100,000
25% $25,000
20% $550,000
10%
$100,000
$110,000
Activity 1:
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Gross profit
SalesMargin =
it shows the relationship between gross profit and net sales.
(ii) Margin / Gross profit as a percentage of Sales
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Margin Gross profit Sales
$24,000 $480,000
15% $18,000
20% $380,000
$120,000
5%
$76,000
Activity 2:
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(iii) The relationship between Mark-up / Margin
Cost of goods sold + Gross profit = Sales
1 + 2 = 3
Fill in the following tables:Cost of
goods soldGross profit Sales Mark-up Margin
4 1
6 8
2 6
$5 25% 20%
$2 33%
$4 50%
25%
33%
Activity 3:
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(b) Net profit ratio
Net profit
SalesNet profit ratio =
it shows the relationship between net profit and sales.
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(c) Return on capital employed
it indicates the profit earning capacity of funds invested in the business by the owners.
Net profit
Capital EmployedReturn on Capital Employed =
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(3) Efficiency Ratios:
Test for financial management:
Cost of goods sold
Average stockStock Turnover =
(a) Stock Turnover
it indicates the number of times the stock is turned over during a given accounting period.
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(b) Debtors’ Ratio / Debtors’ Collection Period
it shows the credit period allowed which means the length of time debtors take to pay.
Debtors x 12 (months)
Credit Sales
Debtors’ Ratio =
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(c)Creditors’ Ratio / Creditors’ Payment Period
Creditors x 12 (months)
Credit PurchasesCreditors’ Ratio =
it shows the credit taken period which means the length of time we take to pay our creditors.
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References:
Go to http://www.geocities.com/accounts_grace
Go to http://www.i-cable.com/money/mnews/
Go to http://finance.hongkong.com/zh_tw/
Go to http://hk.finance.yahoo.com/
Go to http://www.hutchison-whampoa.com/
Go to http//:www.singtao.com/frames/f_t_fin.html
Go to http://www.netvigator.com/fina/index.html
any other web sites …etc.
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Link to Microsoft Word Classwork
Link to Microsoft Word Homework
Supplementary Exercises:
HomePresented By Grace Lui Kam Yin
Reference Books:
•Frank Wood’s Principles of Accounts (Vol. 1) 5th Edition
•KF Li, S Clifford’s Accounting Study Guide (Vol.1) 2nd Edition
•Ching Woon Chee Principles of Accounts (Vol.2) 1st Edition