Home

shows the relationships between significant figures in financial statements.

Home

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

Home

(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.

Home

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.

Home

(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 =

Home

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:

Home

Gross profit

SalesMargin =

it shows the relationship between gross profit and net sales.

(ii) Margin / Gross profit as a percentage of Sales

Home

Margin Gross profit Sales

$24,000 $480,000

15% $18,000

20% $380,000

$120,000

5%

$76,000

Activity 2:

Home

(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:

Home

(b) Net profit ratio

Net profit

SalesNet profit ratio =

it shows the relationship between net profit and sales.

Home

(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 =

Home

(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.

Home

(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 =

Home

(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.

Home

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.

Home

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