(a) Accounting ratios
(b) Eplain the following
i. Accounting ratios
ii. Current ratio
iii. Rate of stock turnover
iv. Return on capital employed
v. Average collection period
vi. Gross profit percentage
(c) List out the importance of accounting ratios
(a) Accounting ratios:These are expressions of the relationship between two or more accounting figures from financial statements.
(b) (i) Current ratio: It is used to measure the adequacy of current assets to meet the short term obligations of a business as they fall due.
(ii) Rate of stock turnover: It is used to determine the number of times stock or inventory is sold within a given period.
(iii) Return on capital employed: It is used to measure the efficiency of management in utilizing assets of a business to generate profit.
(iv) Average collection period: It is used to determine on the average, the number of days customers take to settle their debts.
(vi) Gross profit percentage: It is used to determine the percentage of gross profit made on sales during an accounting period.
(c) Uses of accounting ratios
Accounting ratios are used to:
i. determine the liquidity of an organization;
ii. establish the interrelationship between accounting figures;
iii. evaluate business performance/profitability;
iv. establish trends of performance;
v. assist in inter-firm comparison;
vi. assess the value of an organization;
vii. determine the credit worthiness of an organization;
viii.assess the financial stability of an organization;
ix. estimate the future prospects of an organization.
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