(a) List the four main groups of accounting ratios (b) Identify accounting ratio which relates to each of the following statements i. a return of N10 net pr...
Question 1 Report
(a) List the four main groups of accounting ratios
(b) Identify accounting ratio which relates to each of the following statements
i. a return of N10 net profit for every N100 invested
ii. goods are held on average for a period of one month before they are sold
iii. trade debtors on the average take a period of 33 days to settle their debts.
iv. trade creditors on the average are paid within 44 days for credit purchases
v. gross profit of N40 is made on every N100 of net sales
vi. current assets are three times that of current liabilities
vii. liquid assets are three times that of current liabilities.
viii. for every N100 net turnover, N17 is made after deducting operational expenses.
ix. profit covers interest payment9 times
Answer Details
(a) Four main groups of accounting ratios
- Profitability ratios (e.g. gross profit percentage, net profit margin, return on capital employed).
- Liquidity ratios (e.g. current ratio, acid-test/quick ratio).
- Efficiency / activity ratios (e.g. rate of stock turnover, debtors and creditors periods).
- Gearing / investment (long-term solvency) ratios (e.g. interest cover, gearing ratio).
(b) Ratio relating to each statement
| Statement | Ratio | |
|---|---|---|
| i | N10 net profit for every N100 invested | Return on capital employed (10%) |
| ii | Goods held on average one month before sold | Rate of stock turnover (12 times a year) |
| iii | Debtors take 33 days to pay | Debtors (average) collection period |
| iv | Creditors paid within 44 days | Creditors payment period |
| v | Gross profit of N40 on every N100 net sales | Gross profit percentage/margin (40%) |
| vi | Current assets three times current liabilities | Current ratio (3:1) |
| vii | Liquid assets three times current liabilities | Acid-test / quick ratio (3:1) |
| viii | N17 made per N100 turnover after expenses | Net profit margin (17%) |
| ix | Profit covers interest 9 times | Interest cover ratio |
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