Interpretation Of Accounting Ratios
Visão Geral
Calculating a ratio is only half the job. A gross margin of 18% means nothing until you ask whether it has risen or fallen, why it moved, and what the owner should do about it. Interpretation is where the figures start to tell a story: a falling profit margin warns of creeping expenses, a current ratio that climbs too high hints at cash sitting idle, and a slowing inventory turnover may signal goods that are not selling.
In this lesson you will learn to read each ratio, compare results across years, and explain the likely causes of a change. You will also learn to make sensible recommendations for improving profitability, liquidity and working capital, and to understand why a profitable business can still run short of cash. These are the explanation skills that turn a correct calculation into full marks on Cambridge analysis questions.
Objetivos
- how to prepare and comment on statements showing comparison of results for different years.
- how to interpret the ratios calculated in 6.1.
- make suggestions and recommendations for improving profitability, liquidity and working capital.
- the gross profit margin and the profit margin as indicators of a business’s profitability.
- how gross profit for the year can be affected by the valuation of inventory, sales quantity and changes in selling and purchasing prices.
- how profit for the year can be affected by changes in gross profit, other income and expenses.
- the reasons for the difference between cash and profit.
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- A business has a steady gross margin but a falling profit margin. The most likely cause is: A. Lower selling prices B. Cheaper suppliers C. Rising expenses D. Higher gross profit Answer: C
- A current ratio of 5 : 1 most likely indicates: A. The business cannot pay its debts B. Resources may be used inefficiently C. Very low inventory D. A high profit margin Answer: B
- The trade receivables turnover has increased from 30 days to 50 days. This suggests: A. Credit control has improved B. Customers are paying faster C. Credit control has weakened D. The business pays suppliers faster Answer: C
- A profitable business may still be short of cash because: A. Profit is always equal to cash B. Credit sales add to profit before cash is received C. Drawings increase cash D. Depreciation increases cash Answer: B
- The gap between the gross margin and the profit margin represents: A. The cost of sales as a percentage of revenue B. The expenses as a percentage of revenue C. The gross profit as a percentage of cost D. The return on capital employed Answer: B
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Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet
"Principles of Accounting, Volume 1: Financial Accounting: Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet" by OpenStax, OpenStax, Rice University, licensed under CC BY-NC-SA 4.0 (https://creativecommons.org/licenses/by-nc-sa/4.0/). Source: https://openstax.org/books/principles-financial-accounting/pages/10-4-explain-and-demonstrate-the-impact-of-inventory-valuation-errors-on-the-income-statement-and-balance-sheet. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-introduction
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