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Accounting Ratios






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Accounting Ratios Accounting Ratios Presentation Transcript

  • Accounting Ratios S4 Accounting
    • Profitability Ratios
    • These ratios are calculated using the Profit & Loss:
    • Gross Profit as a Percentage of Net Sales
    • Net Profit as a Percentage of Net Sales
    • Rate of Stock Turnover
  • Gross Profit as a Percentage of Net Sales
    • The GP Percentage is used to calculate what the gross profit is in relation to the sales of a business.
    • The GP Percentage on turnover is calculated using the formula:
    • Gross Profit x 100
    • Net Sales
    • (Remember sales - sales returns = net sales).
  • Reasons for gross profit DECREASE?
    • Cash losses: theft or wrong amounts being rung up on the till.
    • Stock losses: theft of stock by employees or passing of stock to friends.
    • Expenses: Utilities can increase such as gas and electricity prices.
    • Mark downs: Reductions in selling price. Damaged or almost out of date goods.
  • Gross profit to INCREASE.
    • The gross profit can increase. A rise in the gross profit percentage is almost always due to increased efficiency.
  • Rate of Stock Turnover
    • The Rate of Stock Turnover is very important. When a company turns over stock - profit is made.
    • Stock has turned over when it has been sold and replaced with new stock.
    • The higher a company turns over stock the greater the profits should be.
    • Stock Turnover is always expressed as a number followed by the word times .
    • If your Rate of Stock Turnover is 4 times then the company would have turned the stock over every 3 months.
    • We calculate the Rate of Stock Turnover with the following formula:
    • Cost of Goods Sold
    • Average Stock *
    • * To calculate Average Stock
    • Opening Stock + Closing Stock
  • Net Profit as a Percentage of Net Sales
    • The Net Profit Percentage indicates how well a business has controlled their overheads.
    • The Net Profit is calculated by deducting the total expenses from the gross profit.
    • We calculate the Net Profit Percentage of Net Sales with the following formula:
    • Net Profit x 100
    • Turnover
    • If there is little difference between the gross and net profit percentages this indicates that the business has been able to control its overheads efficiently.
    • Balance Sheet Ratios
    • Return on Capital Invested
    • Working (Current) Capital Ratio
  • Return on Capital Invested
    • The most important ratio calculated by the owner of a business.
    • Return on Capital Invested compares profit earned in the year with the capital invested in the business.
    • A good Return on Capital is essential to any business.
    • Poor returns on capital should make the owners or partners think whether continuing with the business is a good idea.
    • To calculate the Return on Capital Invested we use the formula:
    • Net Profit x 100
    • Capital at Start
  • Working (Current) Capital Ratio
    • The Working Capital Ratio or Current Ratio focuses on the relationship between a businesses current assets and current liabilities.
    • The formula to calculate this ratio is:
    • Current Assets
    • Current Liabilities
    • A business must never run short of working capital.
    • This is a very popular cause for business failures.
    • If a business has a ratio of less than 1:1 then in effect it is insolvent.
    • Low ratio indicates a lack of working capital.
    • High ratio indicated there may be too much working capital. Too much money tied up in stock or other assets.