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Accounting Ratios

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• 1. Accounting Ratios S4 Accounting
• 2. Profitability Ratios These ratios are calculated using the Profit &amp; Loss: &#xF06C;Gross Profit as a Percentage of Net Sales &#xF06C;Net Profit as a Percentage of Net Sales &#xF06C;Rate of Stock Turnover
• 3. Gross Profit as a Percentage of Net Sales &#xF06C;The GP Percentage is used to calculate what the gross profit is in relation to the sales of a business. &#xF06C;The GP Percentage on turnover is calculated using the formula: Gross Profit x 100 Net Sales &#xF06C;(Remember sales - sales returns = net sales).
• 4. Reasons for gross profit DECREASE? &#xF06C;Cash losses: theft or wrong amounts being rung up on the till. &#xF06C;Stock losses: theft of stock by employees or passing of stock to friends. &#xF06C;Expenses: Utilities can increase such as gas and electricity prices. &#xF06C;Mark downs: Reductions in selling price. Damaged or almost out of date goods.
• 5. Gross profit to INCREASE. &#xF06C;The gross profit can increase. A rise in the gross profit percentage is almost always due to increased efficiency.
• 6. Rate of Stock Turnover &#xF06C;The Rate of Stock Turnover is very important. When a company turns over stock - profit is made. &#xF06C;Stock has turned over when it has been sold and replaced with new stock. &#xF06C;The higher a company turns over stock the greater the profits should be. &#xF06C;Stock Turnover is always expressed as a number followed by the word times.
• 7. &#xF06C;If your Rate of Stock Turnover is 4 times then the company would have turned the stock over every 3 months. &#xF06C;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
• 8. Net Profit as a Percentage of Net Sales &#xF06C;The Net Profit Percentage indicates how well a business has controlled their overheads. &#xF06C;The Net Profit is calculated by deducting the total expenses from the gross profit. &#xF06C;We calculate the Net Profit Percentage of Net Sales with the following formula: Net Profit x 100 Turnover
• 9. &#xF06C;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.
• 10. Balance Sheet Ratios &#xF06C;Return on Capital Invested &#xF06C;Working (Current) Capital Ratio
• 11. Return on Capital Invested &#xF06C;The most important ratio calculated by the owner of a business. &#xF06C;Return on Capital Invested compares profit earned in the year with the capital invested in the business. &#xF06C;A good Return on Capital is essential to any business.
• 12. &#xF06C;Poor returns on capital should make the owners or partners think whether continuing with the business is a good idea. &#xF06C;To calculate the Return on Capital Invested we use the formula: Net Profit x 100 Capital at Start
• 13. Working (Current) Capital Ratio &#xF06C;The Working Capital Ratio or Current Ratio focuses on the relationship between a businesses current assets and current liabilities. &#xF06C;The formula to calculate this ratio is: Current Assets Current Liabilities
• 14. &#xF06C;A business must never run short of working capital. &#xF06C;This is a very popular cause for business failures. &#xF06C;If a business has a ratio of less than 1:1 then in effect it is insolvent. &#xF06C;Low ratio indicates a lack of working capital. &#xF06C;High ratio indicated there may be too much working capital. Too much money tied up in stock or other assets.