Question

Ratio Analysis - Explain how the following ratios are calculated and what the ratio indicates. Include how these ratios provide useful information related to accounting decision making topics such as efficiency (collecting amounts owed to the firm, using the assets well, getting items to market, etc.), liquidity (ability to pay current debts), solvency (ability to pay long term or all debts), etc. Please look at all the ratios not just these.

Days’ sales in Inventory

Gross Profit Percentage

Return on Sales Ratio

Answer 1

1 Days sales in inventory = No. of days in a year/ Inventory turnover ratio

This Ratio indicates that average no. of days the company holds its inventory before selling it.

2.Gross profit percentage= Gross profit/sales

Gross profit means Sales - factory overheads+direct material +direct labour

This Ratio indicates  the proportion of sales comprised of those costs directly related to either the goods sold or services rendered in order to generate sale

3.Return on sales Ratio= Return/Sales

The return-on-sales ratio measures how much of your revenue results in profit for your company rather than going toward paying your company's costs. A higher ratio means that you keep more money in profit.

Efficiency Ratio

Inventory Turnover ratio= Cost of goods sold/Average stock per period

Asset Turnover ratio: Net asset/ Average Total Asset

Fixed asset Turnover= Net sales/ Fixed Assetaccumulated depreciation

Account Recievable Turnover ratio=Sales revenue/ average account receivable

Liquidity ratio

Quick Ratio= Cash equivalent+ marketable sequrity+account recivable/ Current Liabilities

Current Ratio Current Asset/Current liabilities

Solvency ratio means companies ability to meet long term obligations