Theory question 104
Interpretation of Accounts(a) List the four main groups of accounting ratios.
(b) Identify the accounting ratio which relates to each of the following statements: (i) a return of GH¢10 net profit for every GH¢100 invested; (ii) goods are held on the 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 GH¢40 is made on every GH¢100 of net sales; (vi) current assets is three times that of current liabilities; (vii) liquid assets is twice that of current liability; (viii) for every GH¢100 net turnover, GH¢17 is made after deducting operational expenses; (ix) profit covers interest payments 9 times.
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(a) Profitability ratios; liquidity (solvency) ratios; activity (efficiency) ratios; gearing (capital structure/leverage) ratios; (also investment/shareholder ratios).
(b)(i) Return on capital employed.
(ii) Rate of stock turnover.
(iii) Debtors' collection period.
(iv) Creditors' payment period.
(v) Gross profit margin (percentage).
(vi) Current ratio.
(vii) Acid test (quick) ratio.
(viii) Net profit margin (percentage).
(ix) Interest cover.
Match the wording 'per GH¢100 of sales' to margins and 'per GH¢100 invested' to ROCE.