Theory question 104
Interpretation of Accounts(a) List six users of accounting information.
(b) State the formula and the use of each of the following accounting ratios: (i) Quick ratio; (ii) Net profit margin; (iii) Total assets turnover; (iv) Creditors payment period (in days).
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(a) Any six: owners/shareholders; management; employees and trade unions; banks and lenders; suppliers/creditors; customers; government and tax authorities; potential investors; financial analysts; auditors; the general public.
(b)(i) Quick ratio = (current assets − stock) ÷ current liabilities; shows ability to pay short-term debts without selling stock.
(ii) Net profit margin = net profit ÷ sales × 100; shows profit earned on each unit of sales.
(iii) Total assets turnover = sales ÷ total assets; shows how efficiently assets are used to generate sales.
(iv) Creditors payment period = trade creditors ÷ credit purchases × 365 days; shows the average number of days taken to pay suppliers.
Six users, then formula plus purpose for each ratio.