Ratio Analysis

Question 1

what is a ratio?

Answer 1

a ratio is the number of times one number contains the other number

Question 2

what are the 4 Types of ratios used to analyse financial reports?

Answer 2

• profitability (earning capacity)
• Management effectiveness
• Financial Stability
• Cash Flow

Question 3

What do Profitability Ratios show?

Answer 3

• Show the ability of the enterprise to earn income within the present financial structure of the enterprise

Question 4

what is the Gross Profit Ratio formula?

Answer 4

Gross profit / net sales x 100

Question 5

what is the Net Profit Ratio formula?

Answer 5

Net Profit / Net Sales x 100

Question 6

what does a high ratio indicate?

Answer 6

opportunity to make high profits

Question 7

what does a Low ratio indicate?

Answer 7

less opportunity for profits and should investigate:

Question 8

what are some methods to controlling expenses

Answer 8

• Pricing practices
• Selling techniques
• Increase sales through advertising

Question 9

what is the return of equity formula?

Answer 9

Net Profit / average Owners equity x 100

Question 10

how can a ratio be improved?

Answer 10

• by increasing profit (by methods mentioned above)
• decreasing owner’s equity

Question 11

what is the Return on total Assets formula?

Answer 11

Net profit + interest Expense / Average Total Assets x 100

Question 12

what are the three Ratio formulas of expenses to sales

Answer 12

• Selling & distribution Expenses / Net Sales x 100
• General & Administrative Expenses / Net Sales x 100
• Finance Expense / Net Sales x 100

Question 13

what is the rate of turnover of inventories formula?

Answer 13

Cost of Goods Sold / Average inventories