Accounting·Interpretation of statements · NSSCO 1.1
Calculating accounting ratios
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Figures on their own don't say much — is N$80 000 profit good or bad? Accounting ratios turn those raw figures into meaning. Today we meet the four families of ratios — profitability, liquidity, efficiency and solvency — and work each one out, slowly, step by step, from one real set of figures for Kunene Traders. Every ratio is drawn out in full: the formula, the substitution, and the answer to two decimal places.
What you'll learn in this lesson
By the end you should be able to (NSSCO Accounting 1.1):
- Explain the meaning of the term accounting ratios
- Classify accounting ratios into liquidity, efficiency, profitability and solvency ratios
- Define and calculate liquidity ratios (current, quick/liquid) and explain their uses
- Define and calculate efficiency ratios (rate of inventory turnover, debtors collection period, creditors payment period) and explain their uses
- Define and calculate profitability ratios (mark up, gross margin, net profit margin and return on capital employed) and explain their uses
- Calculate the working capital and the effects of transactions on it
- Make suggestions and recommendations for improving profitability and working capital
- Explain, calculate and interpret the solvency ratio
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Ms Pieters and Mike talk through the whole topic — with the figure and working drawn live.