Ratios (audit Risk W6) Flashcards
Gross Margin
Gross Profit/Sale Revenue * 100%
Operating Margin
Operating Profit/Sales Revenue * 100%
Receivables Collection period
Receivables/Revenue * 365
Payables Payment Period
Payables/Purchases*365
Inventory holding period
Inventory/Cost of Sales * 365
Asset turnover
Revenue/Total Assets
Current ratio
current assets/current liabilities
Quick ratio
(current assets - inventory)/current liabilities
Gearing
Borrowing/Share Capital + Reserves
Return on Capital Employed (ROCE)
Profit before interest and tax/ (share capital + reserves + borrowings)
What are the profitability ratios? What do they represent
Gross margin
Operating margin
-relationship between cost and revenues stable, so changes could mean
overstating revenue due to inappropriate revenue recognition or cut off issues
or
understated cost of sales due to incomplete recording of purchases or overvaluing closing inventory
What are the efficiency ratios? What do they represent
Receivables Collection Period
Payables Payment Period
Inventory holding period
Asset turnover
These ratios show how efficient the business is at converting assets into cash or how long it takes to pay suppliers
What are the liquidity ratios? What do they represent
Current ratio
Quick ratio
indicate the ability to meet its short term debt
key indicator when assessing going concern
What are the investor ratios? What do they represent
Gearing
Return on Capital Employed (ROCE)
measure of external debt finance to internal equity finance
any change in gearing could indicate a change in the financial structure
