Week 6 - Ratio and Proportion Flashcards
This is a mathematical relationship between two or more numbers.
Ratio
If the ratio consists of only two values, it can be expressed using
purely words, alpha numeric characters, numeric characters separated
by semicolon and a since we are only comparing one number from the
another, we can use fractions and decimals.
One is to four
1 is to 4
1 to 4
1:4
1
4
0.25
If the ratio consists of three or more values, it can be represented using
purely words, alpha numeric characters and numeric characters
separated by semicolon only. Fractions and decimals cannot be used
because it can already change the values and interpretation of the
numbers given.
Two is to five is to seven
2 is to 5 is to 7
2 to 5 to 7
2:5:7
Ratio analysis is considered as one of the techniques in financial
statement analysis. This is used as an index for evaluating the
financial performance of the business. In this part I will introduce you
to some of the basic financial ratios.
Financial Ratios
ABC Enterprise had a total sales of Php100,000. The cost of
merchandise sold was Php50,000 while the business operational
expenses and taxes totaled to Php20,000. What is the Profit to Sales
ratio?
Net profit is solved by deducting the sum of cost of merchandise,
business operational expenses and taxes to the total sales. Net profit =
Php100,000 - (Php50,000+Php20,000) = Php30,000
30,000:100,000 or 3:10
The net profit to sales ratio is 3:10. This means that there is a Php3
profit for every Php10 worth of merchandise sold.
ABC Enterprise has a net profit worth Php30,000. It has current assets
worth Php20,000 and non-current assets worth Php60,000. What s the
Net profit to total assets ratio?
First, we must compute for the total assets. Total Assets =
Php20,000+Php60,000=Php80,000.
30,000:80,000 or 3:8
The net profit to total assets ratio is 3:8. This means that the enterprise
has the ability to generate Php3 profit for every Php8 of assets used.
ABC Enterprise has a total current liabilities worth Php20,000 and has
total assets worth Php100,000. What are the current assets to current
debt ratio?
100,000:20,000 or 5:1
This means that the enterprise has Php5 of current assets for every
Php1 current liability. The value of its current assets is larger
compared to the value of its current liabilities.
ABC Enterprise has a cash on hand worth Php50,000 and cash in bank
worth Php100,000. Summing it up, it has a total cash worth
Php150,000. On the other hand, the enterprise owes Php50,000 to its
inventory supplier. What is the cash ratio?
150,000:50,000 or 3:1
It has Php3 for every Php1 current liability. With the use of its cash,
ABC Enterprise has a good short-term debt paying ability. It has the
ability to pay in case current liabilities will be due and it is assured that
the business operations would not incur cash shortage because the
amount of cash is greater than its liabilities.
If a ratio compares relationship of two or more numbers that are in
different units, it is called as
rate
Ratios don’t have units because
the same measures are being compared. Rates are required to have
units, because different measures are being compared
Rates
For example, Mr. John works as a tutor. In 4 hours, he earns Php500.
Php500/4hrs = 125 Php /hr
The rate of Mr. John as tutor is Php500 for 4 hours or Php125 per
hour
In, 3 hours the car has travelled 120 km. What is the average speed of
the car?
120km/3hrs = 40km/hr
The average speed of the car is 40km/hr.
Mr. Mat loaned at the bank for an amount worth Php1,000,000. The
annual simple interest costs is Php90,000. What is the annual simple
interest rate?
Php90,000/year
Php1,000,000
= 0.09/year or 9% per year
This is considered as a ratio because it compared two numbers with
different measurements Php and Php/year (which is already considered
as a rate). But usually interest rate is just expressed in percentage form
and is always being equated with a time element. In the example, we
can say that the interest rate is 9% per year or can be expressed as 9%
annual interest. If the time element is not mentioned in a finance
problem or in the actual contract, it is assumed that the interest rate
given is the annual interest rate.
Mrs. Fe loaned an amount worth Php50,000 payable within three
months. With a simple interest rate of 1% per month, how much is the
total monthly interest? How much will be the total interest to be paid?
Interest = (Php50,000) x (1 %/month) = Php 500 /month
Total Interest = (Php 500/month) x (3 months) = Php1500
Mrs. Fe will be paying Php500 per month as interest for her loan.
After three months, her total interest expense will be Php1,500.
Mr. Mat has USD12 on hand. He went to a money exchange center
and converted his money into Php576. What is the current exchange
rate expressed in Php/USD?
Php576
USD12
= 48 Php/USD
The current currency exchange rate is 48 Philippine pesos per US
dollar. It is considered as a rate because it is a relationship of number
having different currencies
