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Accounting Laws

This document defines and explains key financial ratios used to analyze the liquidity, asset management, debt, profitability, and other metrics of a business. It includes definitions of working capital, invested capital, current ratio, quick ratio, cash ratio, inventory turnover, accounts receivable turnover, accounts payable turnover, cash conversion cycle, debt ratio, debt to equity ratio, gross profit margin, net profit margin, return on equity, return on assets, breakeven point, contribution margin, and margin of safety. These ratios are calculated using information from an organization's financial statements and are used to evaluate its financial performance and health.

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Mohamed Zakarya
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19 views

Accounting Laws

This document defines and explains key financial ratios used to analyze the liquidity, asset management, debt, profitability, and other metrics of a business. It includes definitions of working capital, invested capital, current ratio, quick ratio, cash ratio, inventory turnover, accounts receivable turnover, accounts payable turnover, cash conversion cycle, debt ratio, debt to equity ratio, gross profit margin, net profit margin, return on equity, return on assets, breakeven point, contribution margin, and margin of safety. These ratios are calculated using information from an organization's financial statements and are used to evaluate its financial performance and health.

Uploaded by

Mohamed Zakarya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Financial Statements

Working Capital = Current Assets - Current Liabilities


Invested Capital = Working Capital + Fixed Asssets
Invested Capital is financed by Owners equity + Long Term Liabilities

Liquidity Ratios
Liquidity is the ability of an organization to cover STL "Short Term Liability"
Current Ratio = Current Assets / Current Liabilities CR=CA/CL
Quick Ratio = Current Assets - Inventory / Current Liabilities QR=C.A-Inv/C.L
Cash Ratio = Cash/Current Liabilities CaR=Ca/C.L
If CR= 6/1 & QR=5.5/1 & CaR=5/1 This Means High liquidity & low investment
If the working capital value is negative this means that current ratio is low

Assets Management Ratios


Inventory Turnover = Cost of sales/ Inventory
IDOH= I.T / 365 (Days per Year) Inventory Days On Hand
Account Recievable Turnover = Credit Sales/ Account Recieveable
ACP = ART/ 365 (Days Per Year) Average Collection Period
Account Payable Turnover = Cost of Sales / Account Payable
APP = APT / 365 (Days per Year) Average Payment Period
Its better for collection period to be shorter than payment period ACP < APP
Cash Conversion Cycle = IDOH + ACP - APP
Its better for the company to shorten the CCC
Assets Turnover = Sales / Assets

Debt Ratios
Debt Ratio = Liabilities / Assets %
If the value for example is X% this means that X% of assets are Owed
As DR increases it means that financial leverage is high
Financial Leverage is the use of debt to acquire additional assets
Debt to Equity Ratio = Long term Liabilities / Equity

Profitability Ratios
Growth Profit Margin = Gross Profit / Sales
Operations Margin = Operations / Sales
Net Profit Margin = Net Income / Sales
Return On Equity = NI / Equity
Return On Assets = NI,OP,EBIT / Assets
Return On Investment = NI,OP,EBIT / Investment
Investment (Investing Capital ) = Total Assets - Current Liabilities OR Owners Equity + Long Term Liabilities OR Fixed Assets - Working Capital

Other Ratios
Earning Per Share = NI / Number Of Shares
Price Earning Ratio = Market Price / EPS

Cost - Volume Profit Analysis


Contribution Margin = Sales - Varaiable Costs
Contribution Margin Ratio = CM / Sales
Breakeven Point :- The Point At Which Revenues Equals Costs And Profits As well As Losses Are Equal To Zero , After this point Profits Start
BEP Per Unit = Fixed Cost / CM
BEP Per Dollars = Fixed Cost / CMR
Margin Of Safety = Actual or Planned Sales - BEP
Target Profit = Margin of Safety X CMR

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