Accounting Ratios

How many Accounting Ratio Categories have we learned?

• 4

• 3

• 5

• 6

Answer explanation

. We can calculate a variety of accounting ratios and they can be broadly categorised into:

• Profitability ratios – Looks at the ability of an organisation to make a profit . Determined by comparing profits against bases such as sales, assets or owners’ equity.

• Efficiency ratios – Provides insight into how well an organisation is managing its assets and liabilities.

• Capital structure ratios: Provides an insight into how the organisation is being funded (from owners or through debt) and therefore provides some indicator of risk.

• Liquidity ratios – Provides insights into the ability of an organisation to pay its debts as and when they fall due

• Market based ratios Provides an insight into how the market values an organisation.

What Accounting Ratio Category does Return on Asset (ROA) falls into?

• Market-based

• Profitability

• Liquidity

• Capital Structure

What Accounting Ratio Category does Debts to Assets Ratio  fall into?

• Profitability

• Liquidity

• Efficency

• Capital Structure

• Inventory turnover

• Debtors turnover

• Inventory cost

• Inventory ratio

• Current ratio

• Quick ratio

• Debt to asset ratio

• Return on asset

For Efficency Ratios like Inventory turnover, Debtors turnover ,Operating cash flow margin , generally

• The higher,the better

• The lower, the better

For Captial Structure Ratios like Debts to assets ratio 

and Debt to equity ratio, generally 

• The higher, the better

• The lower, the better

What Accounting Ratio Category does Current Ratio falls into?

• Profitability

• Market-based

• Capital Structure

• Liquidity

What Accounting Ratio Category does Price Earnings Ratio fall into?

• Market-based

• Profitability

• Capitial Structure

• Liquidity

When analysing certain ratios, one must always consider

• The nature of the business (industries, stage of development, country of operation)

• Accounting Policies at the Accounting Period

• How they calculate certain figure (for example at fair value or at historical cost?

• All of the above

Answer explanation