Management Accounting Ratios
Ratio
A Ratio is a number expressed in terms of another number. It is a statistical yardstick - a measure of the relationship between two figures.
Ratios used in Management accounting
1) Balance Sheet Ratios
i) Current ratio
ii) Acid-test ratio
iii) Debt to equity ratio
iv) Capital gearing ratio etc.
2) Income Statement Ratios
i) Gross Profit ratio
ii) Net Profit Ratio
iii) Operating Profit Ratio
iv) Expenses Ratio
3) Composite Ratios
i) Return on Shareholder’s equity
ii) Return on Total investment or total assets
iii) Turnover of fixed assets
iv) Turnover of total assets
v) Turnover of working capital
vi) Creditor’s and debtor’s velocity etc.
Functional Classification of Ratios used in Management Accounting:
1) Solvency Ratios
A) Short-term Solvency Ratios
i) Current Ratio
ii) Acid-test Ratio
b) Long-term Solvency Ratios
i) Debt-Equity ratio
ii) Capital gearing ratio etc.
2) Profitability Ratios
i) Gross Profit Ratio
ii) Net Profit Ratio
iii) Operating Profit ratio
iv) Return on Shareholder’s equity ratio
v) Return on Total assets
vi) Return on Capital employed etc.
3) Turnover Ratios
i) Inventory Turnover ratio
ii) Debtors’ Turnover ratio
iii) Creditors’ Turnover ratio
iv) Average Collection Period
v) Average Payment Period etc.
4) Debt Service Coverage Ratio
5) Cash Position Ratios
i) Absolute cash ratio
ii) Cash position to total assets ratio
iii) Interval measure etc.
Example: A Company had a net income of $5,000 with a turnover of $100,000. The company’s current assets are $200,000 and current liabilities are $150,000. Calculate the net profit margin ratio and current ratio.
Solution: Net Profit Margin = Net Profit/Sales x 100
= $5,000/$100,000 x 100 -> 5%
Current Ratio = Current Assets/Current Liabilities
-> $200,000/$150,000 = 1.33
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