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  • Far.1 Revision Class Notes 1

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    Anila Nawaz
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    This document discusses various financial ratios used to analyze a company's performance and financial health. It provides the formulas and interpretations for 14 common ratios: return on equity capital, return on equity, return on assets, asset turnover, gross profit ratio, net profit ratio, debtor days, creditor days, inventory days, working capital cycle, current ratio, quick ratio, gearing ratio, and interest cover. The ratios are calculated using information from a company's financial statements and can indicate levels of profitability, efficiency, liquidity, and financial leverage.

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    far 1 notes CA

    Original Title

    FAR.1 REVISION CLASS NOTES 1

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    This document discusses various financial ratios used to analyze a company's performance and financial health. It provides the formulas and interpretations for 14 common ratios: return on equity capital, return on equity, return on assets, asset turnover, gross profit ratio, net profit ratio, debtor days, creditor days, inventory days, working capital cycle, current ratio, quick ratio, gearing ratio, and interest cover. The ratios are calculated using information from a company's financial statements and can indicate levels of profitability, efficiency, liquidity, and financial leverage.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    3 views2 pages

    Far.1 Revision Class Notes 1

    Uploaded by

    Anila Nawaz
    This document discusses various financial ratios used to analyze a company's performance and financial health. It provides the formulas and interpretations for 14 common ratios: return on equity capital, return on equity, return on assets, asset turnover, gross profit ratio, net profit ratio, debtor days, creditor days, inventory days, working capital cycle, current ratio, quick ratio, gearing ratio, and interest cover. The ratios are calculated using information from a company's financial statements and can indicate levels of profitability, efficiency, liquidity, and financial leverage.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 2

    Inflation may distort

    Different accounting policies


    The ratios are only as good
    The accounting information
    Changes in accounting policies from year to
    Financial statements on which ratios are based only reflect the financial information but not the complete picture of
    business conditions.
    Ratio name High ratio Formulae Low ratio
    1. ROEC • Higher profitability • PBIT/ Avg. Capital Employed • Lower profitability
    Efficient funds management x 100 • Inefficient funds management
    •

    2. ROE • Higher profitability • PAT/ Avg. Ordinary Equity x • Lower profitability


    Efficient funds management 100 • Inefficient funds management
    •

    3. ROA • Higher profitability • PBIT/ Avg. Assets x 100 • Lower profitability


    Efficient asset management • Inefficient asset management
    •

    4. Asset turnover • Efficient utilization of asset • Net Sales/ Avg. Capital • Inefficient use of asset
    High productivity of asset Employed • Low productivity
    •

    5. Gross profit ratio • Increase in selling price • Gross Profit/ sales x 100
    Reduction in cost
    • Undervaluation of opening • Decrease in selling price
    stock or overvaluation of • Increase in cost
    • closing stock • Overvaluation of opening stock
    or undervaluation of closing stock

    6. Net profit ratio • Efficient operating • Profit after Tax/ Net Sales x • Uncontrolled expenses
    expenses Low finance cost 100 = ……..% • High finance cost
    •

    7. Debtor days • Inefficient collection • Avg. Trade receivable/ credit • Efficient collection
    Longer credit periods Sales x 365 • Shorter credit periods
    • Less discounts offered • More discounts offered

    8. Creditor days • Late payments to supplier • Avg. Trade Payable/ credit • Timely payments to supplier
    Less credit worthiness purchase x 365 • Credit worthiness
    • Less discounts availed • More discounts availed

    •
    9. Inventory days • Inefficient inventory • Avg. Inventory/COS x 365 • Efficient inventory management
    management Lower sales • Higher sales
    •

    10. Working capital • Lower inventory turnover • Debtor Days + Inventory Days • High inventory turnover
    cycle Poor control over debtors - creditor Days • Better control over debtors
    • Timely payments to suppliers • Late payments to suppliers

    11. Current ratio • Better liquidity position • Current Asset/ Current • Financial liquidity
    Larger inventories Liabilities • Lower inventories
    • Less credit purchase • Longer creditors credit period

    12. Quick ratio • Better liquidity position • =(Current Assets – Inventory)/ • Financial difficulty
    Longer debtors credit period Current Liabilities • Lower inventories
    • • Shorter debtors credit period

    13. Gearing ratio • Higher debts • = Long term • Lower debts


    Less risk shared by owner loan/(S.C+S.P+R.E) x 100 • more risk shared by owner
    •
    Less solvent business • Long term loan/ Equity + • better solvent position
    Long term loan x 100
    •

    14. Interest cover • Higher profitability • PBIT/ Interest Payable x 100 • Lower profitability
    Less use of debts • More use of debts
    • Ability to take further debts • Less credit worthiness

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