Question 3
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(a) State two ratios which fall under the following classification of accounting ratios:
(i) profitability;
(ii) activity;
(iii) liquidity;
(iv) investment;
(v) leverage.(b) Outline:
(i) three uses of accounting ratios.
(ii) two limitation in the use of accounting ratios.
Observation
Few candidates attempted the question and the performance was poor in their answers to the classification of accounting ratios [i.e 1(a)]:
(a) (i) Profitability ratios:
- Gross profit as percentage of sales/Gross profit margin/
Gross profit percentage;
- Net profit as percentage of sales/Net profit margin/
Net profit percentage;
- Return on Capital Employed (ROCE);
- Return on shareholders fund.
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(ii) Activity ratio:
- Stock turnover/Stock turn/Rate of turnover;
- Deb tor’s collection period/Debtor’s days/Account
Receivable to sales/Average collection period/Debtor’s ratio;
- Creditors payment period/creditor’s days/Account payable to purchases/Average payment period/Creditor’s ratio.
(iii) Liquidity ratios:
- Current ratio/Working capital ratio;
- Acid test/Quick ratio.
(iv) Investment ratios:
- Dividend per share;
- Earning per share;
- Price earning ratio;
- Dividend cover;
- Dividend yield.
(v) Leverage ratios:
- Gearing/Debt to equity;
- Time interest earned.