Observation

Some of the candidates attempted this question on accounting ratios and performed poorly.  However, few candidates were able to present their points correctly. Some of the expected answers were:

1. Accounting ratios:These are expressions of the relationship between two or more

accounting figures from financial statements.

(b) (i)   Current ratio:It is used to measure the adequacy of current assets to meet the short term obligations of a business as they fall due.

(ii)        Rate of stock turnover:It is used to determine the number of times stock or inventory is sold within a given period.

(iii)       Return on capital employed:It is used to measure the efficiency of management in utilizing assets of a business to generate profit.                                                        

(iv)       Average collection period:It is used to determine on the average, the number of days customers take to settle their debts.

(vi)       Gross profit percentage:It is used to determine the percentage of gross profit
made on sales during an accounting period.

             (c)        Uses of accounting ratios
Accounting ratios are used to:
i. determine the liquidity of an organization;
ii. establish the interrelationship between accounting figures;
iii. evaluate business performance/profitability;
iv. establish trends of performance;
v. assist in inter-firm comparison;
vi. assess the value of an organization;
vii. determine the credit worthiness of an organization;
viii.assess the financial stability of an organization;
ix. estimate the future prospects of an organization.