Observation

Some of the candidates attempted this question on definition and uses accounting ratio and types of activity ratio and performed poorly.  Candidates’ definition was faulty and were also confusing types of other ratios with that of activity ratio. Below are some of the suggested responses:

•    Accounting ratios:
• These are quantitative  relationships between two or more figures from financial statement;

                              OR

• These are mathematical measures of the relationship between two or more figures extracted from financial statements;

      OR

• These are comparison of figures derived from financial statements for decision making purposes.                                                                      
•  
•    Activity ratios
• Debtors Collection Period/Average Collection Period/Receivables Collection

Period/Receivable Days/Debtors ratio/Customer days;

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• Creditors Payment Period/Payables Payment Period/Creditors to Purchases/Payables Days/Suppliers Days/ Creditors ratio;
• Rate of stock turnover/Stockturn/Stock Turnover Period/Stock Turnover ratio/Inventory Turnover;
• Sales to Capital Employed/Capital Turnover;
• Sales to Fixed Assets/Sales to Non-current Assets/Fixed Assets Turnover/Non-current Assets Turnover;
• Sales to Total Assets/Total Asset Turnover;
• Sales Revenue per Employee.
• Debtor’s Turnover/Receivables Turnover;
• Total Working Capital ratio.

                                                                                            
(c)Uses of accounting ratios
                     They are used to:

• determine the performance of a business;
• provide information about the solvency of a firm;
• make inter firm comparisons;
• make intra firm comparisons;
• ascertain the liquidity position of an entity;
• assess the value or worth of a business;
• provide tools necessary for financial forecasting;
• measure the gearing of a firm;
• determine the credit worthiness of a business;
• determine slow and fast moving inventories;
• identify problem areas of a firm’s finances;
• assess the efficiency of management;
• provide information for decision making;
• provide information for planning the activities of an entity;
• provide information for control purposes;