(a) 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.