Financial Statements 4

d) Rate of stock turnover

This is the rate at which the stock is bought or sold within a given period of
time. It is obtained by;
Rate of stock turnover (ROST) = Cost of goods sold/ average stock

Average stock = opening stock + Closing stock/2
In (example OOA) above, determine the rate of stock turnover;
The cost of goods sold = 438 000
The closing stock = 72 000
The opening stock = 0
Therefore
The average stock = opening stock + Closing stock/2

0+72 000/2 = 36 000

Rate of stock turnover (ROST) = cost of goods sold/average cost

= 438 000/36 000

= 12.17 Times

e) Return on capital

This is the expression of net profit as a percentage of the capital invested. That
is;
Return on capital = net profit/capital invested
x 100
It can be given as a ratio or a percentage.
For example: in (example OOA) above, determine the return on capital of the business

Net Profit = 96 720

Capital invested/owner’s equity = 939 220

Return on capital = net profit/capital invested
x 100
=96720/939220 x 100

= 10.33%

f) Acid test ratio/quick ratio

This shows how fast the business can convert its current assets excluding stock to settle its current liabilities. That is;

Quick ratio = current assets - closing asset/current liabilities

It is given in ratio form.

For example: in above (example OOA), determine the quick ratio;

Current assets = 526 000

Stock = 72 000

Current liabilities = 219 500

Quick ratio = current assets - closing asset/current liabilities

=526 000 - 72 000/219500

Importance of Financial Ratios

Mark up and margin helps in the following; setting the selling price, calculating profit or losses and determining the sales for a given period of time

Working capital and acid test ratio help in showing whether the business is in a position to meet its short term obligations and checking whether the business is utilizing its resources properly.

That is high working capital ratio shows that most of the resources are idle

Return on capital shows the following;

- The performance of the business in relation to other similar businesses

- Comparison of the performance of the business over different periods

- Whether the business finances have been invested or not

- Help the potential investors on the decision on where to invest

Rate of stock turnover also help in determining how fast or slow the stock is moving.

It also helps in computing the gross profit or loss.

Financial Statements 1 | Financial Statements 2 |
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