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    Activity Ratios

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    Bookbuzz
    These ratios show the relationship between sales, assets, inventory, debtors, and creditors of a firm. There are several key ratios: [1] Inventory/stock turnover ratio measures how many times inventory is replaced during the year; [2] Debtors turnover ratio and average collection period show the relationship between credit sales and debtors/receivables; [3] Asset turnover ratio measures the efficiency of utilizing total assets, fixed assets, capital employed, and working capital. Higher ratios generally indicate more efficient utilization of resources while lower ratios show under-utilization of resources. [4] Creditors turnover ratio and average credit period show the speed of payments to suppliers and the relationship between credit purchases and average creditors.

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    Activity Ratios

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    Bookbuzz
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    These ratios show the relationship between sales, assets, inventory, debtors, and creditors of a firm. There are several key ratios: [1] Inventory/stock turnover ratio measures how many times inventory is replaced during the year; [2] Debtors turnover ratio and average collection period show the relationship between credit sales and debtors/receivables; [3] Asset turnover ratio measures the efficiency of utilizing total assets, fixed assets, capital employed, and working capital. Higher ratios generally indicate more efficient utilization of resources while lower ratios show under-utilization of resources. [4] Creditors turnover ratio and average credit period show the speed of payments to suppliers and the relationship between credit purchases and average creditors.

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    Activity ratios

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    These ratios show the relationship between sales, assets, inventory, debtors, and creditors of a firm. There are several key ratios: [1] Inventory/stock turnover ratio measures how many times inventory is replaced during the year; [2] Debtors turnover ratio and average collection period show the relationship between credit sales and debtors/receivables; [3] Asset turnover ratio measures the efficiency of utilizing total assets, fixed assets, capital employed, and working capital. Higher ratios generally indicate more efficient utilization of resources while lower ratios show under-utilization of resources. [4] Creditors turnover ratio and average credit period show the speed of payments to suppliers and the relationship between credit purchases and average creditors.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    100 views9 pages

    Activity Ratios

    Uploaded by

    Bookbuzz
    These ratios show the relationship between sales, assets, inventory, debtors, and creditors of a firm. There are several key ratios: [1] Inventory/stock turnover ratio measures how many times inventory is replaced during the year; [2] Debtors turnover ratio and average collection period show the relationship between credit sales and debtors/receivables; [3] Asset turnover ratio measures the efficiency of utilizing total assets, fixed assets, capital employed, and working capital. Higher ratios generally indicate more efficient utilization of resources while lower ratios show under-utilization of resources. [4] Creditors turnover ratio and average credit period show the speed of payments to suppliers and the relationship between credit purchases and average creditors.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 9

    Activity ratios:

    These ratios are also called efficiency ratios / asset utilization ratios or turnover ratios. These ratios show the
    relationship between sales and assets of a firm. The various ratios under this group are:

    • Inventory/stock turnover ratio

    • Debtors’ turnover ratio and average collection period

    • Asset turnover ratio

    • Creditors turnover ratio and average credit period


    Inventory/stock turnover ratio:

    • This ratio indicates the number of times inventory is replaced during the year. It measures the relationship between
    cost of goods sold and the inventory level. There are two approaches for calculating this ratio, namely:

    • Inventory turnover ratio = cost of goods sold

    Average stock

    Where Average Stock can be calculated as (Opening stock + closing stock )/2

    • Alternatively, Inventory turnover ratio = sales

    Closing inventory
    Cont..

    • A firm should have neither too high nor too low inventory turnover ratio.

    • Too high a ratio -may indicate very low level of inventory and a danger of being out of stock and incurring

    high -'stock out cost ‘.

    • On the contrary too -low a ratio is indicative of excessive inventory entailing excessive carrying cost.
    Debtors turnover ratio and average collection period:

    • This ratio is a test of the liquidity of the debtors of a firm. It shows the relationship between -credit sales and
    debtors

    • Debtors turnover ratio = Credit sales

    Average Debtors and bills receivables

    • Average collection period = Months/days in a year

    Debtors turnover
    Cont..

    • These ratios are indicative of the efficiency of the trade credit management. A high turnover ratio and shorter

    collection period indicate prompt payment by the debtor.

    • On the contrary low turnover ratio and longer collection period indicates delayed payment by the debtor.

    • “In general, a high debtor turnover ratio and short collection period is preferable.
    Asset turnover ratio:

    • Depending on the different concepts of assets employed, there are many variants of this ratio. These ratios measure the
    efficiency of a firm in managing and utilizing its assets.

    • Total asset turnover ratio = sales/cost of goods sold

    Average total assets 

    • Fixed asset turnover ratio = sales/cost of goods sold

    Average fixed assets

    • Capital turnover ratio = sales/cost of goods sold

    Average capital employed

    • Working capital turnover ratio =sales/cost of goods sold

    Net working capital


    Cont..

    • Higher ratios are indicative of efficient management and utilization of resources

    • Low ratios are indicative of under-utilization of resources and presence of idle capacity.
     Creditors turnover ratio and average credit period:

    • This ratio shows the speed with which payments are made to the suppliers for purchases made from them. It
    shows the relationship between credit purchases and average creditors.

    • Creditors turnover ratio = credit purchases


    Average creditors & bills payables

    • Average credit period = months/days in a year


    Creditors turnover ratio
    Cont..

    • Higher creditors turnover ratio and short credit period signifies that the creditors are being paid promptly and
    it enhances the credit worthiness of the firm.

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