Defensive Interval Ratio (DIR)

What is Defensive Interval Ratio (DIR)? Defensive interval ratio used to measure the cash-based liquidity and determines the number of days a Company/Organization can operate without using non-current assets or other cash financial resources. The defensive interval is also known as the defensive interval period (DIP) or basic defense interval (BDI). Defensive Interval Ratio is …

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Uses and advantages of accounting ratios

Accounting ratios are a very powerful tool for evaluating the performance of a business unit. The most important uses and advantages of accounting ratios are given below: (1). Basis for comparison of two or more entities The principal advantage of ratios is that they provide a basis for comparison. It is impossible to compare two …

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Accounts receivable turnover ratio

Accounts receivable turnover ratio ( also known as debtors turnover ratio) shows the effectiveness of the company’s credit control system. Much like inventory turnover ratio, accounts receivable turnover ratio shows how many times in a year debtors are given credit and they fully repay it. It is calculated as follows: Formula of Accounts receivable turnover …

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Quick ratio or acid test ratio

Quick ratio Definition Quick ratio or acid test ratio is the ratio of quick assets to all current liabilities. Quick assets for this purpose include cash, marketable securities and good debtors only. In other words, prepaid expenses and inventories are not included in quick assets because there may be a doubt in quick liquidity of inventory. …

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Capital gearing ratio

Capital gearing ratio is the ratio of capital with fixed return (i.e. preference share capital plus long term liabilities) to capital with variable return (i.e. ordinary share capital). The total capital employed of a company comprises of three main segments: equity, preference share capital and long term loans. Equity holders (i.e. ordinary shareholders) are paid …

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Accounting ratios and their classification

What is the financial/accounting ratio? A ratio is a relationship between two quantities by dividing one quantity by another. Financial/accounting ratios help the analyst in making meaningful comparisons of a firm’s financial data at different points of time and with other firms. An accounting ratio is simply one accounting figure expressed in terms of another. …

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Operating assets turnover ratio

Operating assets turnover ratio (also known as current assets turnover ratio) is an improvement on the total assets turnover ratio. It shows the number of times operating assets are turnover in the year. Operating assets for this purpose are the current assets. Operating or current assets are closely linked to volume of business. Stocks levels …

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Return on equity (ROE) ratio

What is Return on Equity (ROE)? -Definition The return on equity ratio (ROE ratio) is calculated by expressing net profit attributable to ordinary shareholders as a percentage of the company’s equity. Equity of a company comprises of paid-up ordinary share capital, reserves and unappropriated profit. This represents the total interest of ordinary shareholders in the …

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Return on capital employed (ROCE) ratio

Definition of Return on Capital Employed Return on capital employed (ROCE) ratio is calculated by expressing profit before interest and tax as a percentage of total capital employed. This ratio aims at showing how well a company has used its total long term funds. A high return on the capital employed ratio is the indication …

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Need of comparing financial performance

At the end of each financial year every company produces a trading and profit and loss account (or income statement), an appropriation account (or statement of retained earnings) and a balance sheet. Essentially these statements present, in a summarized form, all the information recorded in the company’s accounting books. Results disclosed by these statements are …

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Earnings per share (EPS) ratio

Earnings per share ratio is effectively a restatement of return on equity (ROE) ratio. While return on equity ratio is calculated as a percentage, taking total net profit and total equity, earnings per share ratio shows how much profit has been earned by each ordinary share (common share) in the year. Formula Net profit attributable …

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Dividend coverage ratio

Dividend coverage ratio shows the number of times the dividend is covered by available profit and is calculated separately for each class of shares. Formula For preference shares: and for ordinary (common) shares: Example Profit before tax: $480,000 Corporation tax rate: 50% Dividend to preference shareholders: $15,000 Dividend to ordinary shareholders: $25,000 Calculate dividend coverage …

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Accounting equation – MCQs

Take a quick Multiple Choice Questions (MCQs) test about Accounting Equation. These MCQs can help you to prepare for your exams, interviews and different tests. Just click the “start quiz” button and start the accounting equation MCQs quiz. If you find difficulty in answering these questions, read the ‘Accounting Equation‘ chapter thoroughly from the explanation …

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