Calculating Values using Accounting Ratios

Calculating values using accounting ratios

Calculating values using accounting ratios

What information can I find using the margin?

• The formula for margin is $\frac{\mathrm{Gross} \mathrm{profit}}{\mathrm{Revenue}}\times 100$

  • This is given as a percentage

• You can use this percentage to find missing values

What information can I find using the mark-up?

• The formula for mark-up is $\frac{\mathrm{Gross} \mathrm{profit}}{\mathrm{Cost} \mathrm{of} \mathrm{sales}}\times 100$

  • This is given as a percentage

• You can use this percentage to find missing values

• Revenue = Cost of sales + (Mark-up percentage × Cost of sales)

• If you know the mark-up and the revenue then you can also find the cost of sales

  • Find the revenue as a percentage of the cost of sales

    • Add the mark-up to 100%

  • Divide the revenue by this percentage to find the cost of sales

What information can I find using the inventory turnover?

• The formula for inventory turnover is $\frac{\mathrm{Cost} \mathrm{of} \mathrm{sales}}{\mathrm{Average} \mathrm{inventory}}$

  • This is given as a number of times

  • The formula for average inventory is $\frac{\mathrm{Opening} \mathrm{inventory}+\mathrm{Closing} \mathrm{inventory}}{2}$

• You can use this rate of inventory turnover to find missing values