important ratios for prelim 2 - Important Ratios- Prelim 2...

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Important Ratios- Prelim 2 Name Ratio What it means Gross Profit Percentage Gross Profit/ Net sales It measures a company’s ability to charge premium prices and produce goods and services at low cost Higher gross profit = higher net income Business strategy as well as competition affect gross profit %age Receivable s Turnover Ratio Net sales/Average Net trade accounts receivable Reflects how many times average trade receivables are recorded and collected during the period Higher the ratio, the faster the collection of receivables A higher ratio benefits the company because it can invest the money collected to earn interest income or reduce borrowings to reduce interest expense Average Collection period 365/receivables turnover Indicates the average time it takes a customer to pay its accounts Inventory Turnover Cost of goods sold/ average inventory Reflects how many times average inventory was produced and sold during the period. A higher ratio indicates that inventory moves more quickly through the production process to the ultimate customer, reducing
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important ratios for prelim 2 - Important Ratios- Prelim 2...

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