a) List six users of accounting information
(b) State the formula and the use of each of the following accounting ratios:
i. Quick ratio
ii. Net profit margin
iii. Total assets turnover
iv. Creditors payment period (in days)
Explanation
(a) Users of accounting information
(i) Management
(ii) Employees
(iii) Government agencies
(iv) Investors
(v) Bankers/lenders/debenture holders
(vi) Customers/debtors
(vii) Suppliers/creditors
(viii) Trade Unions
(ix) Trade Associations
(x) General Public
(xi) Shareholders/owners/employers
(xi) Financial analysts
(xii) Auditors
(b) Formula and use of ratios
(i) Quick Ratio: Current assets - Inventory
Current liabilities
This ratio is used to measure the ability of a business to pay its short-term debts from current assets, after eliminating inventories.
(ii) Net profit margin: \(\frac{\text{Net profit x 100}}{ sales}\)
This ratio is used to determine the net profit earned on each naira of sales made by the business.
(iii) Total assets turnover = \(\frac{\text{sales x 100}}{\text{total assets}}\)
This is ratio is used to measure how efficiently a business can use its assets to generate sales
(iv) Creditors payment period (in days) = \(\frac{\text{trade creditors x 365 days}}{\text{credit purchases}}\)
The ratio measures on average, the number of days that the business takes to pay its trade creditors/people it owes.