Business A and Business B are both engaged in retailing but seem to take a different approach to this trade according to the information available. The information consists of a table of ratios, shown as Table 7.10.

Required:

(a) Explain briefly how each ratio is calculated.

(b) Describe what this information indicates about the differences in approach between the two businesses. If one of them prides itself on personal service and one of them on competitive prices, which do you think is which, and why?

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Table 7.10 Financial ratios for companies A and B Ratio Business A Current ratio 2:1 Quick assets (acid test) ratio 1.7:1 Return on capital employed (ROCE) 20 per cent Return on owner's equity (ROE) 30 per cent Debtors collection 63 days Creditors payment Gross profit percentage Net profit percentage Inventory turnover Business B 50 days 40 per cent 10 per cent 52 days 1.5:1 0.7:1 17 per cent 18 per cent 21 days 45 days 15 per cent 10 per cent 25 days