Question
ask 1 Example 1: Gross Profit Ratio Description: The profit made by a business before operating expenses are deducted, divided by sales revenue. It is
ask 1
Example 1: Gross Profit Ratio
Description: The profit made by a business before operating expenses are deducted, divided by sales revenue. It is expressed as a percentage.
Purpose: Measures the profit made by a business before its operating expenses (indirect expenses) are deducted.
Example 2: Operating Profit Ratio
Description: The profit made by a business before interest (finance costs) and tax are deducted, divided by sales revenue. It is expressed as a percentage.
Purpose: Measures the profit made by a business after deducting cost of goods (direct expenses) and operating expenses (indirect expenses).
Task 1
Explain the meaning and purpose of each of the ratios stated below. Follow the format used in the two examples given above (ie gross profit ratio and operating profit ratio).
- Current ratio
- Acid test ratio
- Interest cover
- Gearing ratio
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