Question

the 3 main uses of accounting ratios
write the formula, circle whether a higher/lower number is better, and identify their purpose:

1. working capital =

higher or lower is better
purpose:

1. profit margin =

higher or lower is better
purpose:

1. debt to asset ratio =

higher or lower is better
purpose:
principles
what is the historic cost principle?
what is the fair value principle?

Explanation:

Step1: Working Capital formula

Working Capital = Current Assets - Current Liabilities. A higher number is better as it indicates the company has more short - term liquidity to meet its obligations.

Step2: Profit Margin formula

Profit Margin=$\frac{Net\ Income}{Revenue}\times100\%$. A higher number is better as it shows the company is more efficient at generating profit from its revenue.

Step3: Debt to Asset Ratio formula

Debt to Asset Ratio = $\frac{Total\ Debt}{Total\ Assets}$. A lower number is better as it means the company has less debt relative to its assets, indicating lower financial risk.

Step4: Historic Cost Principle

The Historic Cost Principle states that assets should be recorded at the cost at which they were acquired. This provides objective and verifiable information.

Step5: Fair Value Principle

The Fair Value Principle states that certain assets and liabilities should be measured at their fair value (the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date).

Answer:

1. Working Capital = Current Assets - Current Liabilities; higher is better; Purpose: Indicates short - term liquidity.
2. Profit Margin = $\frac{Net\ Income}{Revenue}\times100\%$; higher is better; Purpose: Shows efficiency in generating profit from revenue.
3. Debt to Asset Ratio = $\frac{Total\ Debt}{Total\ Assets}$; lower is better; Purpose: Reflects financial risk.

Historic Cost Principle: Assets are recorded at acquisition cost for objectivity.
Fair Value Principle: Certain assets/liabilities measured at fair value.