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What are some examples of how ratios are used in the decision making process

How does financial accounting help decision making? By Investopedia Updated August 16, — 5: There are three main areas where financial accounting helps decision-making. It provides investors a baseline of analysis for — and comparison between — the financial health of securities-issuing corporations.

Depending on the results of the evaluations, bankers and creditors may choose to extend or retract financing and potential shareholders may adjust the level of commitment in a company. Financial ratios are important tools that judge the profitability, efficiency, liquidity and solvency of an entity.

Commonly used profitability ratios are gross profit margin, operating profit margin and net profit margin.

Gross profit margin measures profitability after considering cost of goods sold, while operating profit margin measures profitability based on earnings before interest and tax expense. Net profit margin is often referred to as the bottom line and takes all expenses into account.

Efficiency ratios evaluate turnover and the return on investments. Examples of efficiency ratios are inventory turnover, sales to receivables and return on assets. Inventory turnover measures the number of times an entire stock of inventory is repurchased while sales to receivables compares trade receivables to revenues.

In both situations, a higher number indicates a higher level of efficiency when selling inventory and collecting receivables. Return on assets compares net income before taxes to total assets and helps show the efficiency of management when using assets to generate profits.

In other words, liquidity ratios evaluate the ability of a company to convert its current assets into cash and pay current obligations. Common liquidity ratios are the current ratio and the quick ratio.

The current ratio is calculated by dividing current assets by current liabilities. According to Thomson Reuters, a general rule of thumb is to have a current ratio of 2. Solvency Ratios Solvency, or leverage, ratios, judge the ability of a company to raise capital and pay its obligations. Solvency ratios, which include debt to worth and working capital, determine whether an entity is able to pay all of its debts.

In practice, bankers often include leverage ratios as debt covenants in contract agreements. Bankers want to ensure the entity can maintain operations during difficult financial periods.

The debt to worth ratio calculation is total liabilities divided by net worth. Working capital is calculated by subtracting current liabilities from current assets.Aug 25, · What are some examples of how ratios are used in the decision-making process?

What are some common ratios used to analyze financial information? Which are the most important? What are some examples of how ratios are used in the decision-making process? Follow. Status: Resolved.

What are some examples of how ratios are used in the decision making process? Expert Answer accounts receivable accounts receivable turnover is an efficiency ratio or activity ratio that measures how many times a business can turn its accounts receivable into cash during a period.

Discuss some of the common ratios used to analyze financial information. Name some examples of how ratios are used in the decision making process. Some of the common ratios that are used to analyze financial information is liquidity ratios, profitability ratios and solvency rations.

Even more specifically broken down these ratios can be a current ratio, an acid test ratio, profit margin, asset turnover, return on asset ratio, earnings per share, debt to total asset ratio and times interest earned%(42).

Some of the common ratios that are used to analyze financial information is liquidity ratios, profitability ratios and solvency rations. Even more specifically broken down these ratios can be a current ratio, an acid test ratio, profit margin, asset turnover, return on asset ratio, earnings per share, debt to total asset ratio and times interest earned%(42).

Ratios that measure the effectiveness of managementâ??s decision making are referred to as efficiency ratios. Efficiency ratios evaluate turnover and the return on investments.

Examples of efficiency ratios are inventory turnover, sales to receivables and return on assets.

Memoire Online - The use of accounting ratios in decision making - Lambert KABERA