Explain one of the major accounting ratios to a group of high school students
#1. Imagine that you’ve been asked to explain one of the major accounting ratios to a group of high school students who have no background in business or accounting, but who are eager to learn. Choose one of the following ratios and describe how you would explain it in your own words, using a specific example: current ratio, asset turnover, or profit margin on sales.
#2. A good ratio in accounting to know is profit margin. This is one of many of the ratios that you will learn if you are interested in following a path in accounting. It is also called gross profit ratio or even return on sales ratio. Profits is something every business strives for, because with profits they can run their business and make more money. Profit margin is a very commonly used ratio to see how your business is doing. The equation for profit margin is Profit margins = Net Profits / Net Sales. And it shows how much of your profits (which is money you make after all your expenses) are made at a level of sales (this level should be specific so you could get a better understanding of it). An example of this profit margin could look something like this, Dana opened a business and her net sales were $10,000 and her net income was $1,000. Her profit margin ratio would look like this. __= $1,000/ $10,000. You would divide the numbers and wind up with .1 or 10%. This means she would only have had 10% of her sales into profits.
#3. There are many concepts an average person, without previous business or accounting knowledge, can understand. While some terms can sound intimidating or complex, they are actually quite easy to grasp if you think about them in everyday life. One example of this is profit margin on sales. Profit margin on sales is simply the percentage of sales leftover after all the business’s expenses are paid. The profit margin on sales can sometimes be referred to as gross profit ratio or return on sales ratio. The profit margin on sales is typically used by people who want to lend or invest in a company. They use this ratio to determine how quickly a company can turn sales into a profit. Before they invest their money, they want to be sure the business is making enough money to pay off their debts. In essence, they want to know that the business is being run efficiently and effectively and using this ratio is one way to determine just that. Additionally, companies use this ratio internally as well to determine their financial goals for the future.
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