Question

The top managers of an organization typically use a variety of financial indicators to assess the performance of their organizations as part of their management control function. Briefly describe and discuss the four major types of financial measures and when each is used.

Answer 1

Four major types of financial measures are :-

1. Profitability or return on investment :- return on investment is used by the top manager to know the gain or return on the investment relative to the amount of money invested. This is also used by the manager to know the gross profitability, net profitability, return on assets, return on investment, earning per share, investment turnover and sales per employee.

2. Liquidity ratio :- liquidity ratio is used by the top manager to know the company's ability to pay its current obligation. company's liquidity ratio includes current ratio, quick ratio, cash to total asset, sale to receivable, Days' receivables ratio, Cost of sales to payables, and cash turnover.

3. Leverage ratio:- leverage ratio is used by the manager to know the solvency of the company. Leverage includes Debt to equity ratio, Debt ratio, Fixed to worth ratio, and Interest coverage.

4. efficiency ratio - efficiency ratio is used by the top manager to measure the company’s ability to use its assests and manage liabilities effectively in the short term. It includes Annual inventory turnover, Inventory holding period, Inventory to assets ratio Inventory/Total Assets, Accounts receivable turnover Net (credit) Sales/Average Accounts Receivable and Collection period 365/Accounts Receivable Turnover

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