Introduction:
In corporate and financial accounting, the sales ratio and time ratio are important metrics used to analyze the acquisition of businesses. These ratios provide insights into the efficiency and profitability of the acquired business. Let's understand how to calculate these ratios in detail.

Sales Ratio:
The sales ratio helps determine the relationship between the sales of the acquired business and the purchase consideration paid for it. It indicates how much revenue the acquired business generates per unit of purchase consideration. Here's how to calculate the sales ratio:

1. Determine the purchase consideration: This refers to the total amount paid to acquire the business, including cash, stock, and any assumed liabilities.

2. Calculate the sales of the acquired business: Obtain the revenue generated by the acquired business either through financial statements or by estimating based on historical data.

3. Divide the sales by the purchase consideration: Divide the sales of the acquired business by the purchase consideration to calculate the sales ratio.

Sales Ratio = Sales of Acquired Business / Purchase Consideration

The sales ratio helps assess the value generated by the acquired business relative to the amount paid for its acquisition. A higher sales ratio indicates that the acquired business generates more revenue per unit of purchase consideration.

Time Ratio:
The time ratio measures the time it takes for the acquired business to generate enough revenue to cover the purchase consideration paid. It provides insights into the payback period and the efficiency of the acquisition. Here's how to calculate the time ratio:

1. Determine the purchase consideration: Same as in the sales ratio calculation.

2. Calculate the net income of the acquired business: Obtain the net income of the acquired business from financial statements or estimate it based on historical data.

3. Divide the purchase consideration by the net income: Divide the purchase consideration by the net income to calculate the time ratio.

Time Ratio = Purchase Consideration / Net Income of Acquired Business

The time ratio represents the number of periods required for the acquired business to generate enough income to cover the purchase consideration. A lower time ratio indicates a shorter payback period and higher efficiency of the acquisition.

Conclusion:
Calculating the sales ratio and time ratio helps in evaluating the acquisition of businesses from a financial standpoint. These ratios provide valuable insights into the efficiency, profitability, and value generated by the acquired business relative to the purchase consideration. By analyzing these ratios, companies can make informed decisions about acquiring businesses and assess their potential for growth and profitability.