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sample papers:business study Notes:business study 12th com Notes:Economics 12th com. important questions for accountancy 12th com Notes:ratio analysis Notes:Dissolution of a Partnership Firm Notes:Retirement or Death of a partner Notes:Admission of a partner Notes:Reconstitution of a partnership firm: change in profit sharing ratio among the existing partners Notes:Accounting for Partnership Firms : Fundamentals Notes:financial statement of not for profit organisations Notes:redemption of debentures Notes:issue of debentures Notes:issue of shares

family of anil chauhan rules of accounts Notes:ratio analysis CHAPTER-5 ACCOUNTING RATIO ACCOUNTTING RATIO By R.N Anthony A Ratio is simply one number expressed in terms of another. It is found by dividing one number onto other. In accounting ratio two or more than two monetory term are compare to each other.

TYPES OF ACCOUNTING RATIO

1. LIQUIDITY RATIO- Liquidity refers to the ability of the firm to meet its current liabilities. The liquidity ratio, therefore, are also called Short term Solvency ratio. These ratio are used to asses the short term financial position of concern. In the words of J. Flink, Liquidity is the ability of the firm to meet its current obligation as they fall due. Liquidity ratio includes two ratios:I. Current Ratio or Working Capital Ratio- This ratio explains the relationship between current assets and current liabilities of a business. The formula for calculating the ratio is :-

Current ratio = 2:1

Current Assets

Ideal Ratio =

Current Liabilities

Current Assets: Cash in hand + Cash at bank + B/R + Shortterm investment + Debtors + Stock + Prepaid expenses. Current liabilities: Bank overdraft+ B/P + Provision for taxation + Proposed dividend + Outstanding Expenses + Loans payable within one year. II. Quick Ratio or Acid test Ratio: Quick Ratio indicates weather the firm is in a position to pay the current liabilities within a month or immediately. The formula is:-

Assets

Quick Ratio Ideal ratio = 1:1 Current liabilities

Liquid

Liquid Assets: Current Assets- Stock- Prepaid expenses. 2. SOLVENCY RATIO these ratios are calculated to assess the ability of firm to meet its Long-term Liabilities as and they become due. It includes three ratios:I. Debt Equity Ratio: This ratio expresses the relationship between long term debts & share holder funds. It indicates the proportion funds which are acquired by long term borrowings in comparison shareholder fund to shareholders funds.

Debt Equity Ratio = Shareholder funds

Long term loans

Shareholders funds: Equity Share capital + Preference Share capital + Securities premium + General Reserve + Capital Reserve + Other Reserve + Cr. Balance of P & L Account Fictitious assets. Long-term loan: Debenture + Bank Loan + Mortgage Loan + Loan from financial institution + Public Deposit.

II.

Total Assets ratio: This ratio is the variation of the debtequity ratio& gives the same indication as the debt-equity ratio. Total Assets ratio: Debts Total Assets: All fixed assets & current assets. But fictitious assets are deducted. Long-term loan: Debenture + Bank Loan + Mortgage Loan + Loan from financial institutions + Public Deposit. Total Assets

III.

Proprietary Ratio: this ratio indicates the proportion of total assets funded by owners or shareholders.

Proprietary funds

Ratio

Shareholder

Total assets Total Assets: All fixed assets & current assets. But fictitious assets are deducted. Shareholders funds: Equity Share capital + Preference Share capital + Securities premium + General Reserve + Capital Reserve + Other Reserve + Cr. Balance of P & L Account Fictitious assets. IV Interest Coverage Ratio: It is a ratio which deals with the servicing of interest on loan.

Interest Coverage Ratio = Net Profit before Interest and Tax Interest on long term debt

3. ACTIVITY RATIO: These ratios are calculated on the basis of cost of sales therefore, these ratios are called as Turn over Ratio. Turnover indicates these speed or no. of times the capital employed has been rotated in the process of doing business. It includes five ratios:I. Inventory Turnover Ratio: This ratio indicates the relationship between the costs of goods sold the year and average stock kept during the year. Cost of goods sold: Opening stock + Purchases + Carriage + Wages + other direct chargesclosing stock. Or Net Sales- Gross Profit. Average stock = Stock + Closing Stock 2 II. Debtor Turnover Ratio: This ratio indicates the relationship between credit sale and average debtor during the year. Opening

Debtor Turn Over Ratio = Credit Sales Average Debtor + Average B/R III.

Net

Creditor Turnover Ratio: This ratio indicates the relationship between credit purchase and creditors during the year. Creditor Turnover Ratio: Credit Purchases Average Creditor + Average B/P Net

IV.

Working Capital Turnover Ratio: This ratio indicates the relationship between Net Sales and Working Capital during the year. Working Capital Turnover Ratio: Sales Working Capital Working Capital: Current Assets Current Liabilities. Net Credit

V.

Fixed Assets Turn Over Ratio: The formula is used for calculating this ratio as follows:Fixed Assets Turn Over Ratio = Net Fixed Assets Net Fixed Assets: Fixed Assets Depreciation. Net Sales

4. PROFITABILITY RATIO: The main object of all business concern to earn profit. Profit is the measurement of the efficiency of the business. Profitability ratio measures the various aspects of the profitability of the company, such as, what is the rate of profit on sales? , Whether the profits are increasing or decreasing, and there causes. It includes seven Ratios: I. Gross Profit Ratio: This ratio shows the relationship between the gross profit and sales. Gross Profit Ratio = Gross Profit Net Sales II. Operating Ratio: This ratio measures the proportion of an enterprises cost of sales and operating expenses comparison to its sales. Operating expenses Operating Ratio = Cost of Sales + * 100 Net Sales III.Net Profit Ratio: This ratio shows the relationship between the net profit and sales. Net Profit Ratio= Net Profit * Net Sales Operating Profit * 100 Net Sales Profit Ratio = Operating 100 * 100

IV. Return on Investment (R.O.I): This ratio reflects the overall profitability of the business. It is calculated by comparing the profit earned and capital employed to earn it. This ratio is usually in percentage and also known as Rate of Return.

R.O.I = Profit before interest, tax & dividend * 100 Capital Employed Capital Employed = Equity Share Capital + Preference Share Capital + Reserve & Surplus + Cr. Balance of P & L + Long term Loans Fictitious assets Non-operating assets Or Fixed Assets + Current Assets. V. Earning per Share (E.P.S): Overall profitability of a company can also be judged by calculating earning per share. In this context, earning refers to profit available for equity shareholder. E.P.S = interest & tax) Number of equity share VI. Price-Earning (P.E.) Ratio: It is computed by dividing the market price of a share by E.P.S. That is:E.P.S = Market Price of share E.P.S Net Profit (after

VII. Dividend per Share: Profit remaining after payment of tax, preference dividend is available to equity shareholder. Out of these apart retained in the business and the remaining is distributed among equity shareholders and as dividend. D.P.S = Dividend paid to equity shareholder Number of equity share

Posted 25th January by ANIL KUMAR CHAUHAN

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