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Ch-4 Ratios Theory

This document provides an overview of different types of accounting ratios used to analyze financial statements. It discusses liquidity ratios like current and liquid ratios, solvency ratios such as debt-equity and total assets to debt ratios, activity ratios including stock and debtors turnover ratios, and profitability ratios like gross profit, operating, and net profit ratios. Formulas for calculating important ratios are provided, such as the current ratio formula of current assets divided by current liabilities. The document aims to explain the classification and calculation of key accounting ratios.

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Shubham Phophalia
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71 views3 pages

Ch-4 Ratios Theory

This document provides an overview of different types of accounting ratios used to analyze financial statements. It discusses liquidity ratios like current and liquid ratios, solvency ratios such as debt-equity and total assets to debt ratios, activity ratios including stock and debtors turnover ratios, and profitability ratios like gross profit, operating, and net profit ratios. Formulas for calculating important ratios are provided, such as the current ratio formula of current assets divided by current liabilities. The document aims to explain the classification and calculation of key accounting ratios.

Uploaded by

Shubham Phophalia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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UDGAM SCHOOL FOR CHILDREN

Accountancy- Notes
Chp. 4 ACCOUNTANCY RATIOS
Name _______________________ Std /Sec: XII______ Roll No._____
_____________________________

CLASSIFICATION OF RATIOS

   
LIQUIDITY RATIOS SOLVENCY RATIOS ACTIVITY RATIOS PROFITABILITY
(Short term solvency ratios) (Long term) RATIOS
- Current Ratio - Debt Equity Ratio - Stock turnover - Gross Profit Ratio
- Liquid Ratio - Total Assets to debt - Debtors turnover - Operating Ratio
Ratio - Creditors turnover - Operating Profit
- Proprietary ratio - Working Capital Ratio
- Interest coverage turnover - Net Profit Ratio
Ratio - Return on
Investment
Liquidity Ratio:

Current Assets
1. Current Ratio =
Current Liabilitie s

Note: (i) Provisions are to be deducted from debtors and Bills Receivable
(ii) Working Capital = Current Assets – Current Liabilities

2. Liquid Ratio / Quick Ratio / Acid Test Ratio:

Liquid Assets / Quick Assets


Liquid Ratio =
Current Liabilitie s
Liquid Assets = Current Assets – (Stock + Prepaid expenses)

Solvency Ratios:

Debt (Long term Loans )


1. Debt Equity Ratio =
Equity (Shareholder ' s fund )
Long term loans = Debentures + Long term loans (Financial Institutions)

Equity = Equity share capital + Preference share capital + Reserves and Surplus – [Losses & Fictitious Assets]

Total Assets
2. Total Assets to Debt Ratio =
Long term debts

Total Assets = Fixed Assets + Current Assts OR


Total Assets – Fictitious Assets

Long term debts = debentures + bonds + loans from financial institutions

D:\XII worksheet\Ch-4 ratios theory.doc


Pr oprietor ' s fund / Shareholder ' s funds
3. Proprietary Ratio:
Total Assets (Excluding fictitious assets)

Net Pr ofit before int . & tax


4. Interest Coverage Ratio =
int erest on long term debt

Activity Ratios:

Cost of goods sold or (cos t of Re venue from operations)


1. Stock turnover Ratio =
Average Inventory ( stock )
OR
Inventory turnover Ratio

Cost of goods sold = opening stock + purchases + direct exp. – closing stock OR
Sales – Gross Profit

Opening stock ( Inventory) + Clo sin g stock (Inventory)


Average stock or Inventory =
2

Net Credit Sales (Re venue from operations)


2. Debtors turnover Ratio =
Average Trade Re ceivables
OR
Receivable turnover Ratio

Net Credit Sales = Credit sales – Sales return

Average Trade Receivables = Opening Debtors + Opening Bills Rec. + closing Debtors + closing bills rec.
2
Total Sales
It can also be worked out as
Debtors
[Debtors are taken before doubtful debts]
365 12
Average collection period = OR
Debtors turnover Debtors turnover

Net Credit Purchases


3. Creditors or Payable Turnover Ratio =
Average Trade Payables

Net Credit Purchase = Credit Purchase – Purchase Return


Average Payable = Opening creditors + opening bills payable + Closing creditors + closing bills payable
2
365 12
Average payment period = OR
Creditors turnover Creditors turnover

Re venue from operations


4. Investment Turnover Ratio =
Capital Employed
(Net Assets Turnover Ratio)
Re venue from operations
(i) Fixed Asset Turnover =
Net Fixed Assets
Net Sales = Sales – Sales Return
Net Fixed Asset = Fixed Assets – Depreciation

Re venue from operations


(ii) Working Capital Turnover =
Working Capital
Working Capital = Current Assets – Current Liabilities
D:\XII worksheet\Ch-4 ratios theory.doc
Profitability Ratios:

Gross Pr ofit
1. Gross Profit Ratio =  100
Re venue from operations
Cost of Re venue from operations + operating exp enses
2. Operating Ratio =  100
Re venue from operations
OR
Operating cos t
 100
Net Sales
Operating expenses = Administrative exp. + Selling & Distribution exp. + interest on short term loans + Discount
allowed and Bad debts

Operating Pr ofit
3. Operating Profit Ratio =  100
Re venue from operations
Operating Profit = Net Profit + Non operating expenses – non operating income

Note: Operating ratio + opening profit ratio = 100.

Net Pr ofit
4. Net Profit Ratio =  100
Re venue from operations
Net Profit = Profit after tax [PAT]

Net Pr ofit before int erest, tax and dividend


5. Return on Capital Employed or Return on Investment [PBIT] =  100
Capital employed

D:\XII worksheet\Ch-4 ratios theory.doc

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