ACCOUNTING RATIOS

Points to Remember :

1. Loose tools and stores & spares will be excluded from inventories while
calculating. Current ratio and inventories turn over ratio.
2. Provision for doubtful debt will be deducted from Trade receivables for calculating
current and liquid ratios. But it will not deduct while calculating trade Receivables
turnover ratio.
3. Non-trade Investment will be exclude from shareholder’s funds and Capital
employed and Total Assets for calculating solvency and Profitability ratios, and
corresponding their income (i.e., interest on Non-trade Investment) will exelucls
from Net Profit.
4. Operating cost and operating expenses are reperate concept shouldn’t inter change.

Accounting Ratio: It is an arithmetical relationship between two accounting

variables.
Ratio Analysis: It is a technique of analysis of financial statements to conduct a
quantitative analysis of information in a company’s financial statements.
“Ratio analysis is a study of relationship among various financial factors in
a business.” –Myers

Proprietory % Debt Proprietory

Ratio Equity Ratio

Profitibility Solvency

Fraction Times % Current

Debtors Turnover
Inventory Turnover Ratio Ratio
Liquidity Activity

Fraction

`
RATIO ANALYSIS

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Expression of ratios: Ratios are expressed in following four ways:

Pure Ratio Like 2:1. All liquidity and solvency ratios are expressed in pure
form.

Percentage e.g. 15%. All profitability ratios are presented in percentage

form.

Times Like 4 times. All turnover ratios and Interest Coverage Ratio are
presented in this form.

Fraction like 3/4.

Classification or Types of Ratios:

Liquidity Ratios
Current Ratio
Current Assets
Current Ratio =
Current Liabilities

Liquid or Quick or Acid Test Ratio

Current Assets
Liquid Ratio =
Current Liabilities

Supporting Formulae
1. Current Assets = Current Investments (also known as Market able
Securities or S.T. Investment)
+ Inventories (except Loose Tools & Stores and
Spares)
+ Trade Receivables (Debtors and B.R.) Net after
provision for bdd.
+ Cash and Cash Equivalents (Cash and Bank Balances)
+ Short Term Loans and Advances
+ Other Current Assets (Prepaid Expenses, Accrued
Income & Advance Tax)
2. Current Liabilities = Short Term Borrowings (Bank Overdraft and Cash
Credit)
+ Trade Payables (Creditors and B.P.)
+ OtherCurrent Liabilities (O/s Expenses, Income
Received in Advance, Unpaid or Ui claimed Dividend)
+ Short Term Provisions (Provision for Tax, Proposed
Dividend)

3. Liquid Assets = Current Assets

- Inventory (closing)
- Other Current assets (Prepaid Expenses, Accrued
Inicome & Advance Tax)
4. Working Capital = Current Assets - Current Liabilities
5. Total Assets = Non-Current Assets + Current Assets
6. Total Liabilities = Non-Current Liabilities + Current Liabilities

3
7. Non-Current Assets = Fixed Assets (tangible and intangible)
+ Non-Current Investments
+ Long Term Loans & Advances (Capital Advances, Security
Deposits)
8. Non-Current Liabilities = Long Term Loans( Debentures, Bank Loans,
Bonds)
+ Long Term Provisions (Provision for employee
benefit & Warranties)
9. Capital Employed = Shareholders Fund
+ Borrowed Fund (Non-Current Liabilities)
10. Capital Employed = Total Assets - Current Liabilities
= Non-Current Assets + Working Capital
11. Shareholders Fund = Share Capital
+ Reserves and Surplus
Non-Current Non Trade Investments Shareholders
Fund = Total Assets - Non Current Liabilities - Current / liabilities
(Note: Total Assets wll include only Non-Current TRADE Investments for Capital
Employed)
Non Current: Investment will remain Non-Current TRADE Investments in Absence of
any other information.

Solvency Ratios
• Debt - Equity Ratio
Debt (Non Current Liabilities)
Debt - Equity Ratio =
Equility (Shareholders Fund)

• Proprietary Ratio
Shareholders Fund
Proprietary Ratio =
Total Assets

• Total Asset to Debt Ratio

Total Assets
Total Asset to Debt Ratio =
Debt (Non Current Liabilities)

• Interest Coverage Ratio

Profit BEFORE Interest, Ta x and Dividend
Interest Coverage Ratio = Interest on Long Term Loans
Activity or Turnover Ratios
• Working Capital Turnover Ratio Working
Revenue from Operation
Capital Turnover Ratio =
Working Capital

• Inventory Turnover Ratio

Cost of Revenue from Operation

Inventory Turnover Ratio =
Average Inventory

• Receivable Turnover Ratio

Net Credit Revenue from Operation

Receivable Turnover Ratio =
Average Debt ors+Average BR.

12 months or 365 days or 52 weeks

Receivable Turnover Ratio = Debt or Average Collection Period

• Payable Turnover Ratio

Payable Turnover Ratio = Net Credit Purchases Average

Creditors + Average B.P.

12 months or 365 days or 52 weeks

Payable Turnover Ratio =
Average Payment Period

Supporting Formulae
a) Revenue from Operation (Net Sales) = Total Revenue from Operation
Return of Revenue from Operation
b) Total Revenue from Operation = Cash Revenue from Operation
+ Credit Revenue from Operation
c) Net Credit Revenue from Operation = Credit Revenue from Operation
- Return of Revenue from Operation
d) Cost Of Revenue From Operation (COGS) = Opening Inventory
+ Net Purchases + Direct Expenses
- Closing Inventory
e) Cost Of Revenue From Operation (COGS) = Revenue From Operation
- Gross Profit

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f) Cost Of Revenue From Operation (COGS) = Cost of Raw Material Consumed
+ Purchases of Stock in Trade
+ Change in Inventory of Finished
Goods, WIP, Stock in Trade
+ Direct Expenses
Opening Inventory + Closing Inventory
g) Average Inventory =
2

Opening Debtors + Closing Debtors 2

h) Average Debtors =

Opening B.R. + Closing B.R.

i) Average B.R. =
2

Opening Creditors + Closing Creditors 2

j) Average Creditors =

Opening BP + Closing B. P.
k) Average B.P. =
2

I) Average Receivable = Average Debtors + Average B.R.

m) Average Payable = Average Creditors + Average B.P.

In absence of Information
• Debtors = Opening Debtors = Closing Debtors = Average = Debtors
• B.R. = Opening B.R. = Closing B.R. = Average B.R.
• Creditors = Opening Creditors = Closing Creditors = Average Creditors
• B.P. = Opening B.P. = Closing B.P. = Average B.P.

Profitabiliy Ratio
Gross Profit Ratio
Groos Profit
Gross Profit Ratio = × 100
Revenue from Operation
Net Profit Ratio
Net Profit After Tax
Net Profit Ratio = × 100
Revenue from Operation
Operating Ratio or Operating Cost Ratio
Operating Cost
Operating Ratio = × 100
Revenue from Operation
Operating Profit Ratio
Operating Profit
Operating Profit Ratio = × 100
Revenue from Operation

Return on Investmetn or Return on Capital employed

Profit BEFORE Interest, Ta x and Dividend
ROI = Capital Employed × 100

Supporting Formulae
• Net Profit = Gross Profit + Indirect Incomes - Indirect Expenses
= Gros profit + Non-Operating Income – (Operating Expenses + Non- Operating
Expenses)
= Gross profit + Non-Operating Incomes – Operating Expenses - Non
Operating Expenses
= Gross profit – Operating Expeses + Non-Operating Incomes - Non Operating
Expenses
= (Gross profit – Operating Expenses) + Non-Operatin, Incomes, non- Operating
Expenses
• Net Profit = Operating Profit + Non-Operating Incomes - Non Operating
Expenses
• Indirect Expenses = Operating Expenses + Non-Operating Expenses
• Non-Operating expenses Example Interest Paid on loans a finance cost
• Operating Expenses = Office and Administrative Expenses
+ Selling and Distribution Expenses
+ General Expenses
+ Depreciation
• Operating Expenses = Employee Benefit Expenses + Other Operating
Expenses
• Indirect Incomes (also known Non-Operating Incomes)
Example: Interest Received on Investment
• Operating Cost = Cost of Revenue from Operation + Operating Expenses
• Operating Profit = Gross Profit - Operating Expenses
= Revenue from Operation - Cost of Revenue - Operating Expenses
= Revenue from Operation - (Cost of Revenue + Operating Expenses)
• Operating Profit = Revenue from Operation-Operating Cost
• Operating Profit = Net Profit - Non Operating Incomes + Non-Operating
Expenses

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 60,000

payment

` 1,50,000

A Ltd.

- 1

24,000
24,000 - 2
 premium
20,000

divident

will

following:
Debt
4,00,000
2,00,000
Non Inventories 1,70,000
Advances 30,000

Asset

9
receivable

were

from

from

operations = Cash Revenue + Credit Revenue Operations

Rs 3,00,000
 CI × T|R

Rs 70,000

6 times

11
 50,000
x= 3.5

Illustration 7:

Proprietary ratio

Mortgage

following ratio:

= 0.722 or 72.2 %
+ current Assets

Ratio
.
mortgage
 50,000

Depreciation 1,50,000 i.e., balance in

Investment

Asset

– 1,50,000

Return

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 Int.
(10% of 1,20000)

16,20,000 – 10,20,000

(–) Surplus Balance

balance Davi

(b) Reserve & Surplus

II ROI = Net profit before int & Tax * 100

Surplus

15
 6=

rs 9,000

Administrative Expenses ` 22,000

rs 80,000
rs 8,00,000 = 85%

+ stock in stock +

Exp. =

Cost of
 –

operating Profit
10 = ×100
8,00,000

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