Ratio: A ratio is an expression of quantitativ proportion of one in relation to other, For ex: partner B will get Rs 40 out of total profit of Accounting Ratio: Accounting ratio is the quantitative a expressed in different ways such as times, r According to J.Batty, accounting rat between figures shown on a Balance Sheet, | in any other part of the accounting organiza(v) Measurement of Liquidity Position: " help of ratio analysis. Here liquidity means shor liquid ratio ete creditors, financial institutions (vi) Assist in Decision Making: Overall ratio analysis. Management can take valuable | (vii) Managerial Efficiency regarding Uti efficiency regarding utilization of different ass (viii) Assist in Controlling: Ratio analysi a firm. For this purpose different expense ratios aware to control the specific areas. Limitations of Ratio Analysis Though ratio analysis gives different ben still this is not free from limitations. The limita (i) Only based on comparison: Only calc it is compared with other ratio also. For exam findings regarding solvency of a firm unless so together to give some conclusion. Hence comps other test also have influence to give some co (ii) Post Martem Fvamination: Ratin an-(i) Gross Profit Ratio (ii) Operating Rati Assets (vi) Return on Capital Employed (ii) Liquidity or Solvency Ratio: Judgir ess for assuring their return and repaym Tatios through which solvency or short term li to be classified on two bases which are disct (a) Short term liquidity: These ratios ; company i.e. how efficiently the company is al important ratios for this purpose are: (i) Current Ratio (ii) Liquid Ratio (iii) Turnover Ratio (f) Creditors Turnover Ratio. (b) Long term Liquidity: These ratios a efficiently the company is able to repay the de long term creditors etc, The important ratios 1 (i) Proprietary Ratio (ii) Debt Equity Rat (iii) Financial Stability Ratios: The sta are interested to know the financial position types of financial risks. The important ratios - (i) Current Ratio (ii) Quick Ratio (iii) De (vi) Fixed Assets Pronrietorchin Ratic Total businQuick Liabilities = Current Liabilities — E Standard Norm: 1:1 Objective: This ratio is applied to judge the help of this ratio current ratio can also be (iii) Absolute Quick Ratio or Super Quick Ra Cash + Mark Absolute Quick Ratio = Quick Standard Norm: 0.5:1 Objective: It is measured to judge the a ratio. In other words, this ratio tests the cash | (iv) Defensive Interval Ratio Defensive Interval Ratio = Projected encanta Phas lks fmm Db amstaneemané = 1GLong-term External I ———$— Proprietor’s Fund Debt-Equity Ratio = Proprietor’s Fund = Equity Share Ca Fictitious Assets ae Ideal Norm: 1:1 if total debt is taken ai Objective: This ratio is calculated to. Proprietor’: fund. With the help of this ra efficiency, risk in capital structure and long (viii) Capital Gearing Ratio Fixed In Capital Gearing Ratio = ————— Equity Shar Fixed Interest Bearing Capital = Pref bearing Long-term External Debt. Reserve and Surplus = Profit & Loss Standard Norm: Capital Gearing RatioOpening Stock + Purchase — Closing S Operating Expenses = Administrative E Expenses Standard Norm: Depends on the nature Objective: This ratio is calculated to me proportion of operating cost in relation to sale (xii) Operating Profit Ratio Operating | Operating Profit Ratio = —————— Net Sal Operating Profit = Net Sales — ( Cost of and distribution expenses) Or Net Profit + Non operating Expenses —! Standard Norm: Depends on the nature Objective: This ratio indicates the relati the help of this ratio managerial efficiency anc(xvi) Return on Proprietor’s Funds Net Profit before Interest and ' S Proprietors Funds Standard Norm: Depends on industr _ Objective: To show the efficiency of ©arning of operating profit. (vii) Return on Investment Net Profit Return on Investment =——___ Net C: Standard Norm: Depends on industry Objective: To show the efficiency of towards earning of operating profit. (xviii) Stock Turnover RatioAverage Debtors or Average R Ee rag Credit Sales Average Debtors = (Opening De Standard Norm: Depends on industry Objective: It is used to measure the effi from debtors in due time. In other words it i collection policy of the firm. Short term solve (xx) Creditors or Payables Turnover Ratio Creditors or Payables Turnover Rati Credit Purchase Average Creditors or Average P Average Creditors or Average |~ ae (xxiii Working Capital Turnover Ratio Working Capital Turnover Ra Net Working Capital = (Current Asse Standard Norm: Depends on industry Objective: This ratio is calculated to jud; tking capital toward generating sales. hg capital can also be judged through t (xxiv) Capital Turnover Ratio of wo Worki Cost of Goc Capital Turnover Ratio = Net CarProfit & Loss A/c of India Dr. Particulars To Op.Stock 2,00,00 To Purchase (60% Credit) 12,00,¢ To Gross Profit C/d 6,50,0( 20,50,0 To Administration expenses 1.20.00 To Selling expenses 1.12.06 To Finance expenses 60.000 Net Operating Profit C/d 3.58.00 6,50,00 To Interest Charges To Income Tax 10,000 To Pref. Dividend pitas To Net Profit after Interest, 30,000 Dividend and Tax cae are Near BeeneRatio (xi) Debtors Turnover Ratio (xii) ¢ Current Assets Turnover Ratio (xv) Workin: on Equity Shareholders Equity (xviii) Earnii Ratio Note: Market price per share Rs 20 Ans: (i) Current Ratio: Current Assets Current Ratio = Current Liabilities (ii) Liquid Ratio / Quick Ratio Quick Assets Quick Ratio = Quick Liabilities Quick Assets = Current Assets — (Stc a eT aN ce oes Oe(vi) Capital Gearing Ratio Fixed Interest bearing Capita ee Equity Share Capital + Reserve & Fixed Interest Bearing Capital = Preferen: Long-term External Debt. =Rs 3,00,000 + Rs 1,00,000 =Rs 4,00,000 Reserve and Surplus = Profit & Loss Acc =Rs 1,90,800 + Rs 1,76,200 =Rs 3,67,000 (vii) Gross Profit Ratio Gross Profit Gross Profit Ratio = x 10 Net Sales (viii) Net Profit Ratio Net Operating Profit(xii) Creditors Turnover Ratio Credit Purchase Average Creditors (xiii) Fixed Assets Turnover Rati Cost of Goods Sold ee Net Fixed Assets (xiv) Current Assets Turnover R Cost of Goods Sold Total Current Assets (xv) Working Capital Turnover ] Cost of Goods Soldprice Earning Ratio (xix) Market Price per Share 20 = ———— = —— Earnings per Share 4.77 (xx) Interest Coverage Ratio Net Profit before Interest and Tax ee ee ee : Fixed Interest Charges (wy Working Capital Rs 4,00,000, Current 1 Liability and Closing stock. Ans: on ene (i) Current Assets & Current Liability: Current Assets Current Ratio = Current Liabilities(ii) Debtors Debtors = (Credit Sales x Credit Perio =(Rs 25,00,000 x 3/] 2) = Rs 6,25,000 (iii) Closing Stock and Openiug Stocl Cost of Goods Solk Stock Velocity = Average Stock 25,00,000 —5,00,00¢ Or 12/3 = Average Stock Op. Stock + C) Now, Average Stock = ————__— Zz OCvyn Stack + On CtrRs 60,000 x 100 . Net Sales Net Sales = Rs 3,00,000 Cost of Goods Sold = Sales — Gross Pr = Rs 3,00,000 — Rs 6( (ii)Debtors Debtors = (Credit Sales x Credit Period = (Rs 3,00,000 * 2/12) = Rs 50,000 (iii) Closing Stock: Cost of Goods Sold Stock Velocity = Average Stock 2,40,000 0 il oOProblems: 1. GP ratio 25%, GP Rs 2,00,000, Debtors t [Ans: Sales Rs 8,00,000, Debtors Rs 2, 2. Operating ratio 70%, Net profit Rs 2,10, goods sold. [Ans: Sales Rs 7,00,000 and COGS Rs _ 3. Current ratio 2:1, Liquid ratio 3:2, Closing [Ans: CARs 1,20,000, CL Rs 60,000] 4. GP ratio 30%, Gross profit 3,00,000, Fixec Proprietor’s fund 12,00,000, Debtors turn turnover ratio 2. Find out (i) Sales (ii) Ce turnover ratio (v) Debt-equity ratio (vi) D. |Ans: Sales Rs 10,00,000, COGS Rs 7,01 Debt-equity ratio .33:1, Debtors Rs 2,5( 5. From the following ratios and informatior Sales for the year 2010, (b) Sundry Debto Closing Stock. Debtors Velocity 3 monthe[Ans: Current Assets Rs 5,00,000 Currer 21,33,333, Sundry Debtors Rs 2 Rs 8,00,000, Reserve & Surplus Rs 4,00,( 14,00,000] 8. From the following particulars prepare a: Fixed Assets to Net Worth Current Ratio Reserve included in Proprietor’s Fu Acid Test Ratio [Ans: Balance Sheet Total Rs 12,50,000, N Current Assets Rs 4,50,000 ( Stock Rs 2, Long term Debt Rs 10,00,000] 9. From the following particulars prepare as Fixed Assets to Net Worth Current Ratin