ACCOUNTING RATIOS
Types of accounting ratio.
1. Liquidity Ratio
(a). Current ratio.
(b). Quick ratio
2. Solvency Ratio
(a). Debt to equity ratio.
(b). Total asset to debt ratio
(c). Proprietary ratio
(d). Interest coverage ratio
3. Activity Ratio
(a). Inventory turnover ratio
(b). Trade receivable turn over ratio.
(c). Trade payable turn over ratio.
(d). Working capital turnover ratio
4. Profitability Ratio.
(a). Gross profit ratio
(b). Operating profit ratio.
(c). Net profit ratio.
(d). Return on investment (ROI)
. Liquidity Ratio
(a). Current ratio.
Current ratio = Current assets/ Current Liabilities
Pure Ratio = 2:1
Current Assets = 4,00,000 + 20,000 + 60,000 + 40,000+ 80,000 = 6,00,000
Current Liab = 60,000 + 1,60,000 +80,000 = 3,00,000
C.R =6,00,000/3,00,000 = 2:1 Ans
Working capital = Current Assets – Current Liab
Ilu 3.
Current assets = 4,00,000
Inventories = 2.00,000
Working capital = 2,40,000
Current ratio=?
C.R =C.A/C.L
C.R= 4,00,000/ 1,60,000 = 2.5:1 Ans
Working capital= Current assets – current liab
2,40,000 = 4,00,000 - c.L
C.L = 4,00,000 – 2,40,000 = 1,60,000
Illustration 7.
Working capital = 10,00,000
Total Debts= 45,00,000
Non – current Lib = 40,00,000
C.R = C.A/C.L = 15,00,000/5,00,000 = 3:1 Ans
C.L. = 45,00,000 – 40,00,000 = 5,00,000
Working capital = C.A – C.L
10,00,000 = C.A – 5,00,000
C.A = 10,00,000 + 5,00,000 = 15,00,000
Illustration :- 14
A firm had current assets of Rs. 3,00,000. It paid current liab of Rs. 60,000. After the
payment the current ratio was 2:1 .Determine current lib and working capital after and
before the payment was made.
C.R= C.A
C.L
2 = 3,00,000 -60,000
1 x
2x= 2,40,000
X= 2,40,000/2 = 1,20,000 Ans c.l
Working capital = C.A -C.L = 3,00,000 – 1,20,000 =1,80,000 ans
Quick Ratio: -
Quick/Lquid = Liquid asset or quick asset
Current Liabilities
Illustration : -21
Current ratio = C.A
C.L
= 5,40,000
2,70,000 = 2:1
(ii). Liquid ratio = L.A
C.L
=
2,70,000
2,70,000 = 1:1
Liquid Assets = Total Current assets – Inventories
= 5.40,000 – 2,70,000 = 2,70,000
Ilus: - 22
C.L = 1,50,000
C.A= 2,80,000
Inventories = 40,000
Advance Tax = 30,000
Prepaid rent = 10,000
Calculate Quick Ratio’
Q.R = Q.A
C.L
Quick Assets = C.A – Inventories – Advance Tax – Prepaid Rent
= 2,80,000 –40,000 - 30,000 – 10,000
= 2,00,000
Q.R = 2,00,000
1,50,000 = 1.33: 1 Ans
Illustration 25
Working capital = 1,80,000
Total outside Liabilities = 3,90,000
Long term debts = 3,00,000
Inventories = 90,000
Sol
L.R = L.A = 1,80,000 = 2:1 Ans
C.L 90,000
C.L = 3,90,000 – 3,00,000 = 90,000
Working capital = C.A – C.L
1,80,000 = C.A – 90,000
C.A = 1,80,000 + 90,000 = 2,70,000
L.A = C.A -Inventories
= 2,70,000 – 90,000 = 1,80,000
Illustration : -26
Current Liab = 3,00,000
C.R = 3
L.R = 1
Inventories =?
L.R = L.A
C.L
1 = L.A
1 3,00,000
L.A = 3,00,000
L.A = C.A -Inventories
3,00,000 = 9,00,000 – inventories
Inventories = 9,00,000 – 3,00,000 = 6,00,000 Ans
C.A = Current ratio x Current Lib
= 3 x 3,00,000 = 9,00,000
Illustration : - 27.
Current ratio of A Ltd is 4.5:1 . and the liquid ratio is 3:1. If its inventories are RS. 3,00,000.
Find its current Liabilities, Current Assets and Quick assets.
Solu
Lett the current liabilities be X
Current ratio 4.5:1
C.R = C.A
C.L
4.5 =C.A
1 x
C.A = 4.5x
Liquid Ratio = 3:1
L.R = Q.A
C.L
3 = Q.A
1 x
Q.A = 3x
Liquid assets = Current Assets – inventories
3x = 4.5x – 3,00,000
4.5x – 3x = 3,00,000
1,5x = 3,00,000
X= 3,00,000/1.5 = 2,00,000 (Current Lib)
Current Ratio = C.A
C.L
4.5 = C.A
2,00,000
C.A = 2,00,000 x 4.5 = 9,00,000 Ans
Quick Assets = C.A -Inventories
= 9,00,000 – 3,00,000 = 6,00,000 Ans
Solvency Ratio
(a). Debt to equity ratio.
Debt to equity ratio = Debt
Equity
Pure ratio = 2:1
Debts = Long term borrowings + Long term provison
Or
= total Liabilities – Current liabilities
Or
Capital employed – Equity (Share capital)
Note: -Capital employed = Debt + Equity
Or
= Non – current assets + Working Capital
Illus 37
:-
Debts to equity = Debt = 1,00,000 = 1:2 Ans
Equity 2,00,000
Debts = 75,000 + 25,000 = 1,000,00
Equity = 1,00,000 + 70,000 + 30,000 = 2,00,000
Illus 42
Debt to equity = 17,85,000
12,70,000
Proprietary ratio
Proprietary Ratio = proprietary funds or share holder fund
Total Assets
Proprietary ratio (Pure ratio) = .75:1 or 75 % Ans
Illustratio 53.
9,00,000 = .28:1 Ans
31,80,000
Illustration 54
Proprietor ratio = total asset = current assets + non-current assets= 40,00,000 +
40,00,000=80,00,000
Tota assets = total liabilities
Total liabilities = 80,00,000
Total lib – long term borrowings – long term provisions – current lib =
80,00,000 – 25,00,000 -15,00,000- 20,00,000 = 20,00,000 (Owner fund or capital)
Proprietary Ratio = proprietary funds or share holder fund
Total Assets
= 20,00,000
80,00,000 = .25 :1 ans
Interest coverage ratio
Interest coverage ratio = Net profit before interest and tax
Interest on long term debt
D= Division of work
A= Authority and responsibility
D= Discipline
U = Unity of command
C= Centralization and decentralization
U= Unity of Direction
S= Subordinate of individual interest to general interest
S= Stability of tenure
R= Remuneration
O = principle of order
I= Initiative
S= Sclar chain
E= Equity
E= Esprit de Corp
Interest coverage ratio = Net profit before interest and tax
Interest on long term debt
= 4,40,000 = 1:1
2,40,000
NPAT= 1,20,000
Let the NPBT = 100
100 – 40 = 60 NPAT
1,20,000 x 100 = 2,00,000 (NPBT)
60
2,00,000 + 2,40,000 = 4,40,000
Inventory turnover ratio
COGS(cost of revenue from operation)
Average inventory
Cogs = Revenue from operation – gross profit
Or
Revenue from operation from operation + gross loss
Or
= Opening inventory + net purchases + Direct expenses- Closing inventory
Average inventory = opening inventory + closing inventory
2
Illustration : - 62
From the following data calculate inventory turn over ratio: -
Cost of revenue from operations = 3.00,000 (COGS)
Purchases = 3,30,000
Opening Inventory = 60,000.
Solution : -
Inventory turnover ratio
COGS(cost of revenue from operation)
Average inventory
Inventory turn over ratio = 3,00,000
75,000 = 4 Times ans
Average inventory = opening inventory + closing inventory
2
= 60,000 + 90,000/2 = 75,000
Closing inventory = Opening inventory + purchases – cost of revenue
= 60,000 + 3,30,000 – 3,00,000
= 90,000
Illustration : -63
Opening inventory = Rs. 29,000
Purchases = 2,42,000
Revenue from operations; i.e Net sales = 3,20,000
Gross profit = 25% on sales
Calculate inventory turn over ratio.
Solution
Inventory turnover ratio
COGS(cost of revenue from operation) = 2,40,000= 8 Times Ans
Average inventory 30,000
Cogs = Revenue from operation – gross profit
= 3,20,000 – 80,000 = 2,40,000
Closing inventory = Opening inventory + purchases – cost of revenue
= 29,000 + 2,42,000 – 2,40,000 = 31,000
Average inventory = opening inventory + closing inventory
2
= 29,000 + 31,000/2 = 30,000
Illustration : - 65
Average inventory = 60,000
Revenue from operations = 6,00,000
Rate of gross loss on sales; 10%
Calculate inventory turnover ratio.
Solution : -
Inventory turnover ratio
COGS(cost of revenue from operation) = 6,60,000 = 11 Time
Average inventory 60,000
COGS = Revenue from operation from operation + gross loss
= 6,00,000 + 60,000 (6,00,00 x10/100) = 6,60,000
Trade receivable turn over ratio =
Credit revenue from operations i.e net credit sales
Average trade receivable
Credit revenue from operations i.e net credit sales = credit sales – sales return
Or
Revenue from operations – cash revenue from operation
Average trade receivable = Opening debtor + opening B/R+ closing debtor + closing B/R
2
Or
Opening trade receivable +closing trade receivable
2
Debtors + b/r = trade receivable
Illustration 72.
Calculate trade receivable turnover ratio and average collection period
Credit revenue from operations i.e net credit sales for the year = Rs. 6,00,000
Debtors and bills receivable at the end year were Rs. 60,000 and Rs 40,000 respectively
Trade receivable turn over ratio =
Credit revenue from operations i.e net credit sales
Average trade receivable
= 6,00,000
60,000+40,000
= 6,00,000
1,00,000
= 6 Times Ans
average collection period
= No. of months in a year
Trade receivable turn over ratio
= 12/6 = 2 months Ans
Illustration : - 73
Calculate trade receivable turnover ratio from the following: -
Total net sales for 2021-22 = 2,00,000
Net cash sale for 2021-22 = 40,000
Debtors as at 1st April 2021 = 35,000
Debtors as at 31st march 2022 = 55,000
Solution =
Trade receivable turnover ratio =
Credit revenue from operations i.e net credit sales = 1,60,000 = 3.56 Times Ans
Average trade receivable 45,000
= Credit revenue from operations i.e net credit sales
= net total sales – net cash sales
= 2,00,000 – 40,000= 1,60,000
= Average trade receivable = 35,000 + 55,000
2 = 45,000
Trade payable turn over ratio.
= Net credit purchase
Average trade payable
Average trade payable = Opening trade payable + Closing trade payable
2
Or
Opening creditors + Opening bills payable + Closing creditors + Closing bills payable
2
Illustration 79: -
From the following particular taken from the books of TATA press Ltd , Calculate trade
payable turn over ratio and average payable periods (in days)
Total purchases = 8,50,000
Cash purchase = 1,00,000
Purchase return = 50,000
Creditors at the end of the year = 1,60,000
Creditors in the beginning= 1,20,000
Solution : -
Trade payable turn over ratio.
= Net credit purchase
Average trade payable
= 7,00,000 = 5 Times
1,40,000
= Average payable period = Average trade payable x 365 = 1,40,000 x 365 = 73 days Ans
Net credit purchase 7,00,000
Q. 80
Opening sundry creditors = Rs. 80,000
Opening bills payable = Rs. 3,000
Closing sundry creditors = Rs. 1,00,000
Closing bills payable = Rs. 17,000
Purchases = Rs. 14,00,000
Cash Purchase = Rs. 5,00,000
Purchase return = Rs. 1,00,000
Calculate trade payable turn over ratio
Solution : -
Trade payable turn over ratio.
= Net credit purchase
Average trade payable
= 8,00,000
1,00,000
= 8 Times Ans
Opening creditors + Opening bills payable + Closing creditors + Closing bills payable
2
80,000 + 3,000 + 1,00,000 + 17,000
2
= 1,00,000
Working capital turnover ratio
= Revenue from operations
Working capital
Or
= Cost of revenue from operations
Working capital
Working capital = Current assets – current liability
Q. 84
Calculate working capital turn over ratio
Cost of revenue from operations= 3,00,000
Current assets = Rs. 2,00,000
Current Liability = 1,50,000
Solution : -
Working capital turnover ratio
= Revenue from operations
Working capital
= 3,00,000 = 6 Time Ans
50,000
w.c = C.A -C.L
= 2,00,000 – 1,50,000 = 50,000
Q. 85
Working capital = Rs. 2,50,000
Cost of revenue from operations (cost of goods sold) = Rs. 10,00,000
Gross profit on sales= 20%
Calculate working capital ration
Solution : -
Working capital turnover ratio
= Revenue from operations = 12,50,000 = 5 Times Ans
Working capital 2,50,000
=
Calculate of revenue from operations i.e Net sales =
Let the sales be RS = 100
100 x20/100 = rs= 20
Profit = Rs 20
Cost = 100 – 20 = 80
When cost is Rs. 80, then sales = Rs. 100
When cost is RS. = 1, then sales = 100/80 x 10,00,000 = 12,50,000( Revenue from operation)
Particular Note 31-3-21 31-03-22 Abolute % change
no (A) (B) change (d)= C/A
(C)= B-A x 100
I. Equity and Liability
1. Share holder fund
(a). Share capital
(i). Equity share capital 5,00,000 12,50,000 7,50,000 150.00
(ii). Preference share capital 2,50,000 2,50,000 Nil 0.00
(b). Reserve and surplus 4,50,000 3,00,000 (1,50,000) (33.33)
2. Non- Current Liabilities
Long term borrowings
12% Debentures 5,50,000 9,50,000 4,00,000 72.72
Loan from Directors 2,00,000 2,50,000 50,000 25.00
3. Current Liabilities
(a). Short term Borrowings 1,75,000 3,50,000 1,75,000 100.00
(b). Trade payable 1,00,000 2,00,000 1,00,000 100.00
(c). Short term provisions 25,000 50,000 25,000 100.00
Total 22,50,000 36,00,000 13,50,000 60.00
II. Assets
1. Non- current Assets
Property, Plant and equipment
and intangible assets
Property, plant and equipment 15,00,000 22,50,000 7,50,000 50.00
2. Current assets
(a). Inventories 2,50,000 4,50,000 2,00,000 80.00
(b). Trade receivable 4,50,000 8,00,000 3,50,000 77.77
(c). Cash and cash equivalent 50,000 1,00,000 50,000 100.00
Total 22,50,000 36,00,000 13,50,000 60.00
