Contents
CBSE Quick Revision Notes and Chapter Summary
Class-12 Accountancy
Part - B - Accounting Ratios
Introduction
The main purpose of Financial Statements is to provide the accounting information to its users. Financial Statements are used for analysis, comparison and interpretation purpose. Accounting ratios are used to analyse the financial statements for assessing the profitability, solvency, efficiency and liquidity of the business. Accounting ratios are an important tool of financial statements analysis. Accounting ratios help in presenting the data in summarized form and in an effective manner.
Classification or types of ratios
Ratios are classified into 4 categories
Liquidity Ratios also called as short term solvency ratios.
Solvency Ratios
Activity ratios also known as Turnover ratios or Performance ratios
Profitability ratios
Liquidity Ratios
Current Ratio = Current Assets
Current Liabilities
Current Assets = Current Investments + Inventories (Excluding Spare Parts and Loose Tools) + Trade Receivables + Cash and Cash Equivalents + Short Term Loans and Advances + Other Current Assets
Current Liabilities = Short-Term Borrowings + Trade Payables + Other Current Liabilities + Short-term Provisions
Liquid Ratio = Liquid Assets
Current Liabilities
Liquid Asset = Current Assets - Inventories - Prepaid expenses.
Current Liabilities = Short-Term Borrowings + Trade Payables + Other Current Liabilities + Short-term Provisions
Solvency Ratios
Debt Equity Ratio = Debt
Equity
Debt =Long Term Borrowings + Long Term Provisions
Equity / Shareholder’s Funds = Share Capital + Reserves and Surplus
OR
Non-Current Assets (Tangible Assets + Intangible Assets + Non-Current Trade Investments + Long-Term Loans & Advances) + Working Capital - Non-Current Liabilities (Long-Term Borrowings + Long-Term Provisions)
Where Working Capital = Current Assets - Current Liabilities
Total Assets to Debt Ratio = Total Assets
Debt
Total Assets = Non-Current Assets (Tangible Assets + Intangible Assets + Non-Current Investments + Long-Term Loans & Advances)
+
Current Assets (Current Investments + Inventories including Spare Parts & Lose Tools + Trade Receivables + Cash & Cash Equivalent + Short-Term Loans & Advances + Other Current Assets).
Debt =Long Term Borrowings + Long Term Provisions
Proprietary Ratio = Proprietors Funds
Total Assets
Proprietors Funds = Share Capital + Reserves and Surplus
OR
Non-Current Assets (Tangible Assets + Intangible Assets + Non-Current Trade Investments + Long-Term Loans & Advances) + Working Capital - Non-Current Liabilities (Long-Term Borrowings + Long-Term Provisions)
Total Assets = Non-Current Assets (Tangible Assets + Intangible Assets + Non-Current Investments + Long-Term Loans & Advances)
+
Current Assets (Current Investments + Inventories excluding Spare Parts & Lose Tools + Trade Receivables + Cash & Cash Equivalent + Short-Term Loans & Advances + Other Current Assets).
Interest Coverage Ratio = Profit before interest and tax
Interest on Long term debt
Significance/Objectives/Importance
This ratio indicates that a firm can pay interest due on long term debts or not.
Higher ratio indicates that firm can pay interest on long term debts without any hurdle.
Low ratio indicates that firm may face problem in paying the interest due on long term debts.
Activity Turnover Ratio
Inventory Turnover Ratio = Cost of Revenue from operations
Average Inventory
Cost of Revenue from Operation = Revenue from Operation - Gross Profit
OR
Opening Inventory + Net Purchases + Direct Expenses (Assume to be given) - Closing Inventories
OR
Cost of materials consumed + purchase of stock-in-trade + change in Inventory (Finished Goods; Work in Progress & Stock-in-trade) + Direct Expenses (Assume to be given)
Average Inventory = Opening Inventory + Closing Inventory
2
T rade Receivable T urnover Ratio = Credit Sales (Net)
Average Trade Receivable
Net Credit Sales = Total Sales - Cash Sales OR
Credit Revenue from Operation =
Revenue from Operation - Cash Revenue from Operation
Average Trade Receivables = Opening Trade Receivable + Closing trade Receivable
2
Trade Receivable = Debtors + Bills Receivables
T rade payable T urnover Ratio = Net Credit Purchase
Average Trade Payable
Net Credit Purchase = Total Purchases - Cash Purchases
Average Trade Payables = Opening Trade Payables + Closing trade Payables
2
Trade Payables = Creditors + Bills Payable
Working Capital Turnover Ratio = Revenue from Operations
Working Capital
Working Capital = Current Assets - Current Liabilities
Current Asset = Current Investments + Inventories (Excluding Spare Parts and Loose Tools) + trade Receivables + Cash and Cash Equivalents + Short Term Loans and Advances + Other Current Assets
Current Liabilities = Short-Term Borrowings + Trade Payables + Other Current Liabilities + Shortterm Provisions
Profitability Ratios
Gross Profit Ratio = Gross profit x 100
Revenue from Operations
Gross Profit = Revenue from Operation - Cost of Revenue from Operations
Cost of Revenue from Operation = Opening Inventory (excluding Spare Parts and Loose Tools) + Net Purchases + Direct Expenses - Closing Inventory (excluding Spare Parts and Loose Tools)
OR
Revenue from Operation - Gross Profit
Operating Ratio = Cost of Revenue from operation + Operating cost x 100
Revenue from operations
Cost of Revenue from Operation = Opening Inventory (excluding Spare Parts and Loose Tools) + Net Purchases + Direct Expenses - Closing Inventory (excluding Spare Parts and Loose Tools)
OR
Revenue from Operation - Gross Profit
Operating Expenses = Office, Administrative, Selling and Distribution Expenses, Employees Benefit expenses, Depreciation & Amortisation
Operating Profit Ratio = Operating Profit x 100
Revenue from operations
Operating Profit = Net Profit (After Tax) + Non Operating Expenses / Losses - Non Operating Incomes
OR
Gross Profit + Operating Income - Operating Expenses
Non Operating Expenses = Interest on Long Term Borrowing + Loss on sale of Fixed or Non Current Assets
Non Operating Income = Interest received on investments + Profit of sale of Fixed Assets or NonCurrent Assets
(4) Net Profit Ratio = Net Profit x 100
Revenue from operations
Net Profit before Interest & Tax = Gross Profit + Other Incomes - Indirect Expenses
Return on Investment (ROI) = N /P before interest, tax & dividend x 100
Capital Employed
Return on Capital Employed
Net Profit before Interest,
Tax and Dividend = Gross Profit + other Income - Indirect Expenses Formula of Capital Employed
Liabilities side approach | Assets Side Approach |
Shareholder’s Fund ( Share Capital + Reserves & surpluses) + Non-Current liabilities ( Long term-borrowing + long term Provisions, | Non-Current Assets (Tangible Assets + Intangible Assets + Non-Current investment + Long-term Loans & Advances) + Working Capital Working Capital = Current Assets - Current Liabilities (It is Assumed that all Non-Current Investments are Trade Investments only) (Interest on Non-Trade Investments should be Deducted from Profit before Interest, Tax and Dividend. Therefore it can not be a part of Non-Current Investments). |
Ratio Analysis : A tool used by individuals to conduct a quantitative analysis of infomation in a company's financial statements.
Expression of ratios : Ratios are expressed in :
Pure form like 2:1 al current ratios are expressed in pure form.
Percentage e.g. 15% al profitability ratios are presented in percentage form
Times like 4 times al turnonver ratios are presented in no. of times
Fraction like 3/4 or .75 al solvency ratios are presented in fractions except Interest Coverage Ratio which is presented in Number of times.