What traumatic event does Zitkala-Sa describe at the school?

The forcible cutting of her long hair

Why was the cutting of her hair so humiliating to Zitkala-Sa?

Among her people, shingled hair was worn by cowards and mourners

Name the four broad categories of ratios.

Liquidity ratios, solvency ratios, activity (turnover) ratios and profitability ratios.

How is the current ratio calculated?

\(\text{Current Ratio}=\dfrac{\text{Current Assets}}{\text{Current Liabilities}}\), normally considered satisfactory at 2:1.

How is the quick ratio calculated?

\(\text{Quick Ratio}=\dfrac{\text{Quick Assets}}{\text{Current Liabilities}}\), where quick assets are current assets less inventories and prepaid expenses; an ideal level is 1:1.

How is the debt-equity ratio calculated?

\(\text{Debt-Equity Ratio}=\dfrac{\text{Long-term Debts}}{\text{Shareholders Funds}}\), used to assess long-term solvency.

How is the inventory turnover ratio calculated?

\(\text{Inventory Turnover Ratio}=\dfrac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}\), where average inventory is the mean of opening and closing inventory.

What does the gross profit ratio measure?

It expresses gross profit as a percentage of revenue from operations, indicating the profitability of trading operations.

What is the operating ratio?

It is the ratio of operating cost (cost of revenue from operations plus operating expenses) to revenue from operations, expressed as a percentage.

Which ratios measure long-term solvency?

Debt-equity ratio, total assets to debt ratio, proprietary ratio and interest coverage ratio.

State two limitations of ratio analysis.

Ratios ignore price-level changes and qualitative factors, and are only as reliable as the financial statements on which they are based.

Accounting Ratios

Q: What is an accounting ratio?

It is a mathematical relationship between two accounting figures, expressed as a fraction, proportion, percentage or number of times.

Class 12 Accountancy · Accountancy Part II · Chapter 5

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CBSE Class 12 · Accountancy

All 18 ratios, with the book's answers

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Summary

An accounting ratio is a mathematical relationship between two accounting figures drawn from the financial statements, expressed as a fraction, proportion, percentage or number of times. Ratio analysis is a major tool of financial statement analysis used to assess the solvency, liquidity, efficiency and profitability of an enterprise and to make intra-firm and inter-firm comparisons. Ratios are commonly classified into liquidity ratios, solvency ratios, activity or turnover ratios and profitability ratios. Liquidity ratios test short-term financial position: the current ratio relates current assets to current liabilities (\(\text{Current Ratio}=\dfrac{\text{Current Assets}}{\text{Current Liabilities}}\)) and the quick ratio relates quick assets to current liabilities (\(\text{Quick Ratio}=\dfrac{\text{Quick Assets}}{\text{Current Liabilities}}\)). Solvency ratios test long-term financial position, the chief example being the debt-equity ratio (\(\text{Debt-Equity Ratio}=\dfrac{\text{Long-term Debts}}{\text{Shareholders Funds}}\)). Activity ratios measure how efficiently resources are used, such as the inventory turnover ratio (\(\text{Inventory Turnover Ratio}=\dfrac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}\)) and the trade-receivables turnover ratio. Profitability ratios measure earning capacity, including the gross profit ratio, operating ratio, net profit ratio and return on investment. The chapter explains the meaning, objectives and limitations of ratio analysis and shows how each ratio is computed and interpreted.

Meaning and objectives of accounting ratiosLiquidity ratios: current and quickSolvency ratios: debt-equity and othersActivity ratios: turnover ratiosProfitability ratios and limitations

Key terms

Accounting Ratio

A mathematical relationship between two accounting figures expressed as a fraction, proportion, percentage or number of times.

Current Ratio

The ratio of current assets to current liabilities, used to assess short-term solvency.

Quick Ratio

The ratio of quick assets (current assets less inventory and prepaid items) to current liabilities, also called the acid-test ratio.

Debt-Equity Ratio

The ratio of long-term debts to shareholders' funds, used to assess long-term solvency.

Inventory Turnover Ratio

The number of times inventory is converted into revenue, equal to cost of revenue from operations divided by average inventory.

Gross Profit Ratio

The ratio of gross profit to revenue from operations, expressed as a percentage to measure profitability.

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An accounting ratio is:

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Accounting Ratios

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Key terms

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Practice quiz · Accounting Ratios

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