Accounting Ratios
Class 12 Accountancy · Accountancy Part II · Chapter 5
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Accountancy, Business Studies, Economics + English
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Accountancy
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Physics, Chemistry, Biology + English
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Accountancy
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Accountancy
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Accountancy
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Physics
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History
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Hindi Elective
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Mathematics
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Sociology
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Economics
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Home Science
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Urdu Elective
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Geography
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Political Science
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Chemistry
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Business Studies
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Hindi Core
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Mathematics
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हिंदी (आधार)
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اردو (اختیاری)
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Mathematics
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हिंदी (आधार)
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संस्कृतम् (केन्द्रिकम्)
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Physics
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हिंदी (ऐच्छिक)
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संस्कृत (ऐच्छिक)
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Physics
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हिंदी (ऐच्छिक)
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اردو (کور)
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Chemistry
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Urdu Elective
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Computer Science
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Chemistry
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Fine Art · Painting
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हिंदुस्तानी संगीत (गायन / वादन)
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Biology
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Informatics Practices
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Biotechnology
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सृजनात्मक लेखन और अनुवाद
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Business Studies
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हिंदुस्तानी संगीत (तबला / पखावज)
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- Charts from the book's own data
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Business Studies
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Economics
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Economics
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History
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History
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- Charts from the book's own data
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History
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- Charts from the book's own data
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Geography
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- Charts from the book's own data
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Geography
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- Charts from the book's own data
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Geography
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English Elective · Kaleidoscope
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Political Science
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Political Science
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Sociology
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Sociology
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Psychology
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English Core · Flamingo
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English Core · Vistas
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Home Science
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Home Science
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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.
Extra questions & answers
Try one from this chapter
An accounting ratio is: