ACCOUNTING RATIO: MEANING, CLASSIFICATION AND IT'S FORMULAE:-
MEANING OF RATIO: Relationship between two or more figures expressed in arithmetical terms, is called a ratio. It can be expressed in the form of fraction, percentage, times, etc.
MEANING OF ACCOUNTING RATIO/ RATIO ANALYSIS:- Ratio Analysis is the study of relationship between the items of financial statement such as item of Statement of P&L and Balance Sheet.
CLASSIFICATION OF RATIOS:-
1- LIQUIDITY RATIO: (It shows short term financial position).
i. Current Ratio/Working Capital Ratio=
Current Assets.
Current Liabilities
ii. Quick Ratio = Quick Assets.
Current Liabilities
Where,
Quick Assets = Current Asset—Inventory—Prepaid Expenses—Advance Tax.
2- SOLVENCY RATIO: (It shows long term financial position).
i. Debt Equity Ratio =
Long term Debt.
Shareholder's Fund
Where,
•Long term Debt = Long term Borrowings+Long term Provisions.
•Shareholder's Fund = Share Capital +Reserves & Surplus.
ii. Total Assets to Debt Ratio =
Total Assets.
Long term Debt
iii. Proprietory Ratio =
Shareholder's Fund.
Total Assets
iv. Interest Coverage Ratio =
Profit before Interest&Tax.
Fixed Interest
3- TURNOVER RATIO/ACTIVITY RATIO/PERFORMANCE RATIO:-
i. Inventory Turnover Ratio =
Cost of Revenue from Operation. Average Inventory
Where,
•Cost of Revenue= Opening Inventory+Net Purchase+Direct Expense—Closing Inventory.
OR
•Cost Of Revenue= Revenue From Operation—Gross Profit/(+Gross loss).
•Average Inventory=
Opening Inventory + Closing Inventory.
2
ii. Trade Receivable Turnover Ratio=
Credit Revenue From Operation. Average Trade Receivable
Where,
•Average Trade Receivable =
Op.Trade Receivable+Cl.TradeReceivable 2
•Average Collection Period =
365.
Trade Receivable Turnover Ratio
NOTE: By calculating Trade Receivable Turnover Ratio, provision for Doubtful Debts doesn't deduct from Debtors or Trade Receivable.
iii. Trade Payable Turnover Ratio=
Net Credit Purchase. Average Trade Payable
Where,
•Average Trade Payable =
Opening Trade Payable+Closing Trade Payable 2
•Average Payment Period =
365.
Trade Payable Turnover Ratio
iv. Working Capital Turnover Ratio=
Revenue from operation.
Working Capital
Where,
•Working Capital = Current Asset—Current Liabilities.
4- PROFITABILITY RATIO:–
i. Gross Profit Ratio =
Gross Profit. ×100
Revenue From Operation
ii. Net Profit Ratio =
Net Profit ×100
Revenue From Operation
Where,
•Net Profit= Gross Profit+Operating Income+Non–Operating Income—Operating Expenses—Non-operating Expenses.
iii. Operating Ratio =
[Cost of Revenue+Operating Expenses]×100
Revenue From Operation
Where,
Operating Expenses= Selling and Distribution Expenses, Office and Administrative Expenses, Depreciation, Bad-Debts.
iv. Operating Profit Ratio =
Operating Profit × 100.
Revenue From Operation
Where,
•Operating Profit = Gross Profit+Operating Income—Operating Expenses.
OR
•Operating Profit = Net Profit+Non-Operating expenses—Non-operating Income.
•Operating Profit = Revenue From Operation—Operating Cost.
Where,
•Operating Cost= Cost of Revenue +Operating Expenses.
Where,
Operating Profit Ratio = 100—Operating Ratio.
•Operating Incomes = Discount received, Commission received.
•Non-Operating Expenses = Loss on Sale of fixed Assets, Loss by fire, etc..
•Non-Operating Income = Profit on sale of fixed Assets, Interest received on Investment, Dividend received, etc.
v. Return on Investment =
Profit before Interest, Tax& Dividend×100
Capital Employed
Where,
By Liability Approach:
Capital Employed= Share Capital + Reserves & Surplus + long term Debts
By Assets Approach:
Capital Employed = Fixed Assets+Non-Current Investment+Long term loans and advances+Working Capital.
0 Comments