GSEB Class 12 Accounts Important Questions Part 2 Chapter 5 Accounting Ratios and Analysis

income statement

Use the to Earnings Ratio Calculator above to calculate the price to earnings ratio from your financial statements. Use the Debt Servicing Ratio Calculator above to calculate the debt servicing ratio from your financial statements. Use the Debt to Tangible Net Worth Calculator above to calculate the debt to tangible net worth from your financial statements. Use the Fixed Asset Turnover Calculator to calculate the fixed asset turnover from your financial statements. Use the Inventory Turnover Calculator to calculate the inventory turnover from your financial statements. Use the Accounts Receivable Turnover Calculator to calculate the accounts receivable turnover from your financial statements.

  • The evaluation is done by utilising financial information from a certain point in time.
  • This ratio provides a basic understanding of residual value of a company should it go bankrupt.
  • Use the Current Ratio Calculator above to calculate the current ratio from your financial statements.
  • The financial statements determine the correctness and efficiency of accounting ratios as a financial statement analysis tool.

The data utilised in the analysis is based on the company’s own published prior results. As a result, ratio analysis indicators are not always indicative of future firm performance. Certain ratios reflect a company’s level of efficiency in managing its assets and other resources. To avoid excessive expenditures, it is critical that assets and financial resources be allocated and used wisely. Turnover and efficiency ratios will highlight any asset mismanagement.

It is the analyst’s responsibility to keep up with changes in accounting policies. The notes to the financial statements section usually contain the changes made. They can tell if a company’s assets are being strained or if the company is over-leveraged. To avoid liquidation in the future, management will need to immediately correct the situation. Debt-Equity Ratios, Leverage Ratios, and other similar ratios are examples.


The balance sheet shows the value of a company’s accounts at a given point in time. The income statement shows the financial effects of activities over a given period of time. Shareholder’s funds include equity share capital plus all reserves and surpluses items.


That’s why inventory turnover ratio is more important in case of grocery store than an insurance company. For a company, gross profit and credit sales are ₹ 1,20,000 and ₹ 4,80,000 respectively. The information given by the corporation in its financial accounts is the basis for ratio analysis. This data could be modified by the company’s management to show a greater performance than it actually has. As a result, ratio analysis may not adequately reflect the underlying nature of the firm, because information misrepresentation is not detectable by basic analysis.

As such, may not reflect the financial position of the company during other periods of the year. Hence, it is always better for the analyst to do the in-depth analysis of the company’s performance rather to only rely on ratios. Use the Profit Margin Calculator above to calculate the profit margin and Du Pont ratios from your financial statements. Financial Statements are prepared by companies to demonstrate its financial activity to stakeholders. These are prepared at regular intervals, and typically contain at least a balance sheet and an income statement.

Dividend Payout Ratio It indicates the percentage of equity share earnings distributed as dividends to equity shareholders. ¾Financial statements refers to two basic statementsstatements whichwhich anan accountantaccountant preparesprepares atat thethe end of an accounting period for a business enterprise. Generally higher stock ratio can be the result of deficit of working capital and lower stock – ratio can be the result of unnecessary investment in working capital. Current assets means which is in the cash form or cash equivalent or which can be converted into cash within 12 months or which can be converted into cash equivalent. Operating ratio disclose the relation between operating cost and sales. Just upload your form 16, claim your deductions and get your acknowledgment number online.

Liquidity Ratios

It is critical for an analyst to be aware of these potential manipulations and to conduct thorough due diligence before drawing any conclusions. If the company’s accounting standards and practices have changed, this could have a significant impact on financial reporting. The key financial indicators used in ratio analysis are changed in this scenario, and the financial outcomes reported after the change are not comparable to those recorded before the change.


composite ratios show Structure Ratios are also known as gearing ratios or solvency ratios or leverage ratios. These are used to analyse the long‐term solvency of any particular business concern. There are two aspects of long‐term solvency of a firm ability to repay the principal amount when due and regular payment ofof interestinterest. On the basis of stock turnover, we can know that during the year, how many times average stock is converted into cost of goods sold and finally into sales of a business unit. Complex accounting statements and financial data are reduced to simple ratios of operating efficiency, financial efficiency, solvency, long-term positions, and so on. To acquire a better picture of the organisation’s financial health and fiscal situation, the ratios must be compared to industry standards.

CAG Ratios

The second one is considered the more refine form of measuring the liquidity of the firm. The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity. 2,50,000, financial cost ₹ 1,50,000 and sales ₹ 30,00,000 then find out operating profit ratio. Accounting ratio is the comparison of two or more financial data which are used for analyzing the financial statements of companies. It is an effective tool used by the shareholders, creditors and all kinds of stakeholders to understand the profitability, strength and financial status of companies.

Pretax Income is a made up of two sources, income from assets funded by shareholders equity, and assets funded by borrowed debt. Leverage of Assets measures the ratio between assets and owner’s equity of a company. The Debt Ratio indicates what proportion of debt a company has relative to its assets.

  • Use the Du Pont Analysis Calculator above to calculate the Du Pont Ratios from your financial statements.
  • Operating Margin shows the profitability of the ongoing operations of the company, before financing expenses and taxes.
  • If the company’s accounting standards and practices have changed, this could have a significant impact on financial reporting.
  • Use the Working Capital Turnover Calculator above to calculate the working capital turnover from you financial statements.

It is possible to analyze the efficiency with which a company’s assets generate pretax income, and allocate this income in proportion to the capital structure. We can then determine the amount that each set of assets contributes to net income. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. Analysts can use activity ratios to assess a company’s inventory management, which is critical to its operational flexibility and overall financial health. An activity ratio is a financial indicator that investors and research analysts use to determine how well a firm uses its assets to create revenue and cash. Activity ratio determines the efficiency by which a company is utilizing its assets to generate revenue and cash or bank balance.

GSEB Class 12 Accounts Important Questions Part 2 Chapter 5 Accounting Ratios and Analysis

Here the long term obligation means payments of principal amount on the due date and payments of interests on the regular basis. For measuring the long term solvency of any business we calculate the following ratios. Accounting ratios are very helpful in analyzing any company’s performance but on the flip side, these ratios calculated using balance sheet on a specific date.

Inventory Turnover Period in Days measures how many days it takes for a company to turnover its entire inventory. Inventory Turnover measures how many times a company’s inventory will be sold and replaced in a year. Note Acid test ratio, quick ratio and liquid ratio are one and the same. From the above formula, it is clear that this ratio reveals the average length of time for which the inventory is held by the firm. Ratio analysis is a very powerful and most commonly used tool of analysis and interpretation of financial statements.

Answer The ratio analysis is the most powerful tool of financial statement analysis. A ratio is a statistical yardstick by means of which relationship between two or various figures can be compared or measured. The higher debtors turnover ratio shows higher collection efficiency and lower investment in debtors and bills receivables. From the current assets the stock and expenses paid in advance are deducted, the balancing figure is liquid assets. The increasing trend of net profit ratio suggest the increase in net/total profitability of a business unit. Leverage ratio measures the utilization of borrowed money by the business.

Asset Turnover measures a firm’s efficiency at using its assets to generate sales revenue, the higher the better. Use the Price to Book Ratio Calculator to calculate the price to book ratio from your financial statements. The Debt to Tangible Net Worth Ratio is a measure of a company’s financial leverage to the tangible asset value of owner’s equity. It indicates what proportion of equity and debt the company is using to finance its tangible assets.

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Days Receivables indicates the average number of days that receivables are outstanding. High numbers indicate long collection periods, low numbers indicate efficient collection of receivables. Earnings Per Share is the portion of a company’s profit allocated to each outstanding share of common stock. The Return on Invested Capital measure gives a sense of how well a company is using its money to generate returns. Comparing a company’s return on capital with its cost of capital reveals whether invested capital was used effectively.

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