1,50,000 In view of the requirements of various users, the accounting ratios may be classified as under 2. 40,000 + Rs. Total Debts (Liabilities) Rs. 22,000 = Rs. 4,00,000 × 20 / 100 = Rs. In the absence of opening creditors and bills payable, closing creditors and bills payable can be used in the above formula. (i) Gross profit ratio Gross profit ratio shows the relationship between the net sales gross profit to net sales (revenue from operations) Net Profit Ratio. Liquidity Assets = Current assets − (Inventories + Prepaid expenses + Advance tax) Profitability Ratios – Question 2 : – The following information is given If Revenue from Operations of XYZ Ltd is Rs. *Non-current Asset (Tangible assets + Intangible assets + Non-current trade investments + Long-term loans and advances) + Working Capital – Non-current Liabilities (Long-term borrowings + Long-term provisions) or own an. = Rs. 24,000 = 3.5x − 2x (i) It is useful in analysis of financial statements. Items Included in Current Assets 2. Ratios when calculated on the basis of accounting information are called accounting Ratios. 60,000 − Rs. The concepts should be clear which will help in faster learning. (a) Shareholders’ funds (i.e. 2,40,000 80,000 − (Rs. The questions involved in TS Grewal Solutions are important questions that can be asked in the final exam. Current assets include current investments, inventories, trade receivables (debtors and bills receivables), cash and cash equivalents, short-term loans and advances and other current assets such as prepaid expenses, advance tax and accrued income, etc. The revision notes covers all important formulas and concepts given in the chapter. = Rs. (ii) Net profit ratio Net profit ratio shows the relationship between net profit and revenue from operations i.e. whether business is able to pay its long-term liabilities or not. Can someone clue me in to the formula used to calculate the ratio? = Rs. Cash Revenue from operations = 20% of Rs. Interest on Long-term Debt = 15% of Rs. 80,000 Ratio analysis is the more popularly and widely used technique of financial statement analysis. Formula: Operating expenses include administration, selling and distribution expenses. (iii) Other short-term liabilities. Average Trade Payable = (Opening Creditors and Bills Payable + Closing Creditors and Bills Payable)/2 73,000 + Rs. 450000 Selling Expense is Rs. Trade Payables Turnover ratio = Net Credit purchases / Average trade payable (iii) Trade payables or Creditors turnover ratio It indicates the speed with which the amount is being paid to creditors. Ratio is an arithmetical expression of relationship between two interdependent or related items. » Current Assets [Current investments + Inventories (including spare parts and loose tools) + Trade Receivables + Cash and Cash Equivalents + Short-term Loans and Advances + Other Current Assets] 90,000 = Rs. 5,000) (a) Gross Profit Ratio: Gross profit ratio as a percentage of revenue from operations is computed to have an idea about gross margin. When ratios are calculated on the basis of accounting information, they are called accounting ratios. = 3.5: 1 (iii) Cash and cash equivalents. 16,000 Cost of Revenue from = Purchases + (Opening Inventory − Closing Inventory) + operations Direct Expenses 4,000 − Rs. Operating Profit Ratio : Operating profit ratio measures the relationship between operating profit and revenue from operations i.e., net sales. Operating profit ratio is computed by dividing operating profit by revenue operations (net sales) and is expressed as percentage. It is computed as follows: Gross Profit Ratio = Gross Profit / Net Revenue of Operations × 100. Need assistance? (v) Misleading results in the absence of absolute data. 5,000) = Rs. (ii) Proprietary ratio It establishes the relationship between proprietors’ funds and total assets. = Rs. To analyse the profitability of the business. 1,20,000 + 80,000 + 40,000 = Rs. 80,000 Current Assets = 3.5x = 3.5 × Rs. = Rs. It may be computed directly or as a residual of operating ratio. (b) Trade Receivables Turnover Ratio: It expresses the relationship between credit revenue from operations and trade receivable. If debt component of the total long-term funds employed is small, outsiders feel more secure. 60,000 × 100/(100 − 40) 60000 Operating Cost = Cost of Materials Consumed + Purchases of Stock-in-trade + Change in Inventories of Finished Goods, Work-in-progress and Stock-in-trade + Employees Benefits Expenses + Other Expenses (Other than non-operating expenses) 70,000 2 = Rs. The three common liquidity ratios used are current ratio, quick ratio, and burn rate. 20,000 + Rs. To assess the operating efficiency of the business. Net profit before interest and tax = Net profit before tax + Interest (iv) Helps in identification of problem areas. 1000000 Cost of Revenue from Operations is Rs. it measures how fast the stock is moving through the firm and generating sales. Among the three, current ratio comes in handy to analyze the liquidity and solvency of the start-ups. The first step in calculating national income via income method is to identify and segregate the units of production. These are: Gross Profit Ratio. 60,000/ Rs. It is expressed as Quick ratio = Quick Assets: Current Liabilities or Quick Assets / Current Liabilities. 4. Turnover or Performance or Activity Ratios These ratios measure how efficiently a company is using its assets to generate sales. Total Assets It includes (v) Other current assets except prepaid expenses. Working Capital = Current Assets – Current Liabilities If 70% of what you make is needed to pay _your_ bills, then your operating ratio is 0.7. You will also love the ad-free experience on … = Rs. 10:00 AM to 7:00 PM IST all days. 1,20,000 / 2 = Rs. (i) Stock turnover ratio or Inventory turnover ratio The ratio indicates the number of times the stock is turned in sales during the accounting period, i.e. Cost / revenue (income). Operating Cost = Cost of Revenue from Operations + Selling Expenses + Administrative Expenses (a) Current investments = Rs. The net sales for Blue Trust Inc. are $5,000. 22,000/ 2 = Rs. Classification of Accounting Ratios (v) Return on investment/Capital employed It establishes the relationship between net profit before interest, tax and preference dividend and capital employed (equity + debts). = Rs. (c) Trade Payable Turnover Ratio: Trade payables turnover ratio indicates the pattern of payment of trade payable. or The operating expenses are $3,000. 50,000 / 50,000 = 1 : 1. (c) Proprietary Ratio: Proprietary ratio expresses relationship of proprietor’s (shareholders) funds to net assets and is calculated as follows: Proprietary Ratio = Shareholders, Funds / Capital employed (or net assets), Significance: Higher proportion of shareholders’ funds in financing the assets is a positive feature as it provides security to creditors. Objectives of Ratio Analysis Revenue from Operations – Gross Profit. Carriage inwards = 4,000, Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory 1. (a) Short-term borrowings Education Franchise × Contact Us. The operating ratio for Blue Trust Inc. is 80%. Learning the important concepts is very important for every student to get better marks in examinations. Equity or Shareholders’ Funds = Equity Share Capital + Preference Share Capital+ Reserves and Surplus 16,000 = 2 : 1. Generally, the ratio of 2 : 1 is considered as an ideal. 4. 3,20,000 = Rs. Solution Use the below-given data for calculation of the operating ratio Therefore, the calculation of operating ratio is as follows, =(3000+1000)/5000 1. (ii) Working capital, i.e. Following information is available for the year 2014-15, calculate gross profit ratio: Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Operation Return on Investment (or Capital Employed) = Profit before Interest and Tax / Capital Employed × 100. Current ratio of 2:1 is considered to be ideal. = Rs. The activity ratios express the number of times assets employed. 60,000; 15% Long-term debt 10,00,000; and Tax rate 40%. = 18,00,000 − 2,00,000 = 16,00,000 46,000 + Rs. = Rs.10,000/Rs.1,00,000 × 100 = 10%. Liquidity Ratio = Liquid Assets/Current Liabilities Ratio analysis is a process of determining and presenting the quantities relationship between two accounting figures to calculate the strength and weaknesses of a business. 10,000 1,00,000 − Rs. = Net Credit Revenue Form Operations / Average Inventory Let us take the example of a company named ADG Ltd which is engaged in the business of manufacturing electronic parts for Tier I auto parts supplier. of days/month in a year ÷Trade Payables Turnover Ratio. (c) Operating Profit Ratio: It is calculated to reveal operating margin. 2,50,000 These solutions for Accounting Ratios are extremely popular among Class 12 Commerce students for Accountancy Accounting Ratios Solutions come handy for quickly completing your homework and preparing for exams. Operating profit ratio is an indicator of operational efficiency of the business. 5. Gross Profit Ratio = Gross Profit/Net Revenue from Operations × 100 Current Liabilities: trade payables (Bills Payable + sundry creditors) + expenses payable (vii) Affected by personal bias and ability of the analyst. Bills Payables on 1.4.2014 = 1,00,000 = Rs. 56,000. ∴ Trade Payables Turnover Ratio = Rs. … It means 55% of the sales revenue would be used to cover cost of goods sold and other operating expenses of Good Luck Company Limited. (v) Helpful in comparative analysis. (i) Short-term borrowings. Office expenses, administrative expenses, selling and distribution expenses, employees benefit expenses, depreciation and amortisation expenses. Gross Profit = Revenue from Operations − Cost of Revenue from Operation The operating ratio is determined by comparing the cost of the goods sold and other operating expenses with net sales. or Finance expenses are generally excluded. 20,000 These ratios indicate the speed at which, activities of the business are being performed. Get Accounting Ratios, Accountancy Chapter Notes, Questions & Answers, Video Lessons, Practice Test and more for CBSE Class 10 at TopperLearning. Download CBSE Class 12 Accountancy Accounting Ratios in pdf, Accountancy chapter notes, class notes mind maps formulas Revision Notes CBSE Class 12 Accounting Ratios. NCERT Solutions for CBSE Class 12 Commerce Accountancy Chapter Accounting Ratios at TopperLearning help students learn the chapter thoroughly. In the form of a formula this ratio is expressed as follows: 18,00,000 (iv) Helpful in budgeting and forecasting. CBSE quick revision note for class-12 Chemistry Physics Math’s, Accountancy and other subject are very helpful to revise the whole syllabus during exam days. Return on sales (ROS): operating profit÷ revenue % 3. From the following information, calculate inventory turnover ratio: Inventory in the beginning = 18,000 1,00,000 Current assets = Rs. Here Operating Surplus = Rent + Interest + Profit. Ratio Analysis It is a technique which involves re-grouping of data by application of arithmetical relationship. = Purchases + Decrease in inventory + Direct Expenses = Rs. The cost incurred includes the raw material cost of $200 million, the direct labor cost of $120 million, the manufacturing overhead cost of $50 million, the selling expense of $30 million and the administrative expense of $10 mil… Items Included in Total Assets 2,20,000 / Rs. Quick ratio helps us find the solvency for six months and the reason why inventory is subtracted is that inventory usually take more than six month to convert into liquid asset. Prepaid expenses = Rs. Total Assets Total assets include The higher the ratio, the better it is. (b) Long-term provisions Where, 2,00,000. Significance: It reveals the number of times interest on long-term debts is covered by the profits available for interest. From the following details, calculate interest coverage ratio: Net Profit after tax Rs. 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