Management accounting (Ratios) PPT.pptx

This ppt is regarding Ratios in Management Accounting

1. Course – B.Com Semester – 3 rd Subject- Indian Economy Faculty Name- Ms. Sarabjit Kaur

2. Recap of Previous Lecture Financial statement Analysis Methods of financial statement analysis Comparative statements Common size statements

3. Ratio Analysis Objectives of Ratio analysis Importance of Ratio analysis Limitations of Ratio analysis Types of Ratios Numerical Questions

4. CO2: Examine the students with tools and techniques of decision making Objective of the topic : Student will be able to learn about ratio analysis as tools of decision making and control in business.

5. Ratio Analysis A ratio is a mathematical number calculated as a reference to relationship of two or more numbers and can be expressed as a fraction, proportion, percentage and a number of times. When the number is calculated by referring to two accounting numbers derived from the financial statements, it is termed as accounting ratio.

6. Objectives of Ratio Analysis: It provides users with crucial financial information and points out the areas which require investigation. Ratio analysis is a technique which involves regrouping of data by application of arithmetical relationships , though its interpretation is a complex matter.

7. Objectives of Ratio Analysis To know the areas of the business which need more attention; To know about the potential areas which can be improved with the effort in the desired direction; To provide a deeper analysis of the profitability, liquidity, solvency and efficiency levels in the business; To provide information for making cross-sectional analysis by comparing the performance with the best industry standards; and To provide information derived from financial statements useful for making projections and estimates for the future.

8. Importance (or Advantages) of Ratio Analysis : Helps to understand efficacy of decisions : The ratio analysis helps you to understand whether the business firm has taken the right kind of operating, investing and financing decisions. It indicates how far they have helped in improving the performance. Simplify complex figures and establish relationships : Ratios help in simplifying the complex accounting figures and bring out their relationships. They help summarise the financial information effectively and assess the managerial efficiency, firm’s credit worthiness, earning capacity, etc.

9. Importance (or Advantages) of Ratio Analysis : Helpful in comparative analysis : The ratios are not be calculated for one year only. When many year figures are kept side by side, they help a great deal in exploring the trends visible in the business. The knowledge of trend helps in making projections about the business which is a very useful feature . Identification of problem areas : Ratios help business in identifying the problem areas as well as the bright areas of the business. Problem areas would need more attention and bright areas will need polishing to have still better results.

10. Importance (or Advantages) of Ratio Analysis : Enables SWOT analysis : Ratios help a great deal in explaining the changes occurring in the business. The information of change helps the management a great deal in understanding the current threats and opportunities and allows business to do its own SWOT (Strength-Weakness-Opportunity-Threat) analysis. Various comparisons : Ratios help comparisons with certain bench marks to assess as to whether firm’s performance is better or otherwise. For this purpose, the profitability, liquidity, solvency, etc. of a business, may be compared: ( i ) over a number of accounting periods with itself (Intra-firm Comparison/Time Series Analysis), (ii) with other business enterprises (Inter-firm Comparison/ Crosssectional Analysis) and (iii) with standards set for that firm/industry (comparison with standard (or industry expectations).

11. Limitations of Ratio Analysis: Limitations of Accounting Data Ignores Price-level Changes Ignore Qualitative Aspects Variations in Accounting Practices Forecasting Lack of ability to resolve problems

12. Types of Ratios Balance Sheet Ratios: 1 . Current Ratio = Current Assets/ Current Liabilities 2. Quick/ Acid test ratio= Liquid Assets/ Current Liabilities Liquid Assets= Current Assets- stock – Prepaid Expenses 3. Stock turnover Ratio= Cost of goods sold/ average stock COGS= opening stock+ purchases + Direct expenses- Closing stock Average stock= opening stock+ closing stock/2

13. Types of Ratios 4. Debtor Turnover Ratios: Net credit sales / Average Debtors Net credit sales= Total sales- Cash sales- sales Return 5. Credit Turnover Ratio= Net credit purchase/ Average creditors Net credit purchases= total purchases- Cash purchases- Purchase return 6. Working Capital turnover ratio= cost of sales/Net working capital 7. Debt Equity Ratio= Debt/Equity 8. Funded Debt to capitalization Ratio= Funded debt/ total capitalization*100

14. Types of Ratios 9. Proprietary Ratios: Shareholders funds/ total assets 9. Solvency Ratios: total Liabilities to outsiders/ Total Assets 10. Gross profit Ratio: Gross profit / Net sales *100 11. Operating Ratio: Operating Cost/Net sales*100 12. Net Profit Ratio: Net profit/ Net sales *100

15. Numerical Questions Calculate current Ratios Stock 60000, creditors 20000, Bills Payable 15000, cash and cash equivalents 20,000; other current assets 10000; Land and Building 100000; Goodwill 50,000; Sundry Debtors 70,000; Bills receivable 30,000; Outstanding Expenses 25,000; Bank overdraft 25,000; Debentures 75,000; short term provisions 18,000 2. Current Ratio 2.5, working capital = 90,000; find out : current assets and current liabilities

16. Numerical Questions 3. Current ratio 2.5; liquid test ratio 1.5:1; current liabilities 50,000 find out current assets, liquid assets and stock 4.Current Ratio 2.8, liquid ratio 1.5 ; working capital 162000 find out current assets, current liabilities and liquid assets 5. Cost of good sold 5,00,000. the opening stock is 40,000 and the closing stock is 60,000. find out stock turnover ratio 6. Rakesh and company supplies credit sales 1,50,000; Cash sales 2,50,000; Returns inward 25,000; opening stock 25,000; Closing stock 35,000

17. Numerical Questions 7. Stock turnover ratios =5 Times, average stock 75000; find out cost of goods sold 8. Credit sales 25,000; sales return 1000; Debtors 3000; Bills receivables :1000 find out Debtors turnover ratios

18. Numerical Questions 9. Following are the ratios relating to trading activities of super star enterprise:  Debtor velocity 3 months  Stock at the end of the year is 20,000 more than it was in the beginning  Stock velocity 6 months  Creditors’ velocity 2 months  Gross profit 25%  Gross profit for the year 5 lakh  Bills receivable Rs . 30,000  Bills payable Rs . 20,000  From the above information compute (a) Sales (b) Sundry debtors (c) Stock (d) Sundry creditors.

19. Numerical Questions 10 The following information is given about S.P ltd. For the year ending march 31, 2022. 1. inventory turnover ratio 6 times 2. gross profit ratio 20% on sales 3. sales for the year ended 31-3-2022 3,00,000 4. closing inventory is Rs . 10000 more than the opening inventory 20000 5.opening trade payables 20000 6.closing trade payables 30000 7. trade receivable at the end 60000 8. net working capital 50000

20. Numerical Questions Calculate  (a) average inventory                (b) purchases          (c) opening inventory (d)payable turnover ratio           (e) average payment period (f) average collection period     (g) working capital turnover ratio

21. Conclusions In summary, the conclusions of ratio analysis provide a comprehensive overview of a company's financial performance and help stakeholders make informed decisions about investing, lending, or managing the company. However, it is important to consider the broader context and not rely solely on ratio analysis, as ratios may be influenced by accounting practices, economic conditions, and other external factors.

22. References M anagement accounting. Pearson Education International. Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young. (2006). Management Accounting. Dorling Kindersley(India) Pvt. Ltd. Garrison H., Ray and Eric W. Noreen. (2016). Managerial Accounting. McGraw Hill.