RATIO ANALYSIS, Expression of Ratio, percentage, time, fraction, classification of Ratio

RATIO ANALYSIS, Expression of Ratio, percentage, time, fraction, classification of Ratio

1. Dr.V.SAKTHIDEVI
Assistant Professor,
Department of Commerce (SF),
V.V.Vanniaperumal College for Women,
Virudhunagar

2. The relationship between two figures
expressed mathematically is called a ‘Ratio’. It
is a numerical relationship between two which
are related in some manner.

3. An analysis of financial statements with the help of
ratio is termed as ratio analysis.

4. Accounting ratios may be expressed in the following ways:
1.Proportion
Inthiscasetherelationshipbetweentwofiguresis
expressedincommondenominator.
E.g.CurrentAsset1,50,000;Currentliabilities50,000
Sotheratiobetweencurrentassetandcurrentliabilities
willbe3:1

5. Aratioexpressedinpercentage.Inthiscase,one
numberisdividedbyanotheranditismultipliedby100.
E.g.SalesfortheyearRs.4,00,000andnetprofits
Rs.80,000.thenpercentageofNetprofittosaleswillbe
20%.

6. In this case, a ratio is expressed in a number of times a
particular figure is compared to another figure.
E.g. Sales for the year 4,00,000 and Fixed Asset are
Rs.1,00,000 it indicates the sales are 4 times of Fixed
Assets.

7. In this form, the ratio expressed in fraction.
E.g.
Share capital Rs.3,00,000 Fixed Asset Rs.2,40,000
The ratio of fixed Asset to share capital
2,40,000/3,00,000 = 4/5

8. I.Classification according to statement
II.Classification according to function

9. Profitandlossaccountratios–Ratioscalculatedon
thebasisoftheitemsoftheprofitandlossaccount
only.E.g.grossprofitratio,netprofitratioetc

10. Gross profit ratio
This ratio express the relationship between gross
profit and net sales
= Gross profit / Net sales * 100

11. Net profit ratio
This ratio measures the relationship between net
profit and net sales
= Netprofit/ Net sales * 100
Net sales = Sales –Sales returns

12. Ratiosarecalculatedonthebasisofthefiguresof
thebalancesheetonly.E.g.currentratio,quick
ratio,

13. Current ratio
Currentratioistherelationshipbetween
currentassetandcurrentliabilities.ideal
Currentratiois2:1
Currentasset/Currentliabilities*100

14. Current asset includes
Cash, stock, Debtors, Bills receivable, prepaid
expenses , Account receivable etc.,
Current liabilities includes
Creditors, Bills payable, Bank O/D, Outstanding
expenses , Account payable etc.

15. Quick Ratio
Quick ratio is also called Acid-test ratio. It is
the relationship between quick assets and quick
liabilities.
ideal quick ratio is 1:1

16. Quick ratio
= Quick assets / Quick liabilities * 100
Quick assets = Current assets –(Stock +Prepaid
expenses)
Quick liabilities = Current liabilities –Bank O/D

17. Turnover ratio (or) Activity ratio
It indicate the relationship between sales and
various assets of the firm.

18. Stock Turn over ratio
=Costofgoodssold/Averagestock
Costofgoodssold=openingstock+purchase–
Closingstock
=Sales–Grossprofit
Averagestock=Openingstock+Closingstock/2

19. 1)Calculate profitability ratio
Rs Rs.
Sales 2,00,000 Administrationexpenses 20,000
Gross profit 70,000Incomefrom investments 22,000
Selling expenses
10,000
Loss due to fire 12,000

20. Gross profit ratio
= Gross profit / sales * 100
= 70,000/2,00,000 * 100
=35%

21. Net profit ratio
= Net profit / sales * 100
Net profit = Gross profit + operating income –
Operating expenses
= (70,000+22,000) –42,000
= 50,000 / 2,00,000 * 100
=25%

22. Thank you