Ratio Analysis. Ratio A ratio is an arithmetical expression of relationship between two related or interrelated items. The term accounting ratio is used.

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Ratio Analysis Ratio Analysis: A ‘Ratio: is defined as an arithmetical/quantitative/numerical relationship between two numbers. Ratio analysis is a very.

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Presentation transcript:

Ratio Analysis

Ratio A ratio is an arithmetical expression of relationship between two related or interrelated items. The term accounting ratio is used to describe significant relationships that exist between figures shown in a balance sheet, in a profit and loss account or in any part of accounting organization.

Ratio analysis Ratio analysis is the study of relationship among various financial factors in a business. Objective of ratio analysis is to judge the earning capacity, financial soundness, operating efficiency of a business organization.

Advantages of ratio analysis Useful in inter and intra firm comparison Useful in analysis of financial statements Useful in simplifying accounting figures Useful in forecasting Useful in judging operating efficiency

Limitations of ratio analysis False results if statements incorrect Not comparable if different policies adopted Ratios may be worked out for insignificant figures Personal bias Window dressing

Liquidity Ratios Current ratio Liquid ratio (Acid or quick ratio) Absolute liquid ratio

1. Current Ratio = Current Assets Current liabilities Current assetsCurrent liabilities Cash and bank balanceCreditors DebtorsBills payable Bills receivableBank overdraft StockShort term loans Marketable securitiesOutstanding expenses Prepaid expensesProvision for tax Advance paymentsUnclaimed dividend

Question 1 Calculate current ratio from the following: Sundry debtors1,00,000 Prepaid expenses10,000 Cash in hand30,000 Short term investments 20,000 Machinery7,000 Bills payable20,000 Debentures40,000 Expenses payable2,00,000 Stock40,000 Sundry creditors40,000

Question 2 Working capital – Rs 15,000 Total debt – Rs. 32,500 Long term debt – Rs. 25,000 Calculate current ratio.

Question 3. Working capital – Rs. 7,20,000 Creditors – Rs. 40,000 Other current liabilities – Rs. 2,00,000 Calculate current ratio.

Question 4 Current assets – Rs. 4,00,000 Stock – Rs. 2,00,000 Working capital – Rs 2,40,000 calculate current ratio.

Question 5. Calculate current ratio, acid ratio and absolute liquid ratio. What conclusions you draw about the company on the basis of these ratios. LiabilitiesAssets Equity share capital 24,000Machinery and equipment 45,000 Profit and loss a/c 6,000Stock12,000 10% debentures 15,000Sundry debtors9,000 Sundry creditors 23,400Cash at bank2,280 Provision for taxation 600Prepaid expenses720

Question 6 The current ratio of A Ltd. Is 4.5:1 and liquid ratio is 3:1. stock is Rs. 3,00,000. What are the current liabilities?

Question 7 Quick ratio is 1.5; current assets Rs. 1,00,000; Current liabilities Rs. 40,000. Calculate the value of the stock.