This chapter explores accounting ratios, crucial for analyzing financial statements. Understanding these ratios helps assess a company's performance, solvency, and efficiency, aiding decision-making.
Accounting Ratios – Formula & Equation Sheet
Essential formulas and equations from Accountancy Part - II, tailored for Class 12 in Accountancy.
This one-pager compiles key formulas and equations from the Accounting Ratios chapter of Accountancy Part - II. Ideal for exam prep, quick reference, and solving time-bound numerical problems accurately.
Key concepts & formulas
Essential formulas, key terms, and important concepts for quick reference and revision.
Formulas
Current Ratio = Current Assets / Current Liabilities
Current Assets represent short-term assets expected to be converted to cash within a year, and Current Liabilities are short-term obligations due within a year. The Current Ratio indicates a firm's ability to cover its short-term liabilities with its short-term assets.
Quick Ratio = (Current Assets - Inventories) / Current Liabilities
The Quick Ratio, also known as the Acid-Test Ratio, measures immediate liquidity by excluding inventory, which is less liquid. It assesses the ability to meet short-term obligations without relying on inventory sales.
Debt-Equity Ratio = Total Long-Term Debts / Shareholders' Funds
This ratio compares total long-term debt to shareholders' equity, indicating the relative proportion of debt and equity in financing the firm's operations. A lower ratio suggests lower financial risk.
Debt to Capital Employed Ratio = Long-Term Debt / (Long-Term Debt + Shareholders' Funds)
Measures the proportion of total capital that is financed through debt. It reflects the long-term solvency of the firm.
Total Assets to Debt Ratio = Total Assets / Long-Term Debt
This ratio indicates the extent to which total assets cover long-term debt, assessing the company's ability to meet its long-term obligations.
Interest Coverage Ratio = Earnings Before Interest and Tax / Interest Expense
It measures the firm's ability to meet its interest payments. A higher ratio indicates better capacity to service debt.
Gross Profit Ratio = (Gross Profit / Revenue from Operations) × 100
Indicates the percentage of revenue that exceeds the cost of goods sold, showing the efficiency of production and sales.
Net Profit Ratio = (Net Profit / Revenue from Operations) × 100
Measures how much of each rupee of revenues is converted into profits, indicating overall profitability.
Return on Investment (ROI) = (Net Profit Before Interest and Tax / Capital Employed) × 100
Evaluates the efficiency of capital utilization in generating profits, helping assess overall financial performance.
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Indicates how many times inventory is sold and replaced over a period, illustrating inventory management efficiency.
Equations
Working Capital = Current Assets - Current Liabilities
Working Capital measures the short-term liquidity of the company. It indicates the difference between current assets and liabilities, helping assess operational efficiency.
Average Collection Period = 365 / Trade Receivable Turnover Ratio
Indicates the average number of days it takes a company to collect payments from its credit sales.
Average Payment Period = 365 / Trade Payable Turnover Ratio
Measures the average number of days a company takes to pay its suppliers, indicating payment policy.
Liquid Ratio = Liquid Assets / Current Liabilities
Reflects the ability to cover current liabilities with liquid assets. A ratio less than 1 may indicate potential liquidity problems.
Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) / Revenue from Operations
Indicates the proportion of revenue consumed by operating expenses, helping assess operational efficiency.
Proprietary Ratio = Shareholders' Funds / Total Assets
Measures how much of the firm's assets are financed by shareholders’ equity, assessing financial stability.
EPS = (Net Profit - Preference Dividend) / Number of Equity Shares
Earnings Per Share shows the portion of a company's profit attributable to each outstanding share of common stock.
Book Value per Share = Shareholders’ Funds / Number of Equity Shares
Indicates the per-share value of a company's equity, reflecting its financial health.
Price Earnings Ratio = Market Price per Share / Earnings per Share
Shows how much investors are willing to pay per rupee of earnings, reflecting market expectations for growth.
Cash Ratio = Cash and Cash Equivalents / Current Liabilities
Analyzes the immediate liquidity position, showing the company's ability to cover current obligations using cash.
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Start chapterThis chapter focuses on the analysis of financial statements, crucial for understanding a company's financial health. It equips students with the skills to interpret key financial data for informed decision-making.
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