Ratios relate one figure in the financial statements to another to judge liquidity, solvency, efficiency and profitability.
The four groups
| Group | Ratios |
|---|---|
| Liquidity | Current ratio, Quick ratio |
| Solvency | Debt-equity, Total assets to debt, Proprietary, Interest coverage |
| Activity | Inventory turnover, Trade receivables turnover, Trade payables turnover, Working capital turnover |
| Profitability | Gross profit, Operating, Operating profit, Net profit, Return on investment |
Key definitions
- Quick assets = Current assets − Inventories − Prepaid expenses.
- Shareholders' funds = Share capital + Reserves and surplus.
- Capital employed = Shareholders' funds + Non-current liabilities (or Non-current assets + Working capital).
- Cost of revenue from operations = Opening inventory + Net purchases + Direct expenses − Closing inventory.
- Working capital = Current assets − Current liabilities.
Effect questions
Questions often ask whether a transaction increases, decreases or does not change a ratio. Work out the effect on the numerator and the denominator separately; when both change by the same amount, compare the ratio with 1.
Every formula is on one page in our accounting ratios formula sheet, also available as a free PDF on the Free notes page.
Recorded lectures for this chapter
9 lectures (3 h 23 min) by Ronak Dugar in Class 12 Accountancy Book 3: Analysis of Financial Statements. Enrolled students watch them in the student portal.
- Class 1 - Liquidity Ratios (Current & Quick Ratio)20 min
- Class 2 - Practical Questions of Current Ratio & Quick Ratio19 min
- Class 3 - Extraordinary Questions of Current & Quick Ratio23 min
- Class 4 - Solvency Ratios (Debt to Equity, Total Asset to Debt, Proprietary, Debt to Capital Employed, Interest Coverage ratio)16 min
- Class 5 - Practical Questions of Solvency Ratios21 min
- Class 6 - Extraordinary Questions of Solvency Ratios29 min
- Class 7 - Turnover Ratios (Inventory Turnover, Trade Receivable/Payable Turnover, Working capital-Fixed asset-Capital employed turnover)30 min
- Class 8 - Profitability Ratios (Gross profit, Net profit, Operating profit, Operating ratio, Return on investment). Timeline of GP--OP--NP12 min
- Class 9 - Practical Question of Profitability Ratios29 min
Learn this chapter with Ronak Sir
Classroom batches in Sector 9, Faridabad and recorded lectures online. Book a free demo class or call +91 83685 45620.