As per the … Return on capital employed (ROCE): operating profit ÷ (non-current liabilities + total equity) % 2. Ratio Analysis 1 | Prepared By: Anuj Bhatia [BBA (Gold Medalist), M.Com (Gold Medalist), CA(Inter. (iv) Working capital turnover ratio This ratio shows the number of times the working capital has been rotated in generating sales. Through the course of calculation, if the outcome is positive in value, it would indicate that the specific partners are sacrificing their share for other existing partners. Current ratio of 2:1 is considered to be ideal. You will also love the ad-free experience on … 60,000 × 100/(100 − 40) Topic 2: Classification of Accounting Ratios Liabilities Approach Share Capital + Reserves and Surplus = Rs. (c) Long-term loans and advances. = Rs. 2,50,000/Rs. 10,000 Gross Profit Ratio, Operating Ratio & Operating Profit Ratio. (d) Cash and cash equivalents (cash in hand, cash at bank, cheques/drafts in hand) 22,000 = Rs. Higher turnover ratio means better utilisation of assets and signifies improved efficiency and profitability, and as such is known as efficiency ratios. Profitability Ratios are of five types. Download CBSE Class 12 Accountancy Accounting Ratios in pdf, Accountancy chapter notes, class notes mind maps formulas Revision Notes CBSE Class 12 Accounting Ratios. They indicate the efficiency with which business as a whole functions. Trade receivables as at 1.4.2014 40,000 Current Liabilities = Rs. 18,000 + Rs. Net Profit before tax = Net profit after tax × 100/ (100 − Tax rate) Net profit ratio is an indicator of overall operational efficiency of the business. »Current Assets [Current investments + Inventories (including spare parts and loose tools) + Trade Receivables + Cash and Cash Equivalents + Short-term Loans and Advances + Other Current Assets] Proprietors’ Funds or Shareholders’ Funds Trade Receivables Turnover Ratio = Net Credit Revenue from Operations / Average Trade Receivables Average Trade Receivables = Opening Trade Receivables + Closing Trade Receivables / 2 It is a measure of security of interest payable on long-term debts. Calculate the Trade receivables turnover ratio from the following information: Total Revenue from operations 4,00,000 Objectives of Ratio Analysis Three ratios are commonly used. 50,000 Advantages of Ratio Analysis Items Included in Total Assets During 2018, the company clocked a total revenue of $450 million. Equity = Share Capital + General Reserve + Surplus = 1,00,000 + 45,000 + 30,000 = 1,75,000, (b) Total Assets to Debt Ratio This ratio measures the extent of the coverage of long-term debts by assets, Total assets to Debt Ratio = Total assets/Long-term debts. Advance tax = Rs. Profitability ratios are calculated to analyse the earning capacity of the business which is the outcome of utilisation of resources employed in the business. Operating Ratio = (Operating Expenses+Cost of Goods Sold)/Net Sales = (18575+92761)/121615 =0.914739; Advantages of Operating Ratio. From the following details, calculate interest coverage ratio: Net Profit after tax Rs. Net Profit after Tax = Rs. Inventories = Current assets − Quick assets 1,50,000 (c) Proprietary Ratio: Proprietary ratio expresses relationship of proprietor’s (shareholders) funds to net assets and is calculated as follows: Proprietary Ratio = Shareholders, Funds / Capital employed (or net assets), Significance: Higher proportion of shareholders’ funds in financing the assets is a positive feature as it provides security to creditors. Accounting Ratios Class 12 Accountancy MCQs Pdf. 16,000 = Rs. 70,000 2 = Rs. Operating Ratio = (Cost of Revenue from Operations + Operating Expenses)/ Net Revenue from Operations × 100. Total Assets to debt ratio = Total Assets / Long term Debts When ratios are calculated on the basis of accounting information, they are called accounting ratios. 1.Liquidity Ratios Liquidity ratios measure the firm’s ability to fulfil its short-term financial obligations. (i) Accounting ratios ignore qualitative factors. Working capital turnover ratio = Net Revenue from Operation / Working Capital. Total Assets Total assets include … It is expressed as Quick ratio = Quick Assets: Current Liabilities or Quick Assets / Current Liabilities. (a) Current investments Two basic measures of liquidity are : (A) Inventory turnover and Current ratio (B) Current ratio and Quick ratio (C) Gross Profit ratio and Operating ratio The revision notes covers all important formulas and concepts given in the chapter. 3. Current Liabilities = Rs. 3,00,000 Profit refers to the Profit before Interest and Tax (PBIT) for computation of this ratio. (i) Gross profit ratio Gross profit ratio shows the relationship between the net sales gross profit to net sales (revenue from operations) If 70% of what you make is needed to pay _your_ bills, then your operating ratio is 0.7. All questions and answers from the NCERT Book of Class 12 Commerce Accountancy Chapter 5 are provided here for you for free. 60,000 Ratios when calculated on the basis of accounting information are called accounting Ratios. = Purchases + Decrease in inventory + Direct Expenses Operating Ratio = Operating Cost/Net Sales x 100 Where Operating Cost = Cost of goods sold + Operating Expenses Here NDPFC = Compensation of Employees + Operating Surplus + Mixed-Income. 90,000 = Rs. The cost of goods sold which are not included in the operating expenses is $1,000. (iv) Short-term loans and advances. When Liabilities Approach is Followed It is computed by adding 24,000 = 1.5x Debt-Equity Ratio = Long term Debts / Shareholders' Funds, Shareholders’ Funds (Equity) = Share capital + Reserves and Surplus + Money received against share warrants Trade receivables as at 31.3.2015 1,20,000. Can someone clue me in to the formula used to calculate the ratio? Items Included in Equity or Shareholders’ Funds (iii) Trade payables or Creditors turnover ratio It indicates the speed with which the amount is being paid to creditors. 2,40,000 = Rs. 5,000) = Rs. 1,00,000 (b) Non-current trade investments. The three common liquidity ratios used are current ratio, quick ratio, and burn rate. Classification of Accounting Ratios In view of the requirements of various users, the accounting ratios may be classified as under. 2,40,000 / Rs. The formula for its calculation is as follows: Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory. (iv) Helpful in budgeting and forecasting. Here Operating Surplus = Rent + Interest + Profit. It may be computed directly or as a residual of operating ratio. 10:00 AM to 7:00 PM IST all days. As trade payable arise on account of credit purchases, it expresses relationship between credit purchases and trade payable. » Non-current Assets [Fixed assets (Tangible and intangible assets) + Non-current Investments + Long-term Loans and Advances = 18,00,000 − 2,00,000 = 16,00,000 Average Trade Payables = Creditors in the beginning + Bills payables in the beginning + Creditors at the end + Bills payables at the end / 2 (b) Operating Ratio: It is computed to analyse cost of operation in relation to revenue from operations. (ii) Trade payables (bills payable and sundry creditors). (i) Non-current assets, i.e. = Rs. The first step in calculating national income via income method is to identify and segregate the units of production. The detailed notes by our subject experts help students perform well in the CBSE board exams and competitive exams. investments + Long-term loans and advances) + Working Capital – Non-current Liabilities (Long-term borrowings + Long-term provisions) 80,000 From the following information, calculate inventory turnover ratio: Inventory in the beginning = 18,000 These are: Gross Profit Ratio. Operating profit ratio is an indicator of operational efficiency of the business. Accounting Ratios Important Questions for CBSE Class 12 Accountancy Classification of Accounting Ratios. = Rs. (iv) Operating profit ratio Operating profit ratio establishes the relationship between the operating profit and i.e. or Answer. 1,40,000 whether business is able to pay its long-term liabilities or not. … cost of goods sold is computed by adding cost of materials consumed, purchases of stock-in-trade, changes in inventories of finished goods, work-in-progress and stock-in-trade and direct expenses. 3,00,000 + Rs. Cost of Revenue from Operations = Inventory in the beginning + Net Purchases + Wages + Carriage inwards − Inventory at the end Operating efficiency - Indicates how well operating activities are carried out. 12,00,000 / Rs. (v) To provide analysis of the liquidity, solvency, activity and profitability of an enterprise. Ratio analysis is the more popularly and widely used technique of financial statement analysis. To help identify the short term liquidity of a firm, this ratio is used. Identification and Classification of Production Units. *Non-current Asset (Tangible assets + Intangible assets + Non-current trade investments + Long-term loans and advances) + Working Capital – Non-current Liabilities (Long-term borrowings + Long-term provisions) long-term borrowings and long-term provisions). Accounting Ratios It is a mathematical expression that shows the relationship between various items or groups of items shown in financial statements. Risk - Indicates degree of financial risk . Net profit before interest and tax = Net profit before tax + Interest 56,000. 1,00,000 − Rs. 2,000 + Rs. = 3.5: 1 Revenue from Operations – Gross Profit. Ratio analysis is a process of determining and presenting the quantities relationship between two accounting figures to calculate the strength and weaknesses of a business. It means 55% of the sales revenue would be used to cover cost of goods sold and other operating expenses of Good Luck Company Limited. (v) Other current assets except prepaid expenses. NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. Items Included in Current Liabilities = Rs. Items Included in Long-term Debts Items Included in Liquid/Quick Assets (a) Short-term borrowings net sales. It is calculated as under: Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100, Operating Profit = Revenue from Operations − Operating Cost. = Rs. Let us take the example of a company named ADG Ltd which is engaged in the business of manufacturing electronic parts for Tier I auto parts supplier. It is computed as follows: Gross Profit Ratio = Gross Profit / Net Revenue of Operations × 100. Where, Average Inventory = Inventory in the beginning + Inventory at the end / 2 (iii) Total assets to debt ratio It establishes a relationship between total assets and total long-term debts. 4,00,000 − Rs. Classification of Accounting Ratios = Rs. 16,000 In view of the requirements of various users, the accounting ratios may be classified as under 1,50,000 = Rs. Current Ratio = Current Assets / Current Liabilities = 2, 00,000 / 1, 00,000 = 2 : 1 90,000 To analyse the profitability of the business. 80,000 − (Rs. Gross Profit = Revenue from Operations − Cost of Revenue from Operation The higher the ratio, the better it is. 4. 60000 Cost / revenue (income). 80,000 = Rs. This ratio can also be computed in relation to total assets instead of net assets (capital employed). = Rs. 10,00,000 = Rs. Become our . (iii) Other short-term liabilities. 14,000 + Rs. The concepts should be clear which will help in faster learning. Current Liabilities: trade payables (Bills Payable + sundry creditors) + expenses payable The net sales for Blue Trust Inc. are $5,000. (b) Trade payables (bills payable and sundry creditors) Formula: Operating expenses include administration, selling and distribution expenses. To assess the operating efficiency of the business. Current Ratio = Current Assets : Current Liabilities or Current Assets / Current Liabilities. These ratios indicate the speed at which, activities of the business are being performed. 20,000 46,000 + Rs. (ii) Working capital, i.e. or own an. Wages = 14,000 ∴ Trade Payables Turnover Ratio = Rs. (iii) Ratios are affected by window-dressing. Ratio is an arithmetical expression of relationship between two interdependent or related items. 22,000/ 2 = Rs. Expenses Ratios: These ratios are also known as supporting ratios to operating ratio. (iv) Effects of inherent limitations of accounting. (c) Trade Payable Turnover Ratio: Trade payables turnover ratio indicates the pattern of payment of trade payable. 1,00,000 + Rs. shareholders’ funds. »Non-current Assets [Fixed assets (Tangible and intangible assets) + Non-current Investments + Long-term Loans and Advances Average Payment Period = No. (a) Long-term borrowings Revenue from operations = 80,000 = Rs. Solvency Ratios Solvency ratios judge the long-term financial position of an enterprise i.e. = 32,00,000 / 16,00,000 = 2 : 1 (iii) Useful in judging the operating efficiency of business. Liquidity Ratios Liquidity ratios measure the firm’s ability to fulfil its short-term financial obligations. Liquidity Assets = Current assets − (Inventories + Prepaid expenses + Advance tax) ), CMA(INTER), G-SLET, UGC NET-JRF, Ph.D (Pur.)] Essensially the percentage of your income that is neede to break even - ie cover costs. 2,20,000 Inventory at the end = 22,000 1000000 Cost of Revenue from Operations is Rs. (d) Short-term provisions Apple's operating ratio must be examined over several quarters to … (iv) Interest coverage ratio This ratio expresses the relationship between net profit before interest and tax and interest payable on long-term debts. 24,000 = 3.5x − 2x (ii) Absence of universally accepted terminology. It expresses the relationship between the cost of revenue from operations and average inventory. X Ltd., has a current ratio of 3.5 : 1 and quick ratio of 2 : 1. 15,000 + Rs. 80,000 Formula: Following formula is used to calculate operating ratio: [(Cost of goods sold + Operating expenses / Net sates)] × 100. Let us take the example of Apple Inc. and calculate its operating ratio for the year 2018. 4. Current Ratio = 3.5 : 1 Quick Ratio = 2 : 1 Solution Use the below-given data for calculation of the operating ratio Therefore, the calculation of operating ratio is as follows, =(3000+1000)/5000 1. Cost of Goods Sold = Cost of Materials Consumed + Purchases of Stock-in-trade + Change in Inventories of Finished Goods, Work-in-progress and Stock in-trade + Direct Expenses Net Purchases = Cash Purchases + Credit Purchases − Return Outwards In the form of a formula this ratio is expressed as follows: (ii) Liquid ratio/Quick ratio/Acid test ratio This ratio establishes relationship between liquid assets and current liabilities and is used to measure the firm’s ability to pay the claims of creditors immediately. Calculate ‘Liquidity Ratio’ from the following information: Current liabilities = Rs. Gross Profit Ratio = Gross Profit / Revenue from operation × 100 Operating profit ratio is computed by dividing operating profit by revenue operations (net sales) and is expressed as percentage. = Rs. Long term debts = total debts (Liabilities) − Current Liabilities Also known as Solvency Ratios, and as the name indicates, it focuses on a company’s current assets and liabilities to assess if it can pay the short-term debts. 3,40,000 x 100 = 70.59% (d) Net Profit Ratio: It relates revenue from operations to net profit after operational as well as non-operational expenses and incomes. 18,000 + Rs. Capital employed may be taken as the total of non-current assets and working capital. (v) Helpful in comparative analysis. (ii) Trade Receivables or Debtors turnover ratio It indicates economy and efficiency in the collection of amount due from debtors. (ii) Helps in simplifying accounting figures. 6. Liquidity Ratio = Liquid Assets/Current Liabilities = Rs. » Current Assets [Current investments + Inventories (including spare parts and loose tools) + Trade Receivables + Cash and Cash Equivalents + Short-term Loans and Advances + Other Current Assets] Net purchases = 46,000 Current Assets = 3.5x = 3.5 × Rs. (b) Long-term provisions (A) Liquidity Ratios 1. CBSE Class-12 Revision Notes and Key Points. or 1,20,000 3. 60,000 − Rs. In case, statement of profit and loss is given, cost of revenue from operations i.e. = Rs. Debt = Debentures + Long term provisions = 75,000 + 25,000 = 1,00,000 Creditors on 1.4.2014 = 3,00,000 (iv) Helps in identification of problem areas. The solutions not only explain the exercise questions but also the unit-wise and page-wise questions. Academic Partner. Learning the important concepts is very important for every student to get better marks in examinations. Net Profit Ratio. Working Capital = Current Assets – Current Liabilities (i) It is useful in analysis of financial statements. It is calculated as follows: Trade Receivable Turnover ratio = Net Credit Revenue from Operations / Average Trade Receivable, Where Average Trade Receivable = (Opening Debtors and Bills Receivable + Closing Debtors and Bills Receivable)/2. Liquidity Ratio = Rs. (b) Inventories (Excluding loose tools, stores and spares) Get Accounting Ratios, Accountancy Chapter Notes, Questions & Answers, Video Lessons, Practice Test and more for CBSE Class 10 at TopperLearning. Calculate the Trade payables turnover ratio from the following figures: Credit purchases during 2014-15 = 12,00,000 The activity ratios express the number of times assets employed. Current liabilities include short-term borrowings, trade payables (creditors and bills payables), other current liabilities and short-term provisions. 5,000. = Rs. Items Included in Long-term Debts It includes long-term borrowings and long-term provisions. 60,000/ Rs. 1800-212-7858 / 9372462318. 5,000) 16,000 = 2 : 1. Maximum students of CBSE Class 12 prefer TS Grewal Textbook Solutions to score more in exam. Unlike the operating ratio, the net profit ratio includes the total revenue of the firm. 1. Operating Cost = Cost of Materials Consumed + Purchases of Stock-in-trade + Change in Inventories of Finished Goods, Work-in-progress and Stock-in-trade + Employees Benefits Expenses + Other Expenses (Other than non-operating expenses) Ratio Analysis It is a technique which involves re-grouping of data by application of arithmetical relationship. (e) Short-term loans and advances 2,50,000 80000 Administrative Expenses is Rs. 2. Total assets = shareholder funds + total debts (liabilities). Items Included in Current Liabilities Current ratio which let us know the short term solvency of a firm. 80,000 = 4 times. Current Assets = Trade Receivables (sundry Debtors) + prepaid Expenses + cash and cash Equivalents + short term Investments + inventories 5,000 + Rs. When Assets Approach is Followed It is computed by adding Credit Revenue from operations = Total revenue from operations − Cash revenue from operations 3,20,000 Calculate the operating ratio for the company. Current assets = Rs. For Enquiry. 2. Items Included in Current Assets 24,000, calculate current assets and current liabilities. (vi) To provide information useful for making estimates and preparing the plans for future. This ratio is a better indicator of liquidity and 1 : 1 is considered to be ideal. Interest on Long-term Debt = 15% of Rs. (i) Current ratio/Working capital ratio This ratio establishes relationship between current assets and current liabilities and is used to assess the short-term financial position of the business concern. Gross Profit = Revenue from Operations − Cost of Revenue from Operations Meaning and definition. 2,20,000 / Rs. Shareholders’ funds Rs. = 1.67 times. Profitability Ratios These ratios measure the profitability of a business assessing the and helps in overall efficiency of the business. CBSE quick revision note for class-12 Chemistry Physics Math’s, Accountancy and other subject are very helpful to revise the whole syllabus during exam days. Ratio analysis formula sheet cbse accounting 1. Free PDF download of Important Questions for CBSE Class 12 Accountancy Chapter 13 Accounting Ratios prepared by expert Accountancy teachers from latest edition of CBSE(NCERT) books, On CoolGyan.Org to score more marks in CBSE board examination. or Current assets = 3.5x and Bills Payables on 1.4.2014 = 1,00,000 Need assistance? Share Capital = Equity share capital + Preference share capital, Shareholders’ Funds (Equity) = Non-current assets + Working capital − Non-current liabilities Working Capital = Current Assets − Current Liabilities, From the following information calculate Debt equity Ratio:-, Debt to equity ratio = Debt / Equity (shareholder funds) = 1,00,000 / 1,75,000 = 0.57 : 1