share capital, reserves and surplus). Objectives of Ratio Analysis 18,000 + Rs. 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. 73,000 + Rs. Gross Profit Ratio = Gross Profit/Net Revenue from Operations × 100 Prepaid expenses = Rs. Operating Expenses = Employees Benefits Expenses + Other Expenses (Other than non-operating expenses) + Depreciation and Amortisation Expenses This ratio can also be computed in relation to total assets instead of net assets (capital employed). (c) Long-term loans and advances. Published in: Business. (ii) Trade payables (bills payable and sundry creditors). = Rs. (revenue from operations) net sales. Equity or Shareholders’ Funds = Equity Share Capital + Preference Share Capital+ Reserves and Surplus 4. Proprietors’ Funds or Shareholders’ Funds 2. = Rs.25, 000 + Rs.75, 000 = Rs. (a) Gross Profit Ratio: Gross profit ratio as a percentage of revenue from operations is computed to have an idea about gross margin. Formula: Following formula is used to calculate operating ratio: [(Cost of goods sold + Operating expenses / Net sates)] × 100. It expresses the relationship between profits available for payment of interest and the amount of interest payable. These are: Gross Profit Ratio. »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] 3,00,000 Profitability ratios are calculated to analyse the earning capacity of the business which is the outcome of utilisation of resources employed in the business. When Assets Approach is Followed It is computed by adding Gross Profit Ratio, Operating Ratio & Operating Profit Ratio. Credit Revenue from operations = Rs. 5. (ii) To know about the potential areas which can be improved on. or own an. Calculate ‘Liquidity Ratio’ from the following information: 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] (d) Short-term provisions (b) Inventories (Excluding loose tools, stores and spares) Three ratios are commonly used. = Rs. Gross Profit = Revenue from Operations − Cost of Revenue from Operation Identification and Classification of Production Units. Contact us on below numbers. Accounting Ratios It is a mathematical expression that shows the relationship between various items or groups of items shown in financial statements. = Rs. Topic 1: Introduction 1. The net sales for Blue Trust Inc. are $5,000. 24,000, calculate current assets and current liabilities. Answer. They indicate the efficiency with which business as a whole functions. 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. 3,40,000 − Rs. 20,000 + Rs. 60,000 × 100/(100 − 40) Long term debts = total debts (Liabilities) − Current Liabilities You will also love the ad-free experience on … Items Included in Long-term Debts It includes long-term borrowings and long-term provisions. 2,00,000. 20,000 3,20,000 / Rs. (a) Inventory Turnover Ratio: It determines the number of times inventory is converted into revenue from operations during the accounting period under consideration. = 20,000 + 40,000 + 40,000 = 1, 00,000, It is the ratio of quick (or liquid) asset to 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. Contact: (M) 9898251471 E-mail: firstname.lastname@example.org Name of the Ratio Formula 1. 3,00,000 + Rs. 1. Operating efficiency - Indicates how well operating activities are carried out. Credit Revenue from operations = Total revenue from operations − Cash revenue from operations Cost of Revenue from Operations, Explanation: Operating cost is calculated by adding cost of goods sold and operating expenses.Therefore operating cost – operating expenses = cost of revenue from operations; Fraction, Explanation: Debt Equity Ratio is expressed in Fraction, the formula will be debt/ equity Quick ratio, Explanation: Quick Ratio is also known as liquid ratio. (a) Current investments A variation on the formula is to exclude production expenses, so that only administrative expenses are matched against net sales. Here NDPFC = Compensation of Employees + Operating Surplus + Mixed-Income. In the form of a formula this ratio is expressed as follows: = Rs.10,000/Rs.1,00,000 × 100 = 10%. From the following details, calculate interest coverage ratio: Net Profit after tax Rs. Ratios when calculated on the basis of accounting information are called accounting Ratios. Cost of Revenue from = Purchases + (Opening Inventory − Closing Inventory) + operations Direct Expenses » Non-current Assets [Fixed assets (Tangible and intangible assets) + Non-current Investments + Long-term Loans and Advances Current assets include current investments, inventories, trade receivables (debtors and bills receivables), cash and cash equivalents, short-term loans and advances and other current assets such as prepaid expenses, advance tax and accrued income, etc. (i) Debt to Equity ratio It establishes the relationship between long-term debt (external equities) and the equity (internal equities) i.e. = Rs. (a) Debt-Equity Ratio: Debt-Equity Ratio measures the relationship between long-term debt and equity. CBSE Class 12 Accountancy Chapter 13 Important Questions – Free PDF Download. 2,000 = Rs. 1. From the following information, calculate inventory turnover ratio: Inventory in the beginning = 18,000 (a) Shareholders’ funds (i.e. Generally, the ratio of 2 : 1 is considered as an ideal. (v) Other current assets except prepaid expenses. Operating Cost = Cost of Revenue from Operations + Selling Expenses + Administrative Expenses Here cost of goods sold = Operating stock + Net purchases + Manufacturing expenses - Closing stock . Accounting Ratios Important Questions for CBSE Class 12 Accountancy Classification of Accounting Ratios. The activity ratios express the number of times assets employed. 80,000 90,000 = Rs. Net Profit Ratio. Using TS Grewal Class 12 solutions Accounting Ratios exercise by students are an easy way to prepare for the exams, as they involve solutions arranged chapter-wise also page wise. (c) Other current liabilities (current maturities of long-term debts, interest, accrued but not due on borrowings, interest accrued and due on borrowings, outstanding expenses, unclaimed dividend, calls-in-advance, etc) (a) Long-term borrowings Cost / revenue (income). 2,20,000 / Rs. (v) Misleading results in the absence of absolute data. If debt component of the total long-term funds employed is small, outsiders feel more secure. 2. Also, if credit purchases are not given, then all purchases are deemed to be on credit. Operating Ratio = Operating Cost / Net Revenue from Operations × 100 1,20,000 / 2 = Rs. Gross margin: gross profit÷ revenue % Return on capital employed Return on capital employed (sometimes known as return … (c) Trade Payable Turnover Ratio: Trade payables turnover ratio indicates the pattern of payment of trade payable. Capital employed may be taken as the total of non-current assets and working capital. (iv) Effects of inherent limitations of accounting. (e) Return on Capital Employed or Investment: Capital employed means the long-term funds employed in the business and includes shareholders’ funds, debentures and long-term loans. … Profitability Ratios are of five types. Steps of Income Method Formula. 80,000 = 4 times. 1800-212-7858 / 9372462318. Revenue from operations = 80,000 or or 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. = Rs. In the absence of opening creditors and bills payable, closing creditors and bills payable can be used in the above formula. (iii) Total assets to debt ratio It establishes a relationship between total assets and total long-term debts. Profit is necessary to give investors the return they require, and to provide funds for reinvestment in the business. 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 In case, statement of profit and loss is given, cost of revenue from operations i.e. Return on Investment (or Capital Employed) = Profit before Interest and Tax / Capital Employed × 100. To analyse the profitability of the business. Items Included in Current Liabilities Let Current liabilities = x net sales. (ii) Net profit ratio Net profit ratio shows the relationship between net profit and revenue from operations i.e. Classification of Accounting Ratios 50,000 Carriage inwards = 4,000, Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory 1,00,000 + Rs. Topic 2: Classification of Accounting Ratios As per the … = Net Credit Revenue Form Operations / Average Inventory Net Purchases = Cash Purchases + Credit Purchases − Return Outwards (iv) Helps in identification of problem areas. If excess of current assets over quick assets represented by inventories is Rs. 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. Higher turnover ratio means better utilisation of assets and signifies improved efficiency and profitability, and as such is known as efficiency ratios. It is computed to ascertain soundness of the long-term financial position of the firm. Get Accounting Ratios, Accountancy Chapter Notes, Questions & Answers, Video Lessons, Practice Test and more for CBSE Class 10 at TopperLearning. = 1.67 times. Significance: It reveals the number of times interest on long-term debts is covered by the profits available for interest. Here Operating Surplus = Rent + Interest + Profit. = Rs. 3,40,000 × 100 = 64.71% »Non-current Assets [Fixed assets (Tangible and intangible assets) + Non-current Investments + Long-term Loans and Advances The solutions not only explain the exercise questions but also the unit-wise and page-wise questions. 10,000 + (Rs. 3,20,000 Current assets = Rs. whether business is able to pay its long-term liabilities or not. 46,000 + Rs. (b) Long-term provisions Total Debts (Liabilities) Rs. 3. The operating ratio is determined by comparing the cost of the goods sold and other operating expenses with net sales. 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 20,000 (iv) Operating profit ratio Operating profit ratio establishes the relationship between the operating profit and i.e. = Rs. or 73,000 5,000 + 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. 60,000/ Rs. 18,000 + Rs. The formula for its calculation is as follows: Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory. (v) Helpful in comparative analysis. 3. Essensially the percentage of your income that is neede to break even - ie cover costs. (iv) Helpful in budgeting and forecasting. (i) It is useful in analysis of financial statements. 5,000) = Rs. *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) = 18,00,000 − 2,00,000 = 16,00,000 1,50,000 (d) Interest Coverage Ratio: It is a ratio which deals with the servicing of interest on loan. = Rs. Current Liabilities: trade payables (Bills Payable + sundry creditors) + expenses payable As trade payable arise on account of credit purchases, it expresses relationship between credit purchases and trade payable. Following information is available for the year 2014-15, calculate gross profit ratio: Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Operation Net purchases = 46,000 (vii) Affected by personal bias and ability of the analyst. 56,000 : Rs. Trade Receivables Turnover Ratio = Net Credit Revenue from Operations / Average Trade Receivables 3,40,000 x 100 = 70.59%. 10:00 AM to 7:00 PM IST all days. Ratio Analysis It is a technique which involves re-grouping of data by application of arithmetical relationship. 16,000 50,000 / 50,000 = 1 : 1. Learning the important concepts is very important for every student to get better marks in examinations. In view of the requirements of various users, the accounting ratios may be classified as under Profit refers to the Profit before Interest and Tax (PBIT) for computation of this ratio. Current Assets = 3.5x = 3.5 × Rs. 80,000 = Rs. Classification of Accounting Ratios In view of the requirements of various users, the accounting ratios may be classified as under. ∴ Inventory Turnover Ratio = Rs. (iii) Cash and cash equivalents. 1.Liquidity Ratios Liquidity ratios measure the firm’s ability to fulfil its short-term financial obligations. The three common liquidity ratios used are current ratio, quick ratio, and burn rate. It is calculated as under: Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100, Operating Profit = Revenue from Operations − Operating Cost. = Rs. investments + Long-term loans and advances) + Working Capital – Non-current Liabilities (Long-term borrowings + Long-term provisions) Net Profit Ratio = Net profit / Revenue from Operations × 100. (vi) To provide information useful for making estimates and preparing the plans for future. During 2018, the company clocked a total revenue of $450 million. Trade Payables Turnover ratio = Net Credit purchases / Average trade payable Operating Ratio: Operating Ratio matches the operating cost to the net sales of the business. 60,000 Profitability Ratios These ratios measure the profitability of a business assessing the and helps in overall efficiency of the business. ), CMA(INTER), G-SLET, UGC NET-JRF, Ph.D (Pur.)] 60,000 − Rs. 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. Debt-Equity Ratio = Long term Debts / Shareholders' Funds, Shareholders’ Funds (Equity) = Share capital + Reserves and Surplus + Money received against share warrants 2,20,000 Operating Ratio = Operating Cost/Net Sales x 100 Where Operating Cost = Cost of goods sold + Operating Expenses 1,00,000 − Rs. Turnover or Performance or Activity Ratios These ratios measure how efficiently a company is using its assets to generate sales. Advantages of Ratio Analysis Operating Profit Ratio : Operating profit ratio measures the relationship between operating profit and revenue from operations i.e., net sales. (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 the operating ratio for the company. (ii) Helps in simplifying accounting figures. (b) Trade Receivables Turnover Ratio: It expresses the relationship between credit revenue from operations and trade receivable. It must be noted that the sacrificing ratio formula is applied in case of each partner and both their old and new ratios are factored in. 5. long-term borrowings and long-term provisions). Calculate the Trade payables turnover ratio from the following figures: Credit purchases during 2014-15 = 12,00,000 (iii) Operating ratio Operating ratio establishes the relationship between operating cost and revenue from operations i.e. (ii) Working capital, i.e. Current Liabilities = Rs. Average Trade Receivables = Opening Trade Receivables + Closing Trade Receivables / 2 Need assistance? Shareholders’ funds Rs. 1,00,000 + Rs. = Rs. 5,000. Trade Receivables Turnover Ratio = Net Credit Revenue from operation / Average Trade Receivable, Average Collection Period = 365 / Trade Receivables Turnover Ratio = 365 / 8.18 = 45 days, Trade Payable Turnover Ratio = Purchases / Average Trade Payables, Chapter 1 - Accounting for Partnership Firms Fundamental, Chapter 2 - Accounting for share capital, Chapter 6 - Change in profit sharing Ratio for Existing, Chapter 7 - Dissolution of a partner firm, Chapter 8 - Financial statement analysis, Chapter 9 - Financial statements of Not-for-profits, Chapter 10 - Financial statements of a company, Chapter 11 - Goodwill Nature and Valuation, Chapter 14 - Retirement, Death of a partner, STUDY MATERIAL FOR CBSE CLASS 12 ACCOUNTS. = Rs. (i) Non-current assets, i.e. 4,00,000 − Rs. Risk - Indicates degree of financial risk . Expenses Ratios: These ratios are also known as supporting ratios to operating ratio. (iii) Ratios are affected by window-dressing. 2,50,000/Rs. Operating Ratio = Operating Cost / Net Revenue from Operations × 100 = Rs. (ii) Trade receivables (bill receivables, debtors less provisions for doubtful debts). 12,00,000 / Rs. Ratio Analysis 1 | Prepared By: Anuj Bhatia [BBA (Gold Medalist), M.Com (Gold Medalist), CA(Inter. If 70% of what you make is needed to pay _your_ bills, then your operating ratio is 0.7. or (ii) Trade Receivables or Debtors turnover ratio It indicates economy and efficiency in the collection of amount due from debtors. Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on long-term debt Items Included in Equity or Shareholders’ Funds NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. 1,20,000 Cash Revenue from operations 20% of Total Revenue from operations To help identify the short term liquidity of a firm, this ratio is used. = Rs. Average Trade Payables = Creditors in the beginning + Bills payables in the beginning + Creditors at the end + Bills payables at the end / 2 Gross Profit = Revenue from Operations − Cost of Revenue from Operations 2,40,000 / Rs. Ratio is an arithmetical expression of relationship between two interdependent or related items. 22,000/ 2 = Rs. (b) Trade payables (bills payable and sundry creditors) The operating ratio for Blue Trust Inc. is 80%. 60,000 1,50,000 = Rs. Working capital turnover ratio = Net Revenue from Operation / Working Capital. Return on capital employed (ROCE): operating profit ÷ (non-current liabilities + total equity) % 2. Advance tax = Rs. Quick assets = 2x Total Assets It includes Creditors on 1.4.2014 = 3,00,000 (i) To know the areas of an enterprise which need more attention. 450000 Selling Expense is Rs. Operating profit ratio is an indicator of operational efficiency of the business. Solvency Ratios Solvency ratios judge the long-term financial position of an enterprise i.e. (ii) Absence of universally accepted terminology. OR = Net sales - Gross profit. 1,00,000 It expresses the relationship between the cost of revenue from operations and average inventory. * Computation of operating expenses: Cost of goods sold + Administrative expenses + Selling expenses This version yields a much lower ratio, and is useful for determining the amount of fixed administrative costs that must be covered by sales. (iv) Working capital turnover ratio This ratio shows the number of times the working capital has been rotated in generating sales. Accounting Ratios It is a mathematical expression that shows the relationship between various items or groups of items shown in financial statements. (d) Net Profit Ratio: It relates revenue from operations to net profit after operational as well as non-operational expenses and incomes. (iv) Short-term provisions. 70,000 2 = Rs. Items Included in Liquid/Quick Assets Debt = Debentures + Long term provisions = 75,000 + 25,000 = 1,00,000 The detailed notes by our subject experts help students perform well in the CBSE board exams and competitive exams. The questions involved in TS Grewal Solutions are important questions that can be asked in the final exam. 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. = Rs. 80,000 (b) Non-current liabilities (i.e. The operating profit ratio is 55%. 14,000 + Rs. 1,20,000 + 80,000 + 40,000 = Rs. Total Assets to debt ratio = Total Assets / Long term Debts It is computed as follows: Gross Profit Ratio = Gross Profit / Net Revenue of Operations × 100. Ratio It is an arithmetical expression of relationship between two related or interdependent items. These solutions for Accounting Ratios are extremely popular among Class 12 Commerce students for Accountancy Accounting Ratios Solutions come handy for quickly completing your homework and preparing for exams. (v) To provide analysis of the liquidity, solvency, activity and profitability of an enterprise. Inventory at the end = 22,000 = Rs. 56,000. Let us take the example of Apple Inc. and calculate its operating ratio for the year 2018. Operating Cost means Cost of goods sold plus Operating Expenses. … (i) Short-term borrowings. 60000 1,30,000 + Rs. 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. Love the ad-free experience on … operating ratio, Quick ratio = operating Cost Net. Is given if Revenue from Operation = Rs information is given if from... 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