ratio0
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Ratio-analysisRatio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis.
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It is an analysis of strength and weakness of an organisation by establishing the quantitative relation among the items of Balance Sheet or Income Statement of such an organisation
Meaning of Ratio Analysis
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Analysis of financial Position Simplification of Accounting Figures Assessment of Operational Efficiency Determining Trends in the long-run Identification of Strength & Weakness Taking Remedial Measures Comparison of Performance
Purpose/Importance/Advantages
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Based on Historical Data No Standard Interpretation Ignoring Qualitative Aspects Difference in Accounting Methods make
comparison difficult
Limitations of Ratio Analysis
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1) Liquidity Ratios
2) Profitability Ratios
3) Solvency Ratios
4) Activity Ratios
5) Shareholders' Ratios
Classification of Ratios
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LIABILITIES ASSETS
NET WORTH/EQUITY/OWNED FUNDSShare Capital/Partner’s Capital/Paid up Capital/ Owners FundsReserves ( General, Capital, Revaluation & Other Reserves) Credit Balance in P&L A/c
FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIES Original Value Less DepreciationNet Value or Book Value or Written down value
LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions)Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities
NON CURRENT ASSETSInvestments in quoted shares & securitiesOld stocks or old/disputed book debtsLong Term Security DepositsOther Misc. assets which are not current or fixed in nature
CURRENT LIABILTIESBank Working Capital Limits such as /Bills/Export CreditSundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or depositsExpenses payable & provisions against various items
CURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & inventory (RM,SIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 months
INTANGIBLE ASSETSPatent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses
Format of balance sheet for ratio analysis
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Liquidity Ratios Used to study the ability of the organisation in meeting short-term payments or obligations
Includes:
1) Current Ratio,
2) Acid Test Ratio.
Liquidity Ratios
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Relation between current assets and current liabilities
Long Term Sources Financing the Current assets give a stable base for the liquidity of the organisation
Normally , the ratio should not be less than 2 i.e., the current assets should be double the size of current liabilities
Current Ratio
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Measurement of Current Ratio
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It is the ratio between quick assets and quick liabilities
Quick assets include current assets except inventory and pre-paid expenses
Quick liabilities include current liabilities other than bank overdraft
A 1:1 ratio is healthy indicator of cash management
Acid Test Ratio/Quick Ratio/Liquid Asset Ratio
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Measurement of Acid Test Ratio
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It is the ratio between cash and current liabilities
Means Availability of cash for meeting current liabilities.
Cash Ratio= Cash in hand + cash at bank Current Liabilities
Cash Ratio
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These ratio shows short term financial soundness of the company.
The Financial position is supposed to very sound, if the current ratio is more than 2:1.
Higher ratio shows the better capacity of the business to meet its current obligation.
Significance of Liquidity Ratio
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1) Net Profit Ratio 2) Gross Profit Ratio 3) Return on Total Assets 4) Return on Equity
Profitability Ratio
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Net Profit Ratio