CH-5 Accounting Ratios

CLASS XII UNIT

- 4 ANALYSIS OF FINANCIAL STATEMENTS CHAPTER- FINANCIAL STATEMENT ANALYSIS & CHAPTER- RATIO ANALYSIS Meaning of Financial Analysis "Financial statement analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements and a study of the trends of these factors as shown in a series of statements ..

Inventory

is not included in liquid assets as it may take a lot of time before it is converted into cash.

Objective

and Significance: Operating Ratio is a measurement of the efficiency and profitability of the business enterprise.

total of shareholders

As defined earlier long- term funds are also known as capital employed which means funds and long- term loans.

Prepaid expenses

too are excluded from the list of liquid assets because they are not expected to be converted into cash.

Government

can increase the GST or can enforce the price regulations.

long term lender

A(n) is interested in finding out whether the business will earn sufficient profits to pay the interest charges regularly.

Ii

() Total assets to Debt Ratio: This ratio is a variation of the debt- equity ratio and gives the same indication as the debt- equity ratio.

Financial statements

(6) Difficulty in Forecasting: are a record of past events and historical facts.

financial difficulties

It is an indicator of the shortage of working capital and may put the concern in .

Loose Tools

Items excluded from Current Assets: (i) , Stores and Spares (ii) Provision for Doubtful Debts Current Liabilities: Current liabilities are the liabilities payable within 12 months from the date of Balance Sheet or within the period of Operating Cycle.

Turnover

indicates the speed or number of times the capital employed has been rotated in the process of doing business.

Analysis of financial statements

(6) Significance for Employees: helps the employees in determining the profitability of the business enterprise.

Horizontal presentation

emphasises the fact that statement for a series of periods are far more significant than those for a single period and that the accounts for one period are but an instalment of what is essentially a continuous history.

Objective

and Significance: An ideal quick ratio is said to be 1: 1.

Inventory

is excluded from liquid assets because it has to be sold before it can be converted into cash.

financial statements

(2) Vertical Analysis: jn such type of analysis, for a single year or on a particular date are reviewed and analysed with the help of proper devices like ratios.

Analysis of financial statements

also helps the trade unions in negotiating wages agreements.

Objective

and Significance: This ratio indicates the speed with which the amount is being paid to trade payables.

Objective

and Significance: This ratio indicates the speed with which the amount is collected from trade receivables.

Objective

and Significance: This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges.

Objective

and Significance: Operating Ratio is a measurement of the efficiency and profitability of the business enterprise.