financial management, Introduction to Accounting, rules of accounting

1. By: Dr. Feeroj Pathan
COURSE CODE- BTHM705 2 Credits
UNIT- 1
• Introduction to Financial Accounting,
Book keeping & Recording:

2. Course Objectives:
To help the students to develop cognizance of the importance of Financial
Management in corporate valuation.
To enable students to describe how people analyze the corporate leverage
under different conditions and understand why people valuate different
corporate in different manner.
To provide the students to analyze specific characteristics of Supply Chain
Industry and their future action for cash flow.
To enable students to synthesize related information and evaluate options
for most logical and optimal solution such that they would be able to
predict and control Debt Equity incurrence and improve results.

3. Course Outcomes:
At the end of this course students will demonstrate the ability to
1. The students would be able to understand and define basic terminology used
in finance and accounts
2. The students would be able to prepare& appraise Financial Statements and
evaluate a company in the light of different measurement systems.
3. The students would be able to analyze the risk and return of alternative
sources of financing.
4. Estimate cash flows from a project, including operating, net working capital,
and capital spending.
5. To estimate the required return on projects of differing risk ,to estimate the
cash flows from an investment project, calculate the appropriate discount rate,
determine the value added from the project, and make a recommendation to
accept or reject the project.
6. To describe and illustrate the important elements in project finance Using
financial calculator and Excel in a variety of problems.

4. Introduction to Accounting
MEANING OF ACCOUNTING
• Accounting is the process of identifying, measuring and
communicating the economic information of an organization
to its users who need the information for decision making.
DEFINITION OF ACCOUNTING
• American Institute of Certified Public Accountants (AICPA)
which defines accounting as “the art of recording, classifying
and summarizing in a significant manner and in terms of
money, transactions and events, which are, in part at least,
of a financial character and interpreting the results thereof”.

5. Accounting and Book-Keeping
• Bookkeeping is a small and simple part of accounting.
• Book- keeping is a process of accounting concerned
with recording transactions and keeping records.
• Accounting includes budgeting, strategic planning, cost
analysis, auditing, income tax preparation, performance
measurement, evaluation, control, preparing
managerial reports for decision making. Etc.

6. Methods of
Accounting
Single Entry: It is incomplete system of
recording business transactions. The
business organization maintains only
cash book and personal accounts of
debtors and creditors.
Double Entry: In a business, every
transaction affects at least two accounts.
The double-entry accounting format
records both effects of a transaction. In
one account, the transaction is recorded
as a debit while in another it is recorded
as a credit.

7. FINANCIAL ACCOUNTING

8. Financial Accounting
• Financial accounting is
the process of
preparing financial
statements that
companies’ use to
show their financial
performance and
position to people
outside the company,
Including investors,
creditors, suppliers,
and customers.

9. NATURE AND SCOPE OF FINANCIAL ACCOUNTING
Dealing with financial transactions:
Recording of information:
Classification of Data:
Making Summaries:
Analyzing:
Interpreting the financial information:
Communicating the results:

10. Importance
of Financial
Accounting
• External communication.
• Internal communication.
• Comparing financial reports.
• Recording transactions.
• Filing taxes and abiding by-
laws.
• Creating budgets and
projections.

11. Accounting Concepts and Conventions/
Generally Accepted Accounting Principles
(GAAP)
GAAP (Generally Accepted Accounting Principles) is a
collection of commonly followed accounting rules and
standards for financial reporting.

12. Accounting
Concepts
• Accounting concepts define the
assumptions based on which
financial statements of a
business entity are prepared.
• Concepts are those basic
assumptions and condition which
form the basis upon which
the accountancy has been laid.

13. Accounting Concepts are as follows:
• Business entity concept: This concept assumes that, for
accounting purposes, the business enterprise and its owners
are two separate independent entities. Thus, the business
and personal transactions of its owner are separate.
• Money measurement concept.
• Going concern concept.
• Accounting period concept.
• Accounting cost concept.
• Dual aspect concept.
• Matching concept.
• Realisation concept.
• Accrual concept.

14. Accounting
Conventions
• An accounting convention refers to
common practices which are
universally followed in recording and
presenting accounting information of
the business entity.
• Conventions denote customs or
traditions which are in use since
long.
• To be clear, these are nothing but
unwritten laws. The accountants
have to adopt the usage or customs,
which are used as a guide in the
preparation of accounting reports
and statements. These conventions
are also known as doctrine.

15. Accounting Conventions are as follows:
• Consistency
• Full Disclosure
• Materiality
• Conservatism

16. TYPES OF ACCOUNTS
The object of book-keeping is to keep a complete record of all
the transactions that place in the business. To achieve this
object, business transactions have been classified into three
categories:
• Transactions relating to persons.
• Transactions relating to properties and assets
• Transactions relating to incomes and expenses.
1. The accounts falling under the first heading are known as
‘Personal Accounts’.
2. The accounts falling under the second heading are known as
‘Real Accounts’
3. The accounts falling under the third heading are called
‘Nominal Accounts’

17. 1. Personal Accounts:
As the name suggests, Personal Accounts are the ones that are related with
individuals, companies, firms, group of associations etc. These persons
could include natural persons, artificial persons, or representative persons.
Type of Personal Accounts
a. Natural Persons
These accounts relate to natural persons such as Veer’s A/c, Ayan’s A/c etc.
b. Artificial Accounts
These accounts relate to companies and institutions such as Kapoor Pvt Ltd
A/c, Booker’s Club A/c etc.
c. Representative Accounts
Accounts that are a representative of some person are called as
representative accounts. These include Outstanding Wages A/c, Prepaid
Expense A/c etc.
The Golden Rule for Personal Accounts is:
Debit the receiver
Credit the giver

18. 2. Real Account
Real Accounts are the ones that are related with properties, assets
or possessions. These properties can be both physically existing as
well as non-physical in nature. Thus, Real Accounts can be of two
types: Tangible Real Accounts and Intangible Real accounts.
a. Tangible Real Accounts
Tangible Real Accounts are accounts which have physical existence.
In other words, such assets can be seen, felt or touched.
For example, Machinery A/c, Vehicle A/c, Building A/c etc.
a. Intangible Real Accounts
These are the assets or possessions that do not have physical
existence but can be measured in terms of money.
For example, trademarks, patents, goodwill, copyrights etc.
Golden Rule Related To The Personal Account
Debit What Comes In,
Credit What Goes Out

19. 3. Nominal Account
Nominal Accounts relate to income, expenses, losses or gains.
These include Wages A/c, Salary A/c, Rent A/c etc.
Golden Rule Related To The Personal Account
Debit All Expenses and Losses,
Credit All Incomes and Gains

20. Rules and principles governing Double
Entry Book-keeping system
• Double-entry is based on a simple principle, that for
every debit, must have equal and opposite credit.
There should be at least two accounts involved in any
transaction.
• Debit Side = Credit Side
• The double-entry is based on the debit and credit
accounts of the transaction. So, we need to
understand what account kind of debits and what
credits.
• There are three different types of accounts Personal,
Real, and Nominal Accounts. Rules of recording the
transactions are decided based on the type of
account.

22. JOURNAL AND LEDGER
Journal is a simple book of accounts in which all the business
transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any
convenient time.
Journalizing refers to the act of recording each transaction in
the journal and the form in which it is recorded, is known as a
journal entry.

23. SUB-DIVISION OF JOURNAL
When innumerable number of transactions takes place, the journal, as
the sole book of the original entry becomes inadequate. Thus, the
number and type of journals required are determined by the nature of
operations and the volume of transactions in a particular business
1.Sales Day Book- to record all credit sales.
2.Purchases Day Book- to record all credit purchases.
3.Cash Book- to record all cash transactions of receipts as well as
payments.
4.Sales Returns Day Book- to record the return of goods sold to
customers on credit.
5.Purchases Returns Day Book- to record the return of goods
purchased from suppliers on credit.
6.Bills Receivable Book- to record the details of all the bills received.
7.Bills Payable Book- to record the details of all the bills accepted.
8.Journal Proper-to record all residual transactions which do not find
place in any of the aforementioned books of original entry.

24. Journal entries
Q.1 The following transactions are related to Dream
India Pvt. Ltd of Mr. Ashok for the month April 2022.
Pass the journal entries & post them into ledger.
• April 1- Mr. Ashok started business with cash Rs.
10,000, Machinery Rs. 12,000 & Building worth Rs.
15,000.
• April 3 – Open bank account by depositing Rs. 5,000.
• April 5- Purchase goods from Mr. Vishal worth Rs.
5,000.
• April 7- Sold goods worth Rs. 3,000/-.

25. FORMAT OF JOURNAL
In the Books of ……….
Journal Entries for the Month of ………
DATE PARTICULAR LF DR AMOUNT CR AMOUNT
1 2 3 4 5

26. • April 8- Sold goods worth Rs. 3,000/-.
• April 19- Cash withdraw from bank Rs. 1,000/-
• April 21 – Rent paid Rs. 2,000/-
• April 22 – Goods worth Rs. 2,000/- withdrawn for
personal purpose.
• April 24- Purchase machinery worth Rs. 10,000/-
• April 29- Sold goods to Mr. Ravi worth Rs. 2,000/-

27. Journal Entries in the books of Dream India Pvt. Ltd
For the month of April 2022
Date Particular L.F.
Debit
Amount
Credit
Amount
1-4-2022 Cash A/c Dr.
Machinery A/c Dr.
Building A/c Dr.
To Capital A/c
(Being business started with
Cash, Machinery & Building by
Mr. Ashok)
10,000
12,000
15,000
---
--
--
--
37,000
3-4-2022 Bank A/c Dr.
To Cash A/c
(Being bank account is
opened)
5,000
---
--
5,000

28. 5-4-2022 Purchase A/c Dr.
To Vishal's A/c
(Being goods purchased from
Mr. Vishal)
5,000
---
--
5,000
7-4-2022 Cash A/c Dr.
To Sales A/c
(Being goods sold by cash)
3,000
---
--
3,000
8-4-2022 Amit's A/c Dr.
To Sales A/c
(Being goods sold to Mr. Amit)
3,000
---
--
3,000
19-4-2022 Cash A/c Dr.
To Bank A/c
(Being cash withdrawn from
bank)
1,000
---
--
1,000
21-4-2022 Rent A/c Dr.
To Cash A/c
(Being rent paid by cash)
2,000
---
--
2,000

29. 22-4-2022 Drawing A/c Dr.
To Goods A/c
(Being goods withdrawal for
personal use)
2,000
---
--
2,000
24-4-2022 Machinery A/c Dr.
To Cash A/c
(Being new machinery
purchased by cash)
10,000
---
--
10,000
29-4-2022 Ravis A/c Dr.
To Goods A/c
(Being goods sold to Mr. Ravi)
2,000
---
--
2,000
TOTAL 70,000 70,000

40. In the leger books of Dream India Pvt. Ltd
(For the month of April 2022.)
Date Particular j.f Amount Date Particular j.f Amount

41. Cashbook
• Cash book records all
receipts and payments in
cash. Usually the deposits
into bank accounts
maintained by a business
firm, withdrawals from such
accounts and cheque
payments are also recorded
in the cash book.

44. Trial Balance
• A trial balance is an accounting or bookkeeping
report that lists balances from a company’s general
ledger accounts. The debit balances ‘and the credit
balances are listed under their respective fields. The
sum of these columns should be the same.
• The preparation of trial balance occurs periodically,
mostly at the end of every accounting period. The
primary purpose of producing this statement is to
confirm that there are no unequal journal entries in
the books which can hamper the process of
preparing any financial report.

45. Rule of
Trial
Balance
The trial balance rules that you have
to follow while preparing one is –
• All assets must be on the debit side
• All expenses and losses must be on
the debit side
• All liabilities must be on the credit
side
• All income and gain must be on the
credit side

54. UNIT- 2
Financial Statement Preparation, Analysis &
Interpretation:

55. Preparation of Trading, Profit/
Loss Account and Balance Sheet
• Definition:
• The accounts prepared at the
final stage of the accounting
cycle to illustrate the profit or
loss and financial position of a
business concern are known as
the final accounts.

56. • Final Accounts is the last step in the accounting
process. Trial Balance is prepared at the end of all the
accounting year to know the balances of all the
accounts & to test the arithmetic accuracy of
accounts. But the basic objective of accounting is to
know about the profit or loss during the previous
year & present financial position.
• This can be known only if Trading account and Profit
& Loss account and Balance Sheet are prepared at
the end pf year. These are also known as Financial
Statements (Final Account) which are prepared

57. These
accounts
consist of the
following:
Trading Account
Profit and Loss
Account
Balance Sheet

58. Trading
Account
• Trading account is prepared by
trading concerns i.e., concerns
which purchase and sell finished
goods, to know the gross profit or
gross loss incurred by them from
buying and selling of goods during
a particular period of time.
• Gross profit or gross loss is the
difference between the cost of
goods sold and the proceeds of
their sale. If the sale proceeds
exceed the cost of goods sold ,
gross profit is made. Otherwise,
gross loss is made.

59. Proforma of Trading Account

60. Profit &
Loss
Account
• For non-corporate business
organization Profit & Loss account is
second part of income statement. It is
prepared to know the net profit/loss
of business during a particular period.
• Every businessman has to spend on
expenses other than manufacture
or purchase of goods which are
called indirect expenses. There can be
other incomes except sales.
• So gross profit or loss is adjusted
keeping in view these indirect
expenses and other incomes to find
out net profit or net loss.

61. Proforma of Profit & Loss Account

62. Balance
Sheet
• Balance Sheet is a component of
financial statements which shows
balances of capital, liabilities &
assets.
• Balance Sheet is the final phase in
accounting cycle. It is a ‘mirror’ which
reflects the true position of the
assets & liabilities of the business on
a particular date.
• “A statement of financial position of
economic unit disclosing as at a given
moment of time its assets, liabilities
& ownership equities. Eric L. kohler

63. Balance Sheet as at .............
Liabilities Amount Assets Amount
Current Liabilities: Current Assets:
Bank overdraft xxxx Cash in Hand xxxx
Outstanding Expenses xxxx Cash at bank xxxx
Bills Payable xxxx Prepaid Expenses xxxx
Sundry Creditors xxxx Sundry Debtors xxxx
Income received in Advance xxxx Accrued Income xxxx
Bills Receivables xxxx
Fixed Non-Current Liabilities: Closing Stock xxxx
Loan xxxx Fixed Assets:
Capital: xxxx Investments xxxx
Opening Balance xxx Furniture & Fixture xxxx
Add Net Profit xxx Plant and Machinery xxxx
Less Net Loss xxx Building xxxx
Less Drawing xxx Land xxxx
Goodwill xxxx
Loose Tools xxxx

64. Adjustments
in Final
Account
• What are adjustments in
accounting? It all starts mainly with
the accrual concept of accounting,
which says that all income earned
during an accounting period should
be recorded whether it has been
received or not. Similarly, all
expenses incurred during the period
should be recorded regardless of the
actual payment. This is the primary
reason for adjustments in final
accounts.
• If such adjustments in preparation of
financial statements are missed then
the numbers shown by the business
in their final accounts will not be
accurate and true.

66. Ratio Analysis
Introduction:
• Ratio analysis is a quantitative method
of gaining insight into a company's
liquidity, operational efficiency, and
profitability by studying its financial
statements such as the balance sheet
and income statement.

67. Classification
of ratios
Ratios may be classified in
the following two ways:
1. Traditional classification
2. Functional classification

68. 1. Traditional Classification
Traditional classification of ratios is done on the basis
of the financial statements from which the ratios are
calculated.
Under the traditional classification, the ratios are
classified as:
i. Balance sheet ratios,
ii. Income statement ratios and
iii. Inter-statement ratios.

70. 2. Functional Classification
Functional classification of ratios is based on
the purpose for which ratios are computed and it is
the most commonly used classification.
Under the functional classification, the ratios are
classified as follows:
I. Liquidity ratios
II. Long term solvency ratios
III. Turnover ratios
IV. Profitability ratios

71. Functional
Classification of
Ratio
•Current ratio
•Quick ratio.
Liquidity ratios
•Debt equity ratio
•Proprietary ratio
•Capital gearing ratio
Long term solvency ratios
•Stock/ Inventory turnover ratio
•Debtors/ Receivables turnover ratio
•Capital Turnover ratio
•Net Working Capital turnover ratio
•Asset turnover ratio
Turnover ratios
•Gross Profit Ratio
•Net Profit Ratio
•Return on Investment (ROI)
•Earning Per Share (EPS)
•Price Earning Ratio (P/E Ratio)
•Operating Cost Ratio
Profitability ratios

72. Liquidity
Ratios
• Liquidity means capability of being
converted into cash with ease.
Liquidity ratios help to assess the
ability of a business concern to
meet its short-term financial
obligations.
• Short term assets (current assets)
are more liquid as compared to long
term assets (fixed assets).
• Liquidity ratios are also called as
short-term solvency ratios.
Liquidity Ratios include:
(i) Current ratio and
(ii) Quick ratio.

73. (i) Current ratio
• Current ratio is sometimes referred to as working
capital ratio or banker's ratio. Current ratio expresses
the relationship of current assets to current liabilities. It
is widely used as a broad indicator of a company's
liquidity and short-term debt paying ability.
• The 2:1 is considered as the ideal current ratio; the
assumption is even if the value of current assets
declines by 50 % the firm can still pay its current
liabilities.
• Higher the current ratio, the better is the liquidity
position, as the firm will be in a better position to pay
its current liabilities. However, a much higher ratio may
indicate inefficient investment policies of the
management.

74. Sr. No Current Assets Current Liabilities
1. Sundry Debtors Sundry Creditors
2. Bills Receivables Bills Payables
3. Closing Stock/Inventories Short term Bank Loan
4. Short-term Investments Outstanding Expenses
5. Prepaid Expenses Salaries and Wages Payable
6. Marketable Securities & Cash equivalents Short-term Obligations
7. Cash in Hand Bank Overdraft
8. Cash at Bank Notes Payable
9. Notes Receivable Short-term Loans
10. Interest Receivables Unearned Revenue
11. Short-term Loans and Advances Accrued Liabilities
12. Unused Office Supplies Rent Payable
13. Merchandise Inventory Merchandise Accounts Payable
14. Accrued Income Customer Deposits
15. Other Current Assets Other Current Liabilities
List of Current Assets and Current Liabilities

75. (ii) Quick ratio.
Quick ratio gives the proportion of quick assets to
current liabilities. It indicates whether the business is
able to pay its current liabilities as and when they
become due, out of its quick assets.
Quick assets are current assets excluding inventories
and prepaid expenses. It is also known as liquid ratio or
acid test ratio.
It is calculated as follows:
Quick ratio = Quick assets / Current liabilities
• Quick assets = Current assets – Inventories – Prepaid
expenses
Higher the quick ratio, better is the short-term financial
position of an enterprise.

76. Long Term
Solvency
Ratios
Long term solvency means the firm’s
ability to meet its liabilities in the
long run. Long term solvency ratios
help to determine the ability of the
business to repay its debts in the
long run.
The following ratios are normally
computed for evaluating long term
solvency of the business:
• Debt equity ratio
• Proprietary ratio
• Capital gearing ratio

77. i) Debt equity ratio
• Debt equity ratio is calculated to assess the long term
solvency position of a business concern.
• Debt equity ratio expresses the relationship between
long term debt and shareholders’ funds.
• It is computed as follows:
• A high ratio indicates high risk as it may be difficult for
the business concern to meet the obligation to
outsiders.

78. ii) Proprietary ratio
• Proprietary ratio gives the proportion of shareholders’
funds to total assets. Proprietary ratio shows the
extent to which the total assets have been financed by
the shareholders’ funds.
• It is calculated as follows:
• Shareholders’ funds = Equity share capital +
Preference share capital + Reserves and surplus
• Higher the proprietary ratio, greater is the satisfaction
for lenders and creditors, as the firm is less dependent
on external sources of finance.

79. (iii) Capital gearing ratio
• Capital gearing ratio is the proportion of fixed
income bearing funds to equity shareholders’
funds. Fixed income bearing funds include fixed
interest and fixed dividend bearing funds. It is
calculated as follows:
• Capital gearing ratio = Equity shareholders' funds /
Funds bearing Fixed interest or Fixed dividend.

80. Turnover Ratios
• Turnover ratios show how efficiently
assets or other items have been used
to generate revenue from operations.
• They are also called as activity ratios
or efficiency ratios. They show the
speed of movement of various items.
They are expressed as number of
times in relation to the item
compared eg. 2 times, 3 times etc..
The important Turnover Ratios are:
i. Stock/Inventory turnover ratio
ii. Debtors/ Receivables turnover ratio
iii. Capital Turnover ratio
iv. Net Working Capital turnover ratio
v. Asset turnover ratio

81. (i) Stock/Inventory turnover ratio
Inventory turnover measure the relative size of
inventory and influence the amount of cash available to
pay liabilities. A smaller, faster moving inventory means
that the company has less cash tied up in inventory.
Average inventory= Opening Stock + Closing Stock
2
Cost of goods sold= Sales-Gross profit

82. ii. Debtors/ Receivables turnover ratio
• The ability of a company to collect for credit sales in a
timely way affects the company's liquidity. It finds out
how faster debts are being collected.
• Receivable turnover shows how many times, on
average, the receivables were turned into cash during
the period. A high debtors turnover ratio indicated
shorter time span between credit sales and cash
collection. In case credit sales figure is not given, total
sales figure can be used to compute receivables
turnover ratio.

83. iii. Capital Turnover ratio
• This ratio measures the effectiveness with which a firm
uses its financial resources. It indicates the number of
times the capital has been rotated in the process of
doing business.
This ratio is computed as follows:
CTR = Net Sales (Or cost of goods sold)
Capital employed or Shareholders' Equity
Net Sales = Total sales – sales returns (if any)
Cost of goods sold = Opening stock + Purchases + Direct expenses
– Closing stock

84. iv. Net Working Capital Turnover ratio
• This ratio indicates whether working capital has been
effectively utilized in making sales. This ratio is
computed by dividing the net sales or Cost of goods
sold by net working capital.
• High net working capital ratio indicates efficient use of
working capital.
This ratio is computed as follows:
CTR = Net Sales (Or cost of goods sold)
Net Working Capital
Net Sales = Total sales – sales returns (if any)
Cost of goods sold = Opening stock + Purchases + Direct expenses
– Closing stock

85. v. Asset Turnover ratio
• Asset turnover ratio is the ratio between the value of a
company's sales or revenues and the value of its
assets. It is an indicator of the efficiency with which a
company is deploying its assets to produce the
revenue. Thus, asset turnover ratio can be a
determinant of a company's performance
• This ratio is computed as follows:

86. Profitability
ratios
• Profitability ratios are a type of
accounting ratio that helps in
determining the financial
performance of business at the end
of an accounting period.
• Profitability ratios show how well a
company is able to make profits from
its operations.
• Types of profitability ratios are
i. Gross Profit Ratio
ii. Net Profit Ratio
iii. Return on Investment (ROI)
iv. Earnings Per Share (EPS)
v. Price Earning Ratio (P/E Ratio)
vi. Operating Cost Ratio

87. i. Gross Profit Ratio
• Gross Profit Ratio is a profitability ratio that measures
the relationship between the gross profit and net
sales revenue. When it is expressed as a percentage,
it is also known as the Gross Profit Margin.
• Formula for Gross Profit ratio is:
• A fluctuating gross profit ratio is indicative of inferior
product or management practices.

88. ii. Net Profit Ratio
Net profit ratio is an important profitability ratio that
shows the relationship between net sales and net
profit after tax. When expressed as percentage, it is
known as net profit margin.
Formula for net profit ratio is:
It helps investors in determining whether the
company’s management is able to generate profit from
the sales and how well the operating costs and costs
related to overhead are contained.

89. iii. Return on Capital Employed (ROCE) or Return
on Investment (ROI)
• Return on capital employed (ROCE) or Return on
Investment is a profitability ratio that measures how
well a company is able to generate profits from its
capital. It is an important ratio that is mostly used by
investors while screening for companies to invest.
• The formula for calculating Return on Capital
Employed is :
• ROCE or ROI = EBIT ÷ Capital Employed × 100
• Where EBIT = Earnings before interest and taxes or
Profit before interest and taxes
• Capital Employed = Total Assets – Current Liabilities

90. iv. Earning Per Share (EPS)
• Earnings per share or EPS is a profitability ratio that
measures the extent to which a company earns
profit. It is calculated by dividing the net profit
earned by outstanding shares.
• The formula for calculating EPS is:
• Earnings per share = Net Profit ÷ Total no. of shares
outstanding
• Having higher EPS translates into more profitability
for the company.

91. v. Price Earning Ratio
• This is also known as P/E Ratio. It establishes a
relationship between the stock (share) price of a
company and the earnings per share. It is very helpful
for investors as they will be more interested in
knowing the profitability of the shares of the
company and how much profitable it will be in future.
• P/E ratio is calculated as follows:
• P/E Ratio = Market value per share ÷ Earnings per
share
• It shows if the company’s stock is overvalued or
undervalued.
• The lower the P/E ratio is, the better it is for both the
business and potential investors

92. vi. Operating Ratio
• Operating ratio is calculated to determine the cost of
operation in relation to the revenue earned from the
operations.
• The formula for operating ratio is as follows
• Operating Ratio = (Cost of Revenue from Operations
+ Operating Expenses)/ Net Revenue from Operations
× 100

93. Thank you