Management Accounting Unit II

1. Management Accounting – Unit II
Karthikeyan R
Assistant Professor
Department of Commerce with Computer Applications
Dr. N.G.P. ARTS AND SCIENCE COLLEGE
(An Autonomous Institution, Affiliated to Bharathiar University, Coimbatore)
Approved by Government of Tamil Nadu and Accredited by NAAC with A++ Grade (3nd Cycle – 3.64 CGPA)
Dr. N.G.P.- Kalapatti Road, Coimbatore-641048, Tamil Nadu, India
Web: www.drngpasc.ac.in | Email: info@drngpasc.ac.in | Phone: +91-422-2369100

2. Ratio Analysis
The relationship between two figures expressed
mathematically called a “Ratio”. It is a numerical
relationship between two numbers which are related to same
manner.
Ratio analysis is a technique of analysis and
interpretation of financial statements.
It is the process of determination and interpretation of
various ratios for helping in decision making.
It involves three steps:
Calculation of appropriate ratios from the financial statements
Comparison of the ratios with standards otherwise with the past period
Interpretation of ratios.
Dr. NGPASC
COIMBATORE | INDIA

3. Significance
Ratio analysis is a most powerful tool of financial
analysis. It is used as platform to analyze and interpret the
financial data.
It helps the management in decision making and
control.
Ratio Analysis widely used by creditors, banks, financial
institutions, investors and shareholders.
It helps them in making decisions regarding the
granting of credit and making investments in companies.
Dr. NGPASC
COIMBATORE | INDIA

4. Important Managerial uses of Ratio Analysis
Simplifies financial Statements
Helps in measuring performance and position
Facilitates intra-firm comparison
Facilitates inter-firm comparison
Helps in forecasting and planning
Helps in Co – Ordination
Helps in Control
Dr. NGPASC
COIMBATORE | INDIA

5. Classification of Ratios
Classification according to Statements
Profit and Loss A/c Ratio: Ratios calculated on the basis of the
items of the P&L A/c only. Ex: gross profit ratio, net profit
ratio..
Balance sheet Ratio: Ratios calculated on the basis of the items
of the balance sheet only. Ex: current ratio, quick ratio,
proprietary ratio..
Composite Ratio: Ratios based on the figures of P&L A/c as well
as the balance sheet. Ex: debtors and creditors turnover ratio,
return on capital employed.
Dr. NGPASC
COIMBATORE | INDIA

6. Classification of Ratios
Classification according to function
Solvency Ratio: Short-term and Long term ratio solvency ratios,
Ex: current ratio, Debt Equity ratio.
Profitability Ratio: Gross profit ratio, Net profit ratio, operating
profit ratio, Return on capital employed.
Turnover or Activity Ratio: Stock turnover ratio, debtors
turnover ratio, Creditors turnover ratio.
Capital Structure Ratio: Capital gearing ratio.
Dr. NGPASC
COIMBATORE | INDIA