This document provides information on ratio analysis, including definitions, calculations, and uses of various types of ratios. It discusses profitability ratios, coverage ratios, turnover ratios, financial ratios, and control ratios. For each type of ratio, it provides examples and explanations of important individual ratios calculated within that category, such as gross profit ratio, current ratio, debt-to-equity ratio, and budget variance ratio. The document is intended to help explain ratio analysis and how different financial ratios can be used for analysis and decision making.
Approaches to determine appropriate capital structure - EBIT-EPS Approch
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Organisational Performance Measures. This is only for study purpose, The content is refereed from various available sources. Through this, the learner, decision makers are may got benefited.
An asset is a property or resource having monetary value, which is capable of producing some future economic benefit, owned by an individual or entity
Simply stated, assets represents the value of ownership/possession that can be converted into cash
In financial accounting concept, assets are resources that can generate cashflow
The balance sheet of a firm records all the current as well as non-current assets owned by the firm
Current Assets
Current assets are short-term economic resources that are expected to be converted into cash within one year
Examples_
Stock
Inventories
Prepaid Expenses
Marketable Securities
Short-term Investments
Fixed Assets
These assets are long-term resources that cannot be easily converted into cash instead are utilized to generate economic benefits for longer period of time
Examples -
Land
Building
Plant & Equipment
Furniture
Machinery
Tangible Assets
A tangible asset is an asset that has a physical form. It could be either fixed or current
Examples-
Land
Building
Furniture
Plant & Equipment
Inventory
Cash
Intangible Assets
An intangible asset is an asset that is not physical in nature. Examples-
Goodwill
Patent
Copyright
Franchisee Agreement
Trademark
Operating Assets
These are the assets required for day to day business transactions. These assets are used in core production process. These assets are like cash, bank balance, inventory
Non-operating Assets
These are the assets owned by business but not used in daily operational activity instead are hold for selling or using them in future. These non-operating assets can provide diversification and act as a financial support
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Approaches to determine appropriate capital structure - EBIT-EPS Approch
anybody can join my google class (financial Mangement)
by entering class code : avkkvj5
Organisational Performance Measures. This is only for study purpose, The content is refereed from various available sources. Through this, the learner, decision makers are may got benefited.
An asset is a property or resource having monetary value, which is capable of producing some future economic benefit, owned by an individual or entity
Simply stated, assets represents the value of ownership/possession that can be converted into cash
In financial accounting concept, assets are resources that can generate cashflow
The balance sheet of a firm records all the current as well as non-current assets owned by the firm
Current Assets
Current assets are short-term economic resources that are expected to be converted into cash within one year
Examples_
Stock
Inventories
Prepaid Expenses
Marketable Securities
Short-term Investments
Fixed Assets
These assets are long-term resources that cannot be easily converted into cash instead are utilized to generate economic benefits for longer period of time
Examples -
Land
Building
Plant & Equipment
Furniture
Machinery
Tangible Assets
A tangible asset is an asset that has a physical form. It could be either fixed or current
Examples-
Land
Building
Furniture
Plant & Equipment
Inventory
Cash
Intangible Assets
An intangible asset is an asset that is not physical in nature. Examples-
Goodwill
Patent
Copyright
Franchisee Agreement
Trademark
Operating Assets
These are the assets required for day to day business transactions. These assets are used in core production process. These assets are like cash, bank balance, inventory
Non-operating Assets
These are the assets owned by business but not used in daily operational activity instead are hold for selling or using them in future. These non-operating assets can provide diversification and act as a financial support
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what is fund flow statement, current and noncurrent assets and liabilities, objectives, characteristics, and limitations of fund flow statement, how to make fund flow, format of fund flow, sources of fund flow
Capital Employed is represented as total assets minus current liabilities. In other words, it is the value of the assets that contribute to a company’s ability to generate revenue
what is fund flow statement, current and noncurrent assets and liabilities, objectives, characteristics, and limitations of fund flow statement, how to make fund flow, format of fund flow, sources of fund flow
Capital Employed is represented as total assets minus current liabilities. In other words, it is the value of the assets that contribute to a company’s ability to generate revenue
Prepare a witten financial analysis. .This should include calculation.pdfarrowit1
Prepare a witten financial analysis. .This should include calculations and discussion related to
the Chapter 5 appendix (Appendix 5A). See illustration 5A-1 for a summary of financial ratios.
Be sure to include (1) these ratios, (2) what they mean and (3) how you interpret them: o Current
ratio o Accounts receivable turnover o Inventory turnover o Profit margin on sales o Return on
assets o Return on stockholders\' equity o Debt to assets ratio Submit a WORD document via
D2L- Assessments - Assignments
Solution
Ans ) The ratios are not meant for a particular person or firm.People in various fields of life are
interested in ratio analysis from their own angles.The parties attached with business or firm are
creditors i.e. mony lenders, shareholders.Management uses the toolof Ratio analysisto
interpretate the information from their own angles.For example creditors are interested in
liquidity and solvency for which they will make use of current ratio , liquidity ratio,
proprietaryRatio, debt equity Ratio,capital gearing Ratio.Shareholders are interested in
profitability and long term solvency.They want to know the rate of return on their capital
employed for which they willmake use of Gross Profit Ratio, Operating Ratio, Dividend ratio
and Price Earning Ratio.Management is interested in overall efficiency of business which can be
better jud ged through Ratios like turnover to fixed assets, turnover to capital employed, stock
turnover ratio etc.So, from the above discussion it is clear that different prties uses the tool of
Ratio analysis for taking their own decisions
The particular purpose of a user is determining the particular Ratios that might be used ofr
financial analysis.Here we will discuss and calculate various ratios to do fianacial analysis.
Current Ratio = Current Assests/Current Liabilities
Current Assests= Cash + Bank+ Prepaid Insurance+Inventory+ Accounts Recievables
Current Assests=44746.5 +510+500+5000+29000=79756.5
Current Laibilites =Accounts payable
Current Laibilites= 30064.83
Current Ratio = 79756.5/30064.83= 2.7
Interpretation : Generally a current ratio of 2 times or 2:1 is cosidered to be satisfactory.Here the
current ratio of greater than 2 denotes the good liquidity position but it also indicates assest
liabilty mis match.But current ratio greater than 2 is generally preferred as compared to less than
2.
2.Account receivables turnover :It represents the number of times the cash is collected from
debtors.Lower turnover denotes poor collection and means that funds are blocked ofr longer
period of tiem and vice-versa.It also measure the liquidity of the firm.It shows how quickly
debtors (receivables) are converted into sales.The Account receivables turnover shows the
relationship between sales and debtors of the firm.
Account receivables turnover= Net Credit Annual Sales/Average trade debtors
3. Inventory turnover :This ratio indicates the number of times inventory or stock is replaced
during the year.The turnover of invent.
Ratio AnalysisFinancial ratios can be used to examine various as.docxcatheryncouper
Ratio Analysis
Financial ratios can be used to examine various aspects of the financial position and performance of a business and are widely used for planning and control purposes.
They can be used to evaluate the financial health of a business and can be utilised by management in a wide variety of decisions involving such areas as profit planning, pricing, working-capital management, financial structure and dividend policy.
Ratio analysis provides a fairly simplistic method of examining the financial condition of a business.
A ratio expresses the relation of one figure appearing in the financial statements to some other figure appearing there.
Ratios enable comparison between businesses.
Differences may exist between businesses in the scale of operations making comparison via the profits generated unreliable.
Ratios can eliminate this uncertainty.
Other than comparison with other businesses, it is also a valuable tool in analysing the performance of one business over time.
However useful ratios are not without their problems.
Figures calculated through ratio analysis can highlight the financial strengths and weaknesses of a business but they cannot, by themselves, explain why certain strengths or weaknesses exist or why certain changes have occurred.
Only detailed investigation will reveal these underlying reasons. Ratios must, therefore, be seen as a ‘starting point’.
Financial ratio classification
The following ratios are considered the more important for decision-making purposes:
Ratios can be grouped into certain categories, each of which reflects a particular aspect of financial performance or position.
The following broad categories provide a useful basis for explaining the nature of the financial ratios to be dealt with.
Profitability.Businesses come into being with the primary purpose of creating wealth for the owners. Profitability ratios provide an insight to the degree of success in achieving this purpose. They express the profits made in relation to other key figures in the financial statements or to some business resource.
Efficiency.Ratios may be used to measure the efficiency with which certain resource have been utilised within the business. These ratios are also referred to as active ratios.
Liquidity.It is vital to the survival of a business that there be sufficient liquid resources available to meet maturing obligations. Certain ratios may be calculated that examines the relationship between liquid resources held and creditors due for payment in the near future.
Gearing.This is the relationship between the amount financed by the owners of the business and the amount contributed by outsiders, which has an important effect on the degree of risk associated with a business. Gearing is then something that managers must consider when making financing decisions.
Investment.Certain ratios are concerned with assessing the returns and performance of shares held in a particular business.
Profitabi ...
Ratio Analysis in financial statements (KK MAHESH PU COLLEGE)Nikhil Priya
There are many standard ratios used to evaluate the overall financial condition of an enterprise. These ratios maybe used by managers within a firm, by current and potential shareholders and by a firm's creditors. Financial analyst use financial ratios to compare the strengths and weaknesses in various companies.
Financial ratios are indispensable to form a clear financial insight in the position of a company. They show the financial health and the potential of the company.
Ratios and Formulas in Customer Financial AnalysisFinancial stat.docxcatheryncouper
Ratios and Formulas in Customer Financial Analysis
Financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for the purpose of evaluating aspects of a company's operations and fall into the following categories:
· Liquidity ratios measure a firm's ability to meet its current obligations.
· Profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business.
· Leverage ratios measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time.
· Efficiency, activity or turnover ratios provide information about management's ability to control expenses and to earn a return on the resources committed to the business.
A ratio can be computed from any pair of numbers. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be derived. A standard list of ratios or standard computation of them does not exist. The following ratio presentation includes ratios that are most often used when evaluating the credit worthiness of a customer. Ratio analysis becomes a very personal or company driven procedure. Analysts are drawn to and use the ones they are comfortable with and understand.
1. Liquidity Ratios
Working Capital
Working capital compares current assets to current liabilities, and serves as the liquid reserve available to satisfy contingencies and uncertainties. A high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due.
Formula
Current Assets - Current Liabilities
Acid Test or Quick Ratio
A measurement of the liquidity position of the business. The quick ratio compares the cash plus cash equivalents and accounts receivable to the current liabilities. The primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio will be lower than its current ratio. It is a stringent test of liquidity.
Formula
Cash + Marketable Securities + Accounts Receivable
Current Liabilities
Current Ratio
provides an indication of the liquidity of the business by comparing the amount of current assets to current liabilities. A business's curren ...
Introduction
Needs and Role of Accounting
System of Accounting
Branches of Accounting
Objectives of Accounting
Generally Accepted Accounting principles : (Accounting Concepts and Conventions)
Documents in Accounting
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Natural Products, In vitro evaluation techniques for Antioxidants, Antimicrobial and Anticancer drugs. In vivo evaluation techniques
for Anti-inflammatory, Antiulcer, Anticancer, Wound healing, Antidiabetic, Hepatoprotective, Cardio protective, Diuretics and
Antifertility, Toxicity studies as per OECD guidelines
Embracing GenAI - A Strategic ImperativePeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
Model Attribute Check Company Auto PropertyCeline George
In Odoo, the multi-company feature allows you to manage multiple companies within a single Odoo database instance. Each company can have its own configurations while still sharing common resources such as products, customers, and suppliers.
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
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A Strategic Approach: GenAI in EducationPeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
Operation “Blue Star” is the only event in the history of Independent India where the state went into war with its own people. Even after about 40 years it is not clear if it was culmination of states anger over people of the region, a political game of power or start of dictatorial chapter in the democratic setup.
The people of Punjab felt alienated from main stream due to denial of their just demands during a long democratic struggle since independence. As it happen all over the word, it led to militant struggle with great loss of lives of military, police and civilian personnel. Killing of Indira Gandhi and massacre of innocent Sikhs in Delhi and other India cities was also associated with this movement.
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Ratio Analysis- Dr.J.Mexon
1. DR. J. MEXON P. RAYAN
MANAGEMENT ACCOUNTING
– Unit 2 (Ratio Analysis)
2. RATIO ANALYSIS
Ratio analysis is a technique of analysis and
interpretation of financial statements. It is the
process of establishing and interpreting various
ratios for helping in making certain decisions.
However, ratio analysis is not an end in itself. It
is only a means of better understanding of
financial strengths and weaknesses of a firm.
Calculation of mere ratios does not serve any
purpose, unless several appropriate ratios are
analysed and interpreted.
3. Interpretation of the Ratios
1) Single absolute ratios :
2) Group of ratios :
3) Historical comparison :
4) Projected ratios :
5) Inter-firm comparison :
4. USES OF RATIO ANALYSIS
1. Managerial uses of Ratio Analysis
Helps in decision making :
Helps in financial forecasting and planning :
Helps in communicating :
Helps in co-ordination :
Helps in control :
Other uses :
2. Utility to Shareholders/ Investors :
3. Uses to Creditors :
4. Uses to Employees :
5. Uses to Government :
5. LIMITATIONS OF RATIO ANALYSIS
1. Limited use of a single ratio :
2. Lack of adequate standards :
3. Inherent limitations of accounting :
4. Change of accounting procedure :
5. Window dressing :
6. Personal bias :
7. Un comparable :
8. Absolute figures distortive :
9. Price level changes :
10. Ratios no substitutes :
7. TYPES OF RATIO ANALYSIS
I. 1. Profitability Ratios
II. 2. Coverage Ratios
III. 3. Turnover Ratios
IV. 4. Financial Ratios
V. 5. Control Ratios
8. I. PROFITABILITY RATIOS
Profitability ratios are a class of financial metrics that are used to assess a
business's ability to generate earnings relative to its revenue, operating costs,
balance sheet assets, or shareholders' equity over time, using data from a
specific point in time. Profitability is an indication of the efficiency with which
the operations of the business are carried on. Poor operational performance
may indicate poor sales and hence poor profits. A lower profitability may areise
due to the lack of control over the expenses. Profitability refers to
the financial performance of the business. Accounting Ratios that
measure profitability are known as Profitability Ratios.
1. Gross Profit Ratio:
2. Operating Ratio
3. Operating Profit Ratio
4. Net Profit Ratio
5. Return on Investment
6. Return on Equity Shareholders’ Fund or Return on Net Worth:
7. Return on Total Assets:
8. Earnings per Share:
9. Payout Ratio:
9. 1. Gross profit: Gross Profit Ratio establishes the
relationship between gross profit and Revenue from
Operations, i.e. Net Sales of an enterprise. The
main objective of computing Gross Profit Ratio is to
determine the efficiency of the business. We can
also compare this ratio with the ratio of earlier years
or with that of other firms to compare and to assess
the efficiency of the business. Therefore, Higher
Gross Profit Ratio is better as it leaves a higher
margin to meet operating expenses and the creation
of reserves.
Gross Profit Ratio = (Gross Profit/Revenue from
Operations) x 100
10. 2. Operating Ratio: It establishes the relationship
between operating costs and Revenue
from Operations. Operating cost includes Cost of
Revenue from Operations and Operating Expenses.
These are those costs which are incurred for
operating activities of the business. The objective of
computing Operating Ratio is to assess the
operational efficiency of the business. Lower
Operating Ratio is better because it leaves a
higher profit margin to meet non-operating
expenses, to pay the dividend, etc. A rise in the
Operating Ratio indicates a decline in efficiency.
Operating Ratio = (Cost of Revenue from
Operations + Operating Expenses/Revenue from
Operations) x 100
11. 3. Operating Profit ratio: Operating Profit Ratio
measures the relationship between Operating
Profit and Revenue from Operations, i.e. Net
Sales. We compute Operating Profit Ratio by
dividing operating profit by revenue from
operations (Net Sales) and is express
in Percentage.
Operating Profit Ratio = (Operating
Profit/Revenue from Operations) x 100
12. 4. Net profit ratio: Net Profit Ratio measures
the relationship between Net Profit and Net
Sales. It shows the percentage of Net Profit
earned on Revenue from Operations.
Net Profit Ratio = (Net Profit/Net Sales) x
100
Net Profit Ratio indicates the overall efficiency of
the business. Higher the Net Profit Ratio, better
is the business. An increase in the ratio over the
previous year shows improvement in operational
efficiency.
13. 5. Return on Investment: Return on Investment
or Return on Capital Employed shows the
relationship of profit (profit before interest and
tax) with capital employed. The result of
operations of a business is either profit or loss.
The funds or sources used in the business to
earn profit/loss are proprietors’ (shareholders’)
funds and loans.
Return on Investment = (Net Profit before
Interest, Tax and Dividend/Capital
Employed) x 100
14. 6. Return on Equity Shareholders’ Fund or
Return on Net Worth: This ratio is a
measure of the percentage of net profit to
equity shareholders’ funds. The ratio is
expressed as follows: Here,
Equity Shareholders’ Fund = Equity Share
Capital + Capital Reserves + Revenue
Reserves+ Balance of Profit and Loss
Account − Fictitious Assets − Non-
business Assets
15. 7. Return on Total Assets: This ratio is
calculated to measure the profit after tax against
the amount invested in total assets to ascertain
whether assets are being utilized properly or not.
Suppose net profit after tax is Rs.20,000 and
total assets are Rs.1,00,000. Return on total
assets will be 20% [i.e., Rs.20,000 ÷
Rs.1,00,000 x 100]. The higher the ratio, the
better it is for the concern.
16. 8. Earning Per share: This helps in determining
the market price of equity shares of the company
and in estimating the company’s capacity to pay
dividend to its equity shareholders.
If there are both preference and equity share
capitals, then out of net income first of all
preference dividends should be deducted in
order to find out the net income available for
equity shareholders. The performance and
prospects of the company are affected by
earning per share.
17. 9. Payout Ratio: This ratio indicates as to what
proportion of earning per share has been used for
paying dividend and what has been retained for
ploughing back.
This ratio is very important from shareholders’ point
of view as it tells him that if a company has used
whole or substantially the whole of it’s earning for
paying dividend and retained nothing for future
growth and expansion purposes, then there will be
very dim chances of capital appreciation in the price
of shares of such company.
18. 2. COVERAGE RATIOS
These ratios indicate the extent to which the
interests of the persons entitled to get a fixed
return (i.e. interest or dividend) or a scheduled
repayment as per agreed terms are safe. The
higher the cover, the better it is. Under this
category the following ratios are calculated:
(i) Fixed Interest Cover:
(ii) Fixed Dividend Cover:
19. Fixed Interest Cover: It really measures the
ability of the concern to service the debt. This
ratio is very important from lender’s point of
view and indicates whether the business
would earn sufficient profits to pay periodically
the interest charges.
Fixed Dividend Cover: This ratio is important
for preference shareholders entitled to get
dividend at a fixed rate in priority to other
shareholders.
20. 3. TURN OVER RATIOS
These ratios are very important for a concern to judge
how well facilities at the disposal of the concern are
being used or to measure the effectiveness with which a
concern uses its resources at its disposal. In short,
these will indicate position of assets usage. The greater
the ratio more will be efficiency of asset usage. The
lower ratio will reflect the under utilisation of the
resources available at the command of the concern.
(i) Sales to Capital Employed (or Capital Turnover)
Ratio:
(ii) Sales to Fixed Assets (or Fixed Assets Turnover)
Ratio:
(iii) Sales to Working Capital (or Working Capital
Turnover) Ratio:
(iv) Total Assets Turnover Ratio:
21. 4. FINANCIAL RATIOS
These ratios are calculated to judge the financial position of the
concern from long-term as well as short-term solvency point of
view. These ratios can be divided into two broad categories:
(A) Liquidity Ratios: These ratios are used to measure the
firm’s ability to meet short term obligations. They compare short
term obligations to short term (or current) resources available to
meet these obligations. From these ratios, much insight can be
obtained into the present cash solvency of the firm and the
firm’s ability to remain solvent in the event of adversity.
(i) Current Ratio (or Working Capital Ratio):
(ii) Liquid (or Acid Test or Quick) Ratio:
(iii) Absolute Liquidity (or Super Quick) Ratio:
(iv) Ratio of Inventory to Working Capital:
22. i.) Current Ratio: This is the most widely used
ratio. It is the ratio of current assets to current
liabilities. It shows a firm’s ability to cover its
current liabilities with its current assets.
Generally 2 : 1 is considered ideal for a concern
i.e., current assets should be twice of the current
liabilities. If the current assets are two times of
the current liabilities, there will be no adverse
effect on business operations when the payment
of current liabilities is made.
23. ii.) Liquid Ratio: This is the ratio of liquid assets
to liquid liabilities. It shows a firm’s ability to
meet current liabilities with its most liquid (quick)
assets. 1 : 1 ratio is considered ideal ratio for a
concern because it is wise to keep the liquid
assets at least equal to the liquid liabilities at all
times.
Liquid assets are those assets which are readily
converted into cash and will include cash
balances, bills receivable, sundry debtors and
short-term investments.
24. iii.) Absolute Liquidity Ratio: Though receivables are
generally more liquid than inventories, there may be
debts having doubt regarding their real stability in time.
So, to get idea about the absolute liquidity of a concern,
both receivables and inventories are excluded from
current assets and only absolute liquid assets, such as
cash in hand, cash at bank and readily realizable
securities are taken into consideration.
The desirable norm for this ratio is 1 : 2, i.e., K.1 worth
of absolute liquid assets are sufficient for K.2 worth of
current liabilities. Even though the ratio gives a more
meaningful measure of liquidity, it is not in much use
because the idea of keeping a large cash balance or
near cash items has long since teen disproved. Cash
balance yields no return and as such is barren.
25. iv.) Ratio of Inventory to Working Capital: In
order to ascertain that there is no overstocking,
the ratio of inventory to working capital should
be calculated.
Working Capital is the excess of current assets
over current liabilities. Increase in volume of
sales requires increase in size of inventory, but
from a sound financial point of view, inventory
should not exceed amount of working capital.
The desirable ratio is 1 : 1.
26. (B) Stability Ratios:These ratios help in
ascertaining the long term solvency of a firm which
depends on firm’s adequate resources to meet its
long term funds requirements, appropriate debt
equity mix to raise long term funds and earnings to
pay interest and installment of long term loans in
time (i.e., coverage ratios).
(i) Fixed Assets Ratio:
(ii) Ratio of Current Assets to Fixed Assets:
(iii) Debt Equity Ratio:
(iv) Proprietary Ratio:
27. i.) Fixed Asset Ratio: This ratio explains
whether the firm has raised adequate long term
funds to meet its fixed assets requirements.
This ratio gives an idea as to what part of the
capital employed has been used in purchasing
the fixed assets for the concern. If the ratio is
less than one it is good for the concern.
28. ii.) Ratio of Current Assets to Fixed Assets:
This ratio will differ from industry to industry and,
therefore, no standard can be laid down. A
decrease in the ratio may mean that trading is
slack or more mechanisation has been put
through. An increase in the ratio may reveal that
inventories and debtors have unduly increased
or fixed assets have been intensively used. An
increase in the ratio, accompanied by increase
in profit, indicates the business is expanding.
29. iii.) Debt Equity Ratio: It measures the extent of
equity covering the debt. This ratio is calculated
to measure the relative proportions of outsiders’
funds and shareholders’ funds invested in the
company. This ratio is determined to ascertain
the soundness of long term financial policies of
that company and is also known as external-
internal equity ratio.
30. iv.) Proprietary Ratio: A variant of debt to
equity ratio is the proprietary ratio which shows
the relationship between shareholders’ funds
and total tangible assets.
This ratio should be 1: 3 i.e., one-third of the
assets minus current liabilities should be
acquired by shareholders’ funds and the other
two-thirds of the assets should be financed by
outsiders funds. It focuses the attention on the
general financial strength of the business
enterprise.
31. 5. CONTROL RATIOS
Control ratios are used by the management to know
whether the deviations of the actual performance from
the budgeted performance are favourable or
unfavourable. If the ratio is 100% or more the
performance is considered as favourable and if the ratio
is less than 100% the performance is considered as
unsatisfactory. This ratio indicates the extent to which
budgeted hours of activity is actually utilized. If the ratio
is 85%, budgeted capacity is utilized up-to 85% and
15% capacity remains unutilized.
This ratio measures the level of activity attained during
the budget period.