Test: Tools Of Financial Analysis - 2

Accounting Ratio is also called financial ratios provide a way of expressing the relationship between one accounting data point and another which is intended to provide a useful comparison.

Financial statement analysis is of two types i.e. External and internal analysis. External analysis is concerned with comparing business with other firm.

External analysis is concerned with:
Creditors
Government
Financial Institutions

Following are the quick assets except Loose Tools:
Trade Receivables
Cheques in hand
Bank Balance

Common Size financial statement is Vertical Analysis of financial statements. It involves amount of each individual item of balance sheet and statement of profit and loss.

Accounting Ratio is arithmetical relationship between two accounting variable. It is a mathematical expression of accounting figures in the form of percentage and time.

Ratio Analysis is a tool used by individuals to conduct a quantitative analysis of information in a company's financial statements.

Accounting Ratios can be expressed in:
•Percentage
•Fraction
•Times

Formula of Calculating Working Capital: Working Capital = Current Assets – Current Liabilities

Current Ratio shows relationship between current assets and current liabilities.

Ideal liquid ratio is 1:1 i.e. Liquid assets should be equal to the current liabilities. In other words, a firm is able to pay its current liabilities.

Quick Ratio is also known as liquid ratio. Formula: Liquid Assets/ Current Liabilities

Formula of Debt Equity Ratio is:
Formula: Debt/Equity
Debt means long term borrowings and Equity means shareholders’ funds.

Following ratios are solvency ratios except Quick ratio:
Proprietary Ratio
Total Assets to Debt Ratio
Debt equity ratio

Following ratios are solvency ratios except Quick ratio:
Proprietary Ratio
Total Assets to Debt Ratio
Debt equity ratio

Quick assets do not include inventories. Stores and spares is the part of inventories.

Activity ratio is always known as performance or turnover ratio. The main purpose of this ratio is to know that how effectively the resources have been used.

Inventory turnover ratio is also known as stock turnover ratio. Inventory is wider term whereas stock is a narrow term.

Following items are part of shareholders’ funds except Proposed Dividend:
Share Capital
General Reserve
Balance i.e. Surplus in Statement of P/L