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Classification of Ratios - Analysis and Interpretation of Financial Statement, Cost Accounting Video Lecture | Cost Accounting - B Com
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FAQs on Classification of Ratios - Analysis and Interpretation of Financial Statement, Cost Accounting Video Lecture - Cost Accounting - B Com
| 1. What are the different types of ratios used for financial statement analysis? |  |
Ans. There are several types of ratios used for financial statement analysis, including liquidity ratios, profitability ratios, activity ratios, and solvency ratios. Liquidity ratios measure a company's ability to meet short-term obligations, profitability ratios assess a company's profitability and return on investment, activity ratios evaluate the efficiency of a company's operations, and solvency ratios determine a company's long-term financial stability.
| 2. How can liquidity ratios help in analyzing a company's financial position? | |
Ans. Liquidity ratios help in assessing a company's ability to meet its short-term obligations. Ratios like the current ratio and quick ratio provide insights into a company's liquidity by comparing its current assets to its current liabilities. A higher ratio indicates a better ability to cover short-term obligations, while a lower ratio may indicate potential liquidity issues.
| 3. What is the significance of profitability ratios in financial analysis? | |
Ans. Profitability ratios are important in financial analysis as they measure a company's ability to generate profits from its operations. Ratios such as gross profit margin, net profit margin, and return on equity (ROE) indicate the company's efficiency in generating profits and managing expenses. Higher profitability ratios generally reflect a more successful and financially stable company.
| 4. How do activity ratios help in evaluating a company's operational efficiency? | |
Ans. Activity ratios assist in evaluating a company's operational efficiency by measuring how effectively it utilizes its assets to generate sales or revenue. Ratios like inventory turnover ratio, accounts receivable turnover ratio, and asset turnover ratio provide insights into how efficiently a company manages its inventory, collects payments from customers, and utilizes its assets to generate sales. Higher activity ratios generally indicate better operational efficiency.
| 5. Why are solvency ratios important in determining a company's long-term financial stability? | |
Ans. Solvency ratios play a crucial role in determining a company's long-term financial stability by assessing its ability to meet long-term obligations. Ratios such as debt-to-equity ratio, interest coverage ratio, and debt ratio measure the proportion of debt in a company's capital structure and its ability to cover interest payments. Higher solvency ratios indicate a lower risk of financial distress and a stronger ability to honor long-term obligations.
Text Transcript from Video
now let's get into the topic today we
are going to talk about the various
classifications of issues let me just
come back here whether anyone that's
facing difficulty in listening to my
voice it is I would request you to get
in touch with our organizer suite
linnekar you can send her a message and
be able to Vega
okay fine thank you
now what are the classifications of
ratios we are going to classify the
ratios broadly into number one liquidity
ratios number two capital structure or
leverage ratios three activity ratios
for profitability ratios okay so what we
are going to understand in liquidity
ratios let's get started we want to
understand liquidity ratios you have to
visualize balance sheet like this that
is your liabilities on your balance
sheet can be divided into short term and
long term similarly your assets can be
divided into short term assets and long
term assets okay but when we talk about
liquidity ratios our focus is going to
be only between these two items that is
short term liabilities and short term
assets so what do we mean by liquidity
first of all liquidity means your
ability to meet your short-term
expensive and short term obligations I
am stressing on the word ability that is
you should be in a position to meet your
obligations you should be in a position
to meet your expenses and when that
would be possible only when it looks
like a scenario like this that is your
liabilities should be lesser your assets
should be greater if you look at the
shaded region I have a small region for
liabilities I have a larger region for
assets it means the liabilities which I
have to pay in short period should be
less than what I am going to get back as
assets in short period it means
basically I'm indicating current assets
here okay my current assets should be
greater than current liability and if
there is going to happen I'm having
comfortable liquidity position so how we
are going to discuss this further okay
it means we are going to classify the
liquidity ratios into four number one
current ratio number two quick ratio
number three cash ratio absolutely
quality ratio and number four basic
difference interval ratio so today in
our discussion I will be talking only
about these two ratios as far as
liquidity ratios are concerned because I
am going to focus more more on the
ratios which have immediate practical
relevance and immediate application for
professional examinations so these two
ratios will not be discussing today okay
so these two ratios are very critical
from practical point of view from
banking point of view okay so let's get
started how to understand current ratio
if you want to understand current ratio
again you have to visualize the balance
sheet like this that is liabilities can
be divided into current and long long
term liabilities so I am taking current
liabilities on liabilities and on the
assets and again current assets so again
if you notice the way in which I have
structured current liabilities have a
smaller portion
whereas current assets has a Jif version
it means you should always have more
current than your current like this why
because current liabilities are those
liabilities which you have to pay with
initiative of 1 year and if you want to
pay them with a bit of 1 year you need
some losers in the form of cash or cash
equivalents so that you can get those
two sources and pedis it so these are
your applications if these are your
liabilities but paying those liabilities
you need some assets and those assets
are only current assets it means you
can't think of filling your fix it aside
and paying your current liability and if
that is going to happen it's going to be
the end of the business okay so for
understanding the current ratio this
picture should help you and let's take
some example the formula for current
ratio I believe all of you would be
knowing right from your school time
current ratio is nothing but current
asset by current liability but what does
drift communicate let's see let's take a
small case if there is a current
liability of 100
Sandra craters of 200 both put together
is a total current leverage of 300 and
let's say you have current average cash
9200 stock of 200 receivables of 200
what is happening here you have total
current liabilities of 300 and you have
total current assets of 600 it means you
have an obligation to pay 300 within a
period of one year and for paying that
300 you have various assets which can be
converted into cash within a period of
one year
and that is 600 it means your liquidity
position is said to be very comfortable
why you have to pay 300 you have 600 and
if I can take current ratio it is going
to be very comfortable if the same if I
put it in the form of a chart let's say
this of this blue shade indicates my
current liability and for paying that
current liability I have so much of
current asset okay it means I have some
excess portion this excess portion that
is current assert minus current
liability will be called as positive net
working capital in our case it is 600
minus 300 and that's 300 so what is this
300 from where it has come this 300 is
basically net working capital which
represents the long term funds that are
used before funding the current assets
okay so if you want to have a healthy
business a business with a healthy
liquidity position that should be
positive net working capital let's
understand this even in a better way
it's take this case - you have current
liabilities same 100 and 200 the current
assets 100 stock of 100 receivables of
hundred so here your total is three
hundred and three hundred it means you
have to pay three hundred within a
period of one year and you have current
assets of three hundred so if I put this
in a graph like this where obligation is
three hundred and your losses are 300 it
looks like perfect but you will
understand it's not perfect when you
appreciate what is quicker issue you
have to pay three hundred for paying
three hundred you have the sources of
three hundred but it's not going to work
fine you will understand little later it
will also have a look at case three very
very important and this case will help
you to appreciate why current which is
so important
it's state B Current Liabilities same
100 and 200 but your asserts or cash in
bank 50 stock of 75 with your business
on the way it means your total
liabilities or 300 whereas the total
assets or resources available or 200 it
means now clearly your company's in a
problem why you have to pay this 300
within a period of one year but for
paying the 300 the resources what you
have is only 200 so if I put up in this
chart 300 it is the liability whereas
this issue's available is only 200 so
clearly I have a shortage and this is a
danger zone why because current
liabilities are very very or they are
going to be very much notorious because
if you don't pay them on time they'll
ensure your business comes to an order
why because they're all basically
short-term lenders they need money back
to ensure their operations working
continuously okay and if you are going
to play with them if you are going to
delay them in making the payment then
they would ensure that all legal steps
are taken and you not be in a position
to run your business properly okay so
all would effect and this should never
happen so here you have current
liability of 300 years current this is
the only 200 and you are facing a
shortage and this shortage is called as
negative working capital if you
recollect I said positive working
capital is a good strength for the
company but as negative needed to lose
something with your company should die
for or they should not think about it
because it is going to make the company
to land in various problems
are going to talk about the various
classifications of issues let me just
come back here whether anyone that's
facing difficulty in listening to my
voice it is I would request you to get
in touch with our organizer suite
linnekar you can send her a message and
be able to Vega
okay fine thank you
now what are the classifications of
ratios we are going to classify the
ratios broadly into number one liquidity
ratios number two capital structure or
leverage ratios three activity ratios
for profitability ratios okay so what we
are going to understand in liquidity
ratios let's get started we want to
understand liquidity ratios you have to
visualize balance sheet like this that
is your liabilities on your balance
sheet can be divided into short term and
long term similarly your assets can be
divided into short term assets and long
term assets okay but when we talk about
liquidity ratios our focus is going to
be only between these two items that is
short term liabilities and short term
assets so what do we mean by liquidity
first of all liquidity means your
ability to meet your short-term
expensive and short term obligations I
am stressing on the word ability that is
you should be in a position to meet your
obligations you should be in a position
to meet your expenses and when that
would be possible only when it looks
like a scenario like this that is your
liabilities should be lesser your assets
should be greater if you look at the
shaded region I have a small region for
liabilities I have a larger region for
assets it means the liabilities which I
have to pay in short period should be
less than what I am going to get back as
assets in short period it means
basically I'm indicating current assets
here okay my current assets should be
greater than current liability and if
there is going to happen I'm having
comfortable liquidity position so how we
are going to discuss this further okay
it means we are going to classify the
liquidity ratios into four number one
current ratio number two quick ratio
number three cash ratio absolutely
quality ratio and number four basic
difference interval ratio so today in
our discussion I will be talking only
about these two ratios as far as
liquidity ratios are concerned because I
am going to focus more more on the
ratios which have immediate practical
relevance and immediate application for
professional examinations so these two
ratios will not be discussing today okay
so these two ratios are very critical
from practical point of view from
banking point of view okay so let's get
started how to understand current ratio
if you want to understand current ratio
again you have to visualize the balance
sheet like this that is liabilities can
be divided into current and long long
term liabilities so I am taking current
liabilities on liabilities and on the
assets and again current assets so again
if you notice the way in which I have
structured current liabilities have a
smaller portion
whereas current assets has a Jif version
it means you should always have more
current than your current like this why
because current liabilities are those
liabilities which you have to pay with
initiative of 1 year and if you want to
pay them with a bit of 1 year you need
some losers in the form of cash or cash
equivalents so that you can get those
two sources and pedis it so these are
your applications if these are your
liabilities but paying those liabilities
you need some assets and those assets
are only current assets it means you
can't think of filling your fix it aside
and paying your current liability and if
that is going to happen it's going to be
the end of the business okay so for
understanding the current ratio this
picture should help you and let's take
some example the formula for current
ratio I believe all of you would be
knowing right from your school time
current ratio is nothing but current
asset by current liability but what does
drift communicate let's see let's take a
small case if there is a current
liability of 100
Sandra craters of 200 both put together
is a total current leverage of 300 and
let's say you have current average cash
9200 stock of 200 receivables of 200
what is happening here you have total
current liabilities of 300 and you have
total current assets of 600 it means you
have an obligation to pay 300 within a
period of one year and for paying that
300 you have various assets which can be
converted into cash within a period of
one year
and that is 600 it means your liquidity
position is said to be very comfortable
why you have to pay 300 you have 600 and
if I can take current ratio it is going
to be very comfortable if the same if I
put it in the form of a chart let's say
this of this blue shade indicates my
current liability and for paying that
current liability I have so much of
current asset okay it means I have some
excess portion this excess portion that
is current assert minus current
liability will be called as positive net
working capital in our case it is 600
minus 300 and that's 300 so what is this
300 from where it has come this 300 is
basically net working capital which
represents the long term funds that are
used before funding the current assets
okay so if you want to have a healthy
business a business with a healthy
liquidity position that should be
positive net working capital let's
understand this even in a better way
it's take this case - you have current
liabilities same 100 and 200 the current
assets 100 stock of 100 receivables of
hundred so here your total is three
hundred and three hundred it means you
have to pay three hundred within a
period of one year and you have current
assets of three hundred so if I put this
in a graph like this where obligation is
three hundred and your losses are 300 it
looks like perfect but you will
understand it's not perfect when you
appreciate what is quicker issue you
have to pay three hundred for paying
three hundred you have the sources of
three hundred but it's not going to work
fine you will understand little later it
will also have a look at case three very
very important and this case will help
you to appreciate why current which is
so important
it's state B Current Liabilities same
100 and 200 but your asserts or cash in
bank 50 stock of 75 with your business
on the way it means your total
liabilities or 300 whereas the total
assets or resources available or 200 it
means now clearly your company's in a
problem why you have to pay this 300
within a period of one year but for
paying the 300 the resources what you
have is only 200 so if I put up in this
chart 300 it is the liability whereas
this issue's available is only 200 so
clearly I have a shortage and this is a
danger zone why because current
liabilities are very very or they are
going to be very much notorious because
if you don't pay them on time they'll
ensure your business comes to an order
why because they're all basically
short-term lenders they need money back
to ensure their operations working
continuously okay and if you are going
to play with them if you are going to
delay them in making the payment then
they would ensure that all legal steps
are taken and you not be in a position
to run your business properly okay so
all would effect and this should never
happen so here you have current
liability of 300 years current this is
the only 200 and you are facing a
shortage and this shortage is called as
negative working capital if you
recollect I said positive working
capital is a good strength for the
company but as negative needed to lose
something with your company should die
for or they should not think about it
because it is going to make the company
to land in various problems
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Nov 15, 2024 Last updated |
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