PPT - Accounting Ratios | Accountancy Class 12 - Commerce PDF Download

 Page 1


Accounting Ratios
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Accounting Ratios
I n t r o d u c t i o n
Financial statements provide 
crucial information about a 
business enterprise to meet 
the needs of decision-
makers. In the corporate 
sector, these published 
statements contain financial 
data that require analysis, 
comparison and 
interpretation by both 
external and internal users.
This process is known as 
financial statement analysis 
and is an integral part of 
accounting. The most 
commonly used techniques 
include comparative 
statements, common size 
statements, trend analysis, 
accounting ratios and cash 
flow analysis.
This presentation focuses on 
accounting ratios as a 
technique for analyzing 
financial statements to 
assess the solvency, 
efficiency and profitability of 
enterprises. We'll explore 
how these ratios help 
stakeholders make informed 
decisions about a business's 
financial health.
Page 3


Accounting Ratios
I n t r o d u c t i o n
Financial statements provide 
crucial information about a 
business enterprise to meet 
the needs of decision-
makers. In the corporate 
sector, these published 
statements contain financial 
data that require analysis, 
comparison and 
interpretation by both 
external and internal users.
This process is known as 
financial statement analysis 
and is an integral part of 
accounting. The most 
commonly used techniques 
include comparative 
statements, common size 
statements, trend analysis, 
accounting ratios and cash 
flow analysis.
This presentation focuses on 
accounting ratios as a 
technique for analyzing 
financial statements to 
assess the solvency, 
efficiency and profitability of 
enterprises. We'll explore 
how these ratios help 
stakeholders make informed 
decisions about a business's 
financial health.
Meaning of Accounting Ratios
Definition
An accounting ratio is a 
mathematical number 
calculated by referring to two 
accounting numbers derived 
from financial statements. It 
can be expressed as a fraction, 
proportion, percentage, or 
number of times.
Example
If gross profit is Rs. 10,000 and 
Revenue from Operations is Rs. 
1,00,000, the gross profit ratio 
is 10% (10,000/1,00,000 × 100). 
Similarly, an inventory turnover 
ratio of 6 means inventory 
converts to Revenue from 
Operations six times yearly.
Meaningful Correlation
Ratios must be calculated using meaningfully correlated numbers. A 
ratio using unrelated figures (like furniture to purchases) would hardly 
serve any purpose. The efficacy of ratios depends greatly on the 
accuracy of the basic numbers used.
Page 4


Accounting Ratios
I n t r o d u c t i o n
Financial statements provide 
crucial information about a 
business enterprise to meet 
the needs of decision-
makers. In the corporate 
sector, these published 
statements contain financial 
data that require analysis, 
comparison and 
interpretation by both 
external and internal users.
This process is known as 
financial statement analysis 
and is an integral part of 
accounting. The most 
commonly used techniques 
include comparative 
statements, common size 
statements, trend analysis, 
accounting ratios and cash 
flow analysis.
This presentation focuses on 
accounting ratios as a 
technique for analyzing 
financial statements to 
assess the solvency, 
efficiency and profitability of 
enterprises. We'll explore 
how these ratios help 
stakeholders make informed 
decisions about a business's 
financial health.
Meaning of Accounting Ratios
Definition
An accounting ratio is a 
mathematical number 
calculated by referring to two 
accounting numbers derived 
from financial statements. It 
can be expressed as a fraction, 
proportion, percentage, or 
number of times.
Example
If gross profit is Rs. 10,000 and 
Revenue from Operations is Rs. 
1,00,000, the gross profit ratio 
is 10% (10,000/1,00,000 × 100). 
Similarly, an inventory turnover 
ratio of 6 means inventory 
converts to Revenue from 
Operations six times yearly.
Meaningful Correlation
Ratios must be calculated using meaningfully correlated numbers. A 
ratio using unrelated figures (like furniture to purchases) would hardly 
serve any purpose. The efficacy of ratios depends greatly on the 
accuracy of the basic numbers used.
Objectives of Ratio Analysis
1
Identify Focus Areas
Ratio analysis helps identify areas of the business that 
need more attention, highlighting potential problems or 
inefficiencies that require management intervention.
2
Reveal Improvement Opportunities
It uncovers potential areas that can be improved with 
effort in the desired direction, helping businesses 
optimize their operations and financial performance.
3
Provide Deeper Analysis
Ratios offer deeper analysis of profitability, liquidity, 
solvency, and efficiency levels in the business, giving a 
comprehensive view of financial health.
4
Enable Comparative Analysis
They provide information for cross-sectional analysis by 
comparing performance with industry standards, helping 
businesses benchmark against competitors.
Page 5


Accounting Ratios
I n t r o d u c t i o n
Financial statements provide 
crucial information about a 
business enterprise to meet 
the needs of decision-
makers. In the corporate 
sector, these published 
statements contain financial 
data that require analysis, 
comparison and 
interpretation by both 
external and internal users.
This process is known as 
financial statement analysis 
and is an integral part of 
accounting. The most 
commonly used techniques 
include comparative 
statements, common size 
statements, trend analysis, 
accounting ratios and cash 
flow analysis.
This presentation focuses on 
accounting ratios as a 
technique for analyzing 
financial statements to 
assess the solvency, 
efficiency and profitability of 
enterprises. We'll explore 
how these ratios help 
stakeholders make informed 
decisions about a business's 
financial health.
Meaning of Accounting Ratios
Definition
An accounting ratio is a 
mathematical number 
calculated by referring to two 
accounting numbers derived 
from financial statements. It 
can be expressed as a fraction, 
proportion, percentage, or 
number of times.
Example
If gross profit is Rs. 10,000 and 
Revenue from Operations is Rs. 
1,00,000, the gross profit ratio 
is 10% (10,000/1,00,000 × 100). 
Similarly, an inventory turnover 
ratio of 6 means inventory 
converts to Revenue from 
Operations six times yearly.
Meaningful Correlation
Ratios must be calculated using meaningfully correlated numbers. A 
ratio using unrelated figures (like furniture to purchases) would hardly 
serve any purpose. The efficacy of ratios depends greatly on the 
accuracy of the basic numbers used.
Objectives of Ratio Analysis
1
Identify Focus Areas
Ratio analysis helps identify areas of the business that 
need more attention, highlighting potential problems or 
inefficiencies that require management intervention.
2
Reveal Improvement Opportunities
It uncovers potential areas that can be improved with 
effort in the desired direction, helping businesses 
optimize their operations and financial performance.
3
Provide Deeper Analysis
Ratios offer deeper analysis of profitability, liquidity, 
solvency, and efficiency levels in the business, giving a 
comprehensive view of financial health.
4
Enable Comparative Analysis
They provide information for cross-sectional analysis by 
comparing performance with industry standards, helping 
businesses benchmark against competitors.
Advantages of Ratio Analysis
Evaluate Decision 
Efficacy
Ratio analysis helps 
understand whether 
the business has 
taken the right 
operating, investing, 
and financing 
decisions, indicating 
how they've 
improved 
performance.
Simplify Complex 
Figures
Ratios simplify 
complex accounting 
figures and establish 
relationships, 
effectively 
summarizing 
financial information 
to assess managerial 
efficiency, 
creditworthiness, 
and earning 
capacity.
Enable 
Comparative 
Analysis
When calculated 
over multiple years, 
ratios help explore 
business trends, 
facilitating 
projections and 
forecasting that aid 
in strategic planning 
and decision-
making.