Page 68 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 4: Ratio Analysis

,
,
,
,
`6 00 000 + `1 30 000 Notes
Operating ratio = × 100 = 73%
10 00 000
,
,

(iii) Operating profi t ratio = Operating profit × 100

Net sales

To find out the operating profit from the profit & loss account, the following

methodology will help to determine as effectively as possible.
Pro forma for finding out the operating profi t

Particulars `
Net Profi t XXXX
Add: Non operating expense/loss XXXX
Less: Non operating income XXXX
Operating income XXXX
Operating profi t = `3,00,000 - `40,000 + `10,000 = 2,70,000
,
,
Operating profi t ratio = `270000 × 100 = 27%
,
,
`10 00 000

(iv) Net profit expenses ratio = Net profit × 100

Net sales
,
,
= `3 00 000 × 100 = 30%
,
`10 00 000
,
Self Assessment
Fill in the blanks:

11. The net profit ratio is an indicator of over all ………………… of the firm in terms of return

out of sales volume.
12. The operating ratio is establishing the relationship in between the ………………… and
operating expenses with the total sales volume.
13. The ………………… is nothing but the combination of both non current liabilities and
owners’ equity.

4.6 Turnover Ratios

It highlights the relationship in between the sales and various assets. The ratio indicates that the

rate of speed which is taken by the firm for converting the assets into sales.
4.6.1 Stock Turnover Ratio

The ratio expresses the speed of converting the stock into sales. In other words, how fast the
stock is being converted into sales in a year. The greater the ratio of conversion leads to lesser the
number of days/weeks/months required to convert the stock into sales.

Cost of Goods Sold Sales

Stock Turnover Ratio = or
Average Stock Closing Stock

LOVELY PROFESSIONAL UNIVERSITY 63