Page 192 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 11: Ratio Analysis

3. To interpret the profitability of the firm — Profit earning capacity of the fi rm Notes

4. To identify the operating efficiency of the firm — turnover of the ratios.

11.2 Classification of Ratios

The accounting ratios are classified into various categories, viz.:
1. On the basis of fi nancial statements
2. On the basis of functions

11.2.1 On the basis of Financial Statements

1. Income Statement Ratios: These ratios are computed from the statements of Trading, Profi t
& Loss account of the enterprise. Some of the major ratios are as following GP ratio, NP
ratio, Expenses Ratio and so on.
2. Balance Sheet or Positional Statement Ratios: These types of ratios are calculated from the

balance sheet of the enterprise which normally reveals the financial status of the position
i.e. short-term, long-term fi nancial position, share of the owners on the total assets of the
enterprise and so on.
3. Inter Statement or Composite Mixture of Ratios: Theses ratios are calculated by extracting
the accounting information from the both financial statements, in order to identify stock

turnover ration, debtor turnover ratio, return on capital employed and so on.
11.2.2 On the basis of Functions

1. On the basis of solvency position of the fi rms: Short-term and long-term solvency position
of the fi rms.

2. On the basis of profitability of the fi rms: The profitability of the firms are studied on the

basis of the total capital employed, total asset employed and so on.
3. On the basis of effectiveness of the fi rms: The effectiveness is studied through the turnover
ratios — Stock turnover ratio, Debtor turnover ratio and so on.
4. Capital structure ratios: The capital structure position are analysed through leverage
ratios as well as coverage ratios.

Self Assessment

Fill in the blanks:
1. Ratio analysis, as a technique or analysis of ..................... uses this method of comparing the
various items found in fi nancial statements.
2. The accounting ratios are applied to study the relationship in between the .....................

information available and to take decision on the financial performance of the fi rm.
3. The ..................... position are analysed through leverage ratios as well as coverage ratios.
4. The ..................... of the firms are studied on the basis of the total capital employed, total

asset employed and so on.

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