# Ratio Analysis

Financial statements are statements of income and Balance sheet which, highlight the income or profitability and change in fixed assets and capital during a specific period. Ratio analysis is one of the important techniques to explain salient features of financial statement.

The ratio analysis establishes relationship between two figures, for example, current assets are \$10,000 and current liabilities are \$30,000 the current ratio is 3:1, this means assets are 3 and liabilities are one after paying one dollar as a liability the balance of \$2 will be as working capital.

The ratio can be in times, percentage and proportion. The ratio is used for comparison, for example, gross profit ratio for current year is also 40% previous year was 30 %. Thus, there is some improvement. Ratio is used for decision making. In this chapter, various ratios will be discussed and their utility for the business as a whole will be studied seriously. we have managed all the explanation about Ratio analysis in the form of questions and answers to assure better understandings for students.

## Control Ratios

What are Control Ratios? Under the system of budgetary control, the actual performances are compared with budgeted performances so as to determine the deviations or variances. The deviations or variances may be favorable or unfavorable and may be expressed in terms of absolute figures or in terms of ratios. The ratios in terms of which …

## Important accounting ratios and formulas

Below are the important accounting ratios and formulas: Test of liquidity Ratios to be computed: 1. Current ratio Formula: = Current Assets / Current liabilities 2. Quick or acid test or liquid ratio (for immediate solvency) Formula = (Liquid/Quick Assets) / Current liabilities 3. Absolute Liquid ratio Formula = Absolute liquid assets / Current liabilities …

## Q.1. What is Ratio Analysis? Discuss Importance and limitations of Ratio Analysis.

Answer Meaning of ratio The term ratio analysis is used in quantitative relationship between two variables. The Ratios are needed for evaluating the financial statement. The use of ratios in the hands of financial experts works as a tool for evaluating different financial statements. Definitions of Ratio Analysis Following are some authentic definitions of Ratio …

## Q. 2. Explain balance sheet ratios with examples

Answer The following are the important balance sheet ratios: Current Ratio Current ratio can be calculated as: Current ratio = Current assets / Current liabilities Current assets are: cash in hand, cash at bank, bills receivable, sundry debtors, inventories, work in progress and prepaid expenses. Current liabilities are: Bills payable, sundry creditors, sundry outstanding expenses. …

## Q. 3. Explain Profitability Ratio with examples

Answer Profitability Ratio The main aim of all business enterprises is to earn profit. Moreover, profit earning is considered essential for business prosperity. The profit is like an engine which drives the business forever. It is also the entire business efficiency. Profits are always measured in terms of sales or investment. These ratios are expressed …

## Q. 4. Explain Return on equity capital with examples

Answer Return on equity capital The equity shareholders are the real owners of the company. They bear all risk whereas preference shareholders have priority of payments of dividends and as well as capital. The rate of dividend on equity shares differs year to year, depending upon the amount of profit. The performance of a company …

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