NCERT Class 12 Books Accountancy Part 2 Chapter 5- Accounting Ratios

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You may learn about Chapter 5 of the NCERT Accountancy Class 12 Books, "Accounting Ratios," here. Additionally, you may find download links for the previous chapters.
 
Table of Content

The Starting of the Chapter
Glimpses of the Chapter
PDF link for Download purpose
 

Accounting Ratios Goes Like This-

LEARNING OBJECTIVES

After studying this chapter, you will be able to-

• Explain the meaning, objectives and limitations of accounting ratios
• Identify the various types of ratios commonly used
• Calculate various ratios to assess solvency, liquidity, efficiency and profitability of the firm
• Interpret the various ratios calculated for intra-firm and interfirm comparisons

Financial statements aim at providing financial information about a business enterprise to meet the information needs of the decision-makers. Financial statements prepared by a business enterprise in the corporate sector are published and are available to the decision-makers. These statements provide financial data which require analysis, comparison and interpretation for taking decision by the external as well as internal users of accounting information. This act is termed as financial statement analysis. It is regarded as an integral and important part of accounting. As indicated in the previous chapter, the most commonly used techniques of financial statements analysis are comparative statements, common size statements, trend analysis, accounting ratios and cash flow analysis. The first three have been discussed in detail in the previous chapter. This chapter covers the technique of accounting ratios for analysing the information contained in financial statements for assessing the solvency, efficiency and profitability of the enterprises. 

5.1 Meaning of Accounting Ratios

As stated earlier, accounting ratios are an important tool of financial statements analysis. A ratio is a mathematical number calculated as a reference to relationship of two or more numbers and can be expressed as a fraction, proportion, percentage and a number of times. When the number is calculated by referring to two accounting numbers derived from the financial statements, it is termed as accounting ratio. For example, if the gross profit of the business is Rs. 10,000 and the ‘Revenue from Operations’ are Rs. 1,00,000, it can be said that the gross profit is 10% 10, 000 100 1, 00, 000 × of the ‘Revenue from Operations’. This ratio is termed as gross profit ratio. Similarly, inventory turnover ratio may be 6 which implies that inventory turns into ‘Revenue from Operations’ six times in a year.

It needs to be observed that accounting ratios exhibit relationship, if any, between accounting numbers extracted from financial statements. Ratios are essentially derived numbers and their efficacy depends a great deal upon the basic numbers from which they are calculated. Hence, if the financial statements contain some errors, the derived numbers in terms of ratio analysis would also present an erroneous scenario. Further, a ratio must be calculated using numbers which are meaningfully correlated. A ratio calculated by using two unrelated numbers would hardly serve any purpose. For example, the furniture of the business is Rs. 1,00,000 and Purchases are Rs. 3,00,000. The ratio of purchases to furniture is 3 (3,00,000/1,00,000) but it hardly has any relevance. The reason is that there is no relationship between these two aspects.

5.2 Objectives of Ratio Analysis

Ratio analysis is indispensable part of interpretation of results revealed by the financial statements. It provides users with crucial financial information and points out the areas which require investigation. Ratio analysis is a technique which involves regrouping of data by application of arithmetical relationships, though its interpretation is a complex matter. It requires a fine understanding of the way and the rules used for preparing financial statements. Once done effectively, it provides a lot of information which helps the analyst:

• To know the areas of the business which need more attention
• To know about the potential areas which can be improved with the effort in the desired direction
• To provide a deeper analysis of the profitability, liquidity, solvency and efficiency levels in the business
• To provide information for making cross-sectional analysis by comparing the performance with the best industry standards
• To provide information derived from financial statements useful for making projections and estimates for the future.

Some Glimpses of the Chapter are-

 

NCERT Class 12 Books Accountancy Part 2 Chapter 5 - Accounting Ratios- PDF Download

Part 2 Chapter 5 - Accounting Ratios

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