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Classification of Ratio in various group
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Classification of Ratio in various group

Classification of Ratio in various group

Classification of Ratio in various group.Their classification depends upon the objects of analysis nature of party interest in analysis and the source and quality of data available .The following three form of ratio classification are more common.

  1. Statement wise classification
  2. classification of ratio by user
  3. classification by relative importance

Statement wise classification

  1. Balance Sheet Ratio

a)Current ratio

b) liquid ratio

c) Proprietary Ratio

d) Fixed assets Ratio

e) Capital Gearing Ratio

f) Book Value Per Share

2) Profit And Loss Accounts Ratio

a) Operating Ratio

b) Expense Ratio

c) Net Profit Ratio

d) Gross Profit Ratio

e) Stock Turn over Ratio

3) Composite or Mixed Ratio

a) Return on Capital Employed

b) Return on Shareholders Fund

c)Current asset turn over ratio

d) debtor ratio

e) ratio on net sale of fixed asset

classification of ratio by user

  1. Ratio of Management

a) operating ratio

b) return on capital employed

c) stock turn over

d) Debtors turn over

e) Solvency ratio

2) Ratio of Creditor

a) Current Ratio

b) Solvency Ratio

c) Creditor turnover

e) Fixed Asset Ratio

f) Asset Cover

g) Debts service Ratio

c) Ratio for shareholder

  1. Returns on Share holders funds
  2. capital gearing Ratio
  3. dividend cover ratio
  4. asset cover ratio

Classification by relative importance

This classification is being adopted by the british institute of management for inter firm comparison.

Current Ratio :

Current Ratio shows the relationship  between Current assets and current liabilities .It calculated by dividing current assets by current liabilites

Current ratio = current assets / Current liabilities

When current assets are assets held on short term basis which refers to an accounting period. These assets includes cash and bank balances bills receivable ,goods debtors (debtors provisions) inventory (stock of finished goods,raw material stock of work in progress),short term investment,prepaid expenses and accrued income.

Current liabilities include creditors , bills payable , cash credit and bank overdraft short period liabilities for expense , income received in advance , proposed dividend , unclaimed dividend and any other liabilities due for payment during the current accounting period.

A current ratio of 2: 1 is generally considered to be acceptable .If the current ratio is more than 2 : 1 it is beneficial to the short term creditors .If the current ratio is less than 2: 1 it indicates lack of liquidity and short of working capital.

Example
:

From following information  compute the current ratio

Sundry debtors   100,000

Prepaid expense 10,000

Cash in hand and at bank    30,000

Short term investment 20,000

Machinery 7,000

Bills payable 20,000

Sundry Creditors   40,000

Debentures 200000

Stock 40,000

Expense payable 40,000

Answer :

Current Ratio = Current Assets / Current Liabilities

current Assets = Sundry Debtors + prepaid expense + cash in Hand + short term investment + stock

= 1,00,000 + 10,000 + 30,000 + 20,000 + 40,000 = 2,00,000

current liabilities = Bills payable + Sundry Creditors  + expense payable
= 20,000 + 40,000 + 40,000

= 100,000

Current ratio = 2,00,000 / 1,00,000 = 2: 1

Liquid Ratio or Quick ratio or Acid test Ratio 

Quick Ratio is the relationship between liquid assets and current liabilities or immediate liabilities .The ratio seeks to ascertain the liquidity position of a business enterprise .Liquidity implies the ability to convert current assets into cash . This ratio is computed by dividing liquid assets for quick current assets by current liabilities .

Quick or Quick or Acid test Ratio = Liquid Assets / Quick Liabilities.

Where the term liquid assets implies current assets minus inventory or stock and prepaid expense .While quick liabilities refers to current liabilities minus overdraft.

Example :

Liquid liabilities Rs 50,000

Current Assets Rs 80,000

Stock Rs 25,000

Prepaid Expense Rs 5,000

Debtors Rs . 30,000

Liquid or quick Assets = Current Assets – Stock – Prepaid Expense / quick  liabilites

= 50,000 / 50,000  = 1: 1

 

 

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