This is a comprehensive set of video lessons on the chapter Accounting Ration, their meaning, objectives, limitations, types, calculation ans such other points
Introduction to CBSE Class 12 Accountancy Chapter: Accounting Ratios
Accounting ratios are quantitative tools used to analyze financial statements. They help in assessing the financial health and operational efficiency of a business. The main types of ratios include:
- Liquidity Ratios: These ratios measure the company’s ability to meet its short-term obligations. The two primary liquidity ratios are:
- Current Ratio: Current Assets / Current Liabilities
- Quick Ratio: (Current Assets – Inventory) / Current Liabilities
- Solvency Ratios: These ratios assess the company’s ability to meet its long-term obligations. Key solvency ratios include:
- Debt-Equity Ratio: Total Debt / Shareholders’ Equity
- Interest Coverage Ratio: Earnings Before Interest and Taxes (EBIT) / Interest Expense
- Profitability Ratios: These ratios evaluate the company’s ability to generate profits relative to sales, assets, and equity. Important profitability ratios are:
- Gross Profit Ratio: Gross Profit / Revenue
- Net Profit Ratio: Net Profit / Revenue
- Return on Assets (ROA): Net Income / Total Assets
- Return on Equity (ROE): Net Income / Shareholders’ Equity
- Activity Ratios: These ratios measure how efficiently the company utilizes its assets. Significant activity ratios include:
- Inventory Turnover Ratio: Cost of Goods Sold / Average Inventory
- Trade Receivables Turnover Ratio: Net Credit Sales / Average Trade Receivables
- Trade Payables Turnover Ratio: Net Credit Purchases / Average Trade Payables
Understanding these ratios helps stakeholders make informed decisions regarding investments, credit, and management practices.
Assignments for CBSE Class 12 Accountancy Chapter: Accounting Ratios
- Assignment 1: Calculate Liquidity Ratios
- Using a given balance sheet, calculate the current ratio and quick ratio. Discuss what these ratios indicate about the company’s short-term financial health.
- Assignment 2: Analyze Profitability Ratios
- Take a set of financial statements and calculate the gross profit ratio, net profit ratio, ROA, and ROE. Interpret the results and explain what they reveal about the company’s profitability.
- Assignment 3: Evaluate Activity Ratios
- Given data on sales, inventory, and receivables, compute the inventory turnover ratio and trade receivables turnover ratio. Analyze how efficiently the company is managing its inventory and receivables.
Conclusion of CBSE Class 12 Accountancy Chapter: Accounting Ratios
Understanding and analyzing accounting ratios is crucial for evaluating a company’s financial performance. These ratios provide insights into liquidity, solvency, profitability, and operational efficiency, aiding stakeholders in making well-informed decisions.
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Questions and Answers for CBSE Class 12 Accountancy Chapter: Accounting Ratios
Q1. What is the purpose of accounting ratios? ANS: Accounting ratios are used to analyze financial statements and assess a company’s performance, liquidity, profitability, and solvency.
Q2. How is the current ratio calculated? ANS: The current ratio is calculated by dividing current assets by current liabilities.
Q3. What does the debt-equity ratio indicate? ANS: The debt-equity ratio indicates the proportion of a company’s total debt to its shareholders’ equity, showing its financial leverage.
Q4. What is the significance of the gross profit ratio? ANS: The gross profit ratio measures the relationship between gross profit and revenue, indicating the efficiency of production and pricing strategies.
Q5. How do you calculate the inventory turnover ratio? ANS: The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory.
Q6. What does a high interest coverage ratio signify? ANS: A high interest coverage ratio signifies that the company can easily meet its interest obligations from its earnings.
Q7. Explain the return on equity (ROE) ratio. ANS: The ROE ratio measures the profitability of a company in generating income from shareholders’ equity.
Q8. What is the quick ratio, and why is it important? ANS: The quick ratio, also known as the acid-test ratio, measures a company’s ability to meet its short-term obligations without relying on inventory. It is important because it provides a more stringent measure of liquidity.
Q9. How does the trade receivables turnover ratio help in financial analysis? ANS: The trade receivables turnover ratio helps in assessing how efficiently a company collects its receivables and converts them into cash.
Q10. Why is the net profit ratio important for investors? ANS: The net profit ratio is important for investors as it shows the percentage of revenue that remains as profit after all expenses are deducted, indicating the company’s overall profitability.
