GNG Classes

Accountancy by CA Gaurav Gupta (B.Com, FCA, D.I.S.A, Cs Final)

Venue: JP Associates Campus Sipri & RNS Junior Wing
Contact Nos :7080247627, 9415067627 website www.gngclasses.in
RATIO ANALYSIS

Conversion of data given in Balance sheet and Profit & Loss A/c in terms of %, Fraction,
Proportion, Times is known as Ratio Analysis. It helps in judging performance of company and
decision making.

Important Theory from book : Advantage & Disadvantages of Ratios

Four pillars of Ratio are :

1. LIQUIDITY : These ratio relates to identifying short term financial position of business
2. SOLVENCY : These ratio relates to identifying Long term financial position of business
3. PROFITABILITY: These ratio relates to identifying capacity to earn profit of company
4. ACTIVITY : These ratio relates to Sales and Turnover of Company

Under Category of LIQUIDITY following Ratios are covered :

Current Assets (All assets which can be converted into money within 1 yr)
1. Current Ratio = ---------------------------------
Current Liabilities (All Liabilities which are to be paid within 1 yr)

Current Assets = Inventory (Stock) + Trade Receivable (Debtors & B/R) + Cash + Bank + Accrued
Income + Prepaid Expenses + Short Term Investments (Marketable investment)

Current Liabilities = Bank O.D + Trade Payable (Creditor & B/P) + Unearned Income + Outstanding
Expenses + Short Term Borrowing + Short Term Provision (eg provision for tax)

Note : Loose tools will not be included in Inventory

Ideal Ratio (Bench Mark) 2:1 or above

Quick Assets(Liquid Assets)

2. Quick Ratio = ---------------------------------
(Liquid ratio or acid test ratio) Current Liabilities

Quick Assets = Current Assets - Inventory (Stock) - Prepaid Expenses

Ideal Ratio (Bench Mark) 1:1 or above

3. Working Capital = Current Assets – Current Liability

Type of Questions : Data given –Select Figures, find CA or CL by making B/s , Logical
Analysis (Impact on ratio) & Missing Figures (algebraic)
FORMAT OF BALANCESHEET IN PROPRIETORSHIP BUSINESS (As discussed in 11 th also)

BALANCE SHEET

LIABILITY SIDE Amount ASSET SIDE Amount

Capital xx Non Current Assets XX
-drawing -xx (Eg Building , Machinery
+ Profit +xx XX Investment , Goodwill etc)

Long term Liability XX Current Assets XX

(Cash, Debtors, Stock,
Preparaid)
Current Liability XX
XX XX

FORMAT OF BALANCESHEET IN COMPANY

EQUITY AND LIABILITY Note No AMOUNT

Share Holders Fund
Share Capital (Equity + Preference Share Capita) XXX
Reserves (Undistributed Profits ) XXX

Non Current Liabilities XXX

(Eg Debentures, long term Loan, long Term Provision)

Current Liabilities XXX

(Eg Creditors, BP, Outstanding expenses etc)

TOTAL XXX

ASSETS
Assets- Non Current XXX
(Fixed Assets + Investments)
Assets- Current XXX
XXX
 GNG Classes
Accountancy by CA Gaurav Gupta (B.Com, FCA, D.I.S.A, Cs Final)
Venue: JP Associates Campus Sipri & RNS Junior Wing
Contact Nos :7080247627, 9415067627 website www.gngclasses.in

Under Category of SOLVENCY following Ratios are covered :

Debt ( All Non Current Liabilities)

1. Debt Equity = ---------------------------------
Equity (Share Holders Fund)

Debt = Long term Loan + Debentures + Public deposit + other Long Term Liabilities+ Long
term provision

Equity = Equity Share Capital + Preference Share Capital + Reserves & Surplus

Ideal Ratio (Bench Mark) upto 2:1

Total Assets ( Non Current Assets + current Assets)

2. Total Assets to Debt Ratio = ---------------------------------
Debt ( Long Term Liabilities)

It can be asked in reversed manner Also “Debt to Total Assets” Ratio

Equity
3. Proprietory Ratio = ---------------------------------
Total Assets ( Non Current Assets + current Assets)

Formula 2. & 3. Can also be expressed in Terms of % (then we have to Multiply by 100)

Profit before Interest & Tax

4. Interest Coverage Ratio = ---------------------------------------------------------
Interest

Answer is always in “TIMES”

Profit before interest tax XXX

Less: Interest (XXX)
Profit before tax XXX
Less: Tax (XXX)
Profit after Tax XXX
In these question if Profit after tax is given so we will add back Tax & Interest to get Profit
before Interest and tax
During solving always assume Profit before Tax as = x

GNG Classes
Accountancy by CA Gaurav Gupta (B.Com, FCA, D.I.S.A, Cs Final)
Venue: JP Associates Campus Sipri & RNS Junior Wing
Contact Nos :7080247627, 9415067627 website www.gngclasses.in

All the Numerators and Denominator in Liquidity and Solvency Ratios were taken from various
figures of Balance Sheet Itself

But in Activity and Profitability Ratio we have to take help from Trading and Profit & Loss
Accounts also

NEW TERMS

Net Sales : Net Revenue from Operation [RFO]

(Sales – Sales Return)

Cost of Goods Sold: Cost of Revenue from Operation

Things to remember

 Cost of Revenue from operation ( Cost of Goods Sold)

= Opening Inventory + Net Purchases + Direct Expenses (Like wages, carriage,

freight etc) – closing inventory

Or

= Net Revenue from operation - Gross Profit

 Cash Revenue from Operation + Credit Revenue from Operation = Total revenue from operation
(Cash Sales) (Credit Sales) (Total Sales)

 If Gross Profit is in % (For Eg 20 %) it will be calculated on Sales however if it is

mentioned that GP is 20 % on cost then it will be calculated on Cost of RFO

Cost of revenue from operation

1a. Inventory Turnover Ratio = ---------------------------------
Average inventory

365
1b. Inventory Holding Period = - --------------------------------
Inventory Turnover Ratio
 Average Inventory = (Opening Inventory + Closing Inventory)/2

GNG Classes
Accountancy by CA Gaurav Gupta (B.Com, FCA, D.I.S.A, Cs Final)
Venue: JP Associates Campus Sipri & RNS Junior Wing
Contact Nos :7080247627, 9415067627 website www.gngclasses.in

Net Credit revenue from operation

2a. Trade Receivable Turnover Ratio = ---------------------------------
Average Trade Receivable

365
2b. Trade Receivable collection period = ---------------------------------
Trade Receivable Turnover Ratio

Average Trade Receivable = (Opening Trade Receivable + Closing Trade Receivable)/2

Net Credit Purchase

3a. Trade Payable Turnover Ratio = ---------------------------------
Average Trade Payable

365
3b. Trade Payable payment period = ---------------------------------
Trade Payable Turnover Ratio

Average Trade Payable = (Opening Trade Payable + Closing Trade Payable)/2

Net Revenue from Operation

4. Non Current Assets/ Current Assets/ Working Capital / Total Assets T O Ratio =---------------------------------
NCA/CA/WC/TA

In this formula if Net Revenue from Operation is not given we can also take Cost of Rev from
operation as Numerator
 GNG Classes
Accountancy by CA Gaurav Gupta (B.Com, FCA, D.I.S.A, Cs Final)
Venue: JP Associates Campus Sipri & RNS Junior Wing
Contact Nos :7080247627, 9415067627 website www.gngclasses.in
Under Category of PROFITABILITY following Ratios are covered :
Gross Profit
1. Gross profit Ratio = ------------------------------------- X 100
Net Revenue from Operation

Net Profit
2. Net profit Ratio = ------------------------------------- X 100
Net Revenue from Operation

Cost of RFO + Operating Expenses- Operating Income

3. Operating Ratio = ------------------------------------------------------------------------ X 100
Net Revenue from Operation

Operating Exp = Office & Administrative Exp + Selling & DistributionExp + Depreciation +
Interest on short term loan + bad debts + discount
(It means routine expenses of business which are necessary for day to day running of business)

Operating Incomes = Regular business income Like Commission Received & Discount Received

Net RFO – Cost of RFO – Operating Expenses +Operating Income

4. Operating Profit Ratio = ------------------------------------------------------------------- X 100
Net Revenue from Operation

Or = 100 % - Operating Ratio

Profit before interest & Tax

5. Return of capital employed = ------------------------------------- X 100
(Investment) Capital Employed

Capital Employed = Equity + Debt

ONLY FOR ISC

Profit after interest , Tax and preference Dividend

6. Earing per Share (E.P.S) = -------------------------------------
Numbers of Equity Shares

Market Price of One Equity Share

6. Price Earning Ratio = -------------------------------------
E.P.S