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PANKAJ’S ACCOUNTANCY CLASSES CONTACT NO. 9999899644 –9999511677
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1: LIQUIDITY RATIO:
(A): Current Ratio = Current Assets = --:-- { e.g. 10,000 = 2:1}
Current Liabilities 5,000
Current Assets = Cash + Bank + Closing Stock/ Inventory + Trade/Account Receivable ( – Provision*) +
Prepaid Expenses + Accrued Income + Short term Investments/ Marketable Securities
+ Short term loans & Advances (Dr.) + Tax Deducted at Source (Dr. Balance)
Current Assets = Current Liabilities + Working Capital.
Current Assets = Liquid Assets + Stock + Prepaid Expenses.
Current Assets = Total Assets – Net Fixed Assets – Long term Investment.
Current Assets = Capital Employed + Current Liabilities – Fixed Assets – Trade Investment.
Current Assets = Total Assets – Capital Employed + Working Capital
Note:
☛ All items covered under head Current Assets will be considered as current assets except “Loose Tools,
Stores and Spare parts”.
☛ *Provision for Doubtful Debts will not be deducted from Debtors/Trade Receivables if debtors are not
good.
Current Liabilities = Trade Payable + Bank Overdraft + Outstanding Expenses + Cash Credit +
Short term Loans & Advances (Cr.) + Income Received in Advance + Dividend
Payable + Unclaimed/unpaid Dividend + Provision for tax (Income Tax payable)
+ Tax deducted at source (Cr.).
Current Liabilities = Total Debts – Long Term Debts.
Current Liabilities = Current Assets – Working Capital.
Current Liabilities = Total Assets – Capital Employed – Non Trade Investment.
Working Capital= Current Assets – Current Liabilities
Capital Employed=
Assets Approach/Side:
☛ Net Fixed Assets + Trade Investment – Working Capital
☛ Total Assets – Current Liabilities – Non Trade Investment
Liabilities Approach/Side:
☛ Share Holders’ Funds + Non Current Liabilities – Non Trade Investment

(B): Liquid/Quick/Acid Test Ratio = Liquid Assets = --:--

Current Liabilities
Liquid Assets = Total Current Assets – Stock – Prepaid Expenses.
Liquid Assets = Total Assets – Fixed Assets – Long term Investments – Closing Inventory – Prepaid Expenses.

2: SOLVENCY RATIOS:
(A): Debt to Equity Ratio = Debt/ Long Term Debt = --:--
Shareholders’ Funds

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Long Term Debts = Debentures + Mortgage Loan + Bank Loan + Loan from Financial Institutions B B Y
A

+ Bonds + Public Deposit + Term Loans + Secured Loan or Unsecured Loans.

Long Term Debts = Total Debts – Current Liabilities
Long Term Debts = Total Assets – Shareholders’ Funds – Current Liabilities
Long Term Debts = Capital Employed – Shareholders Funds + Non-Trading Investments.

Shareholders’ Funds = Equity Share Capital + Pref. Share Capital + Reserve & Surplus – Miscellaneous
Expenditure and Fictitious Assets (included under Other Non Current Assets and Other Current Assets)
Reserve and surplus include: Securities Premium + General Reserve + Capital Reserve +
Statement of Profit & Loss A/c (Cr./Profit) + Accumulated Profits + Capital Redemption
Reserve + Sinking Fund + Debenture Redemption Reserve + Dividend Equalization Reserve +
Deferred tax liability (net) - Deferred tax asset - Statement of Profit & Loss A/c (Loss/Dr.).
Miscellaneous Expenditure & Fictitious Assets include: Preliminary Expenses + Share issue
Expenses + Underwriting Commission + Loss/Discount on issue of shares/ Debentures

Shareholders’ Funds = Equity shareholders’ Funds + Preference Share Capital.

Shareholders’ Funds = Capital Employed – Long term Debts + Non-trade Investments
Shareholders’ Funds = Net Fixed Assets + Trade Investment + Working Capital – Long term Debts.
Shareholders’ Funds = Total Assets – Total Debt ( i.e. Long term debt + CL)
Note:
Ø The concept of Trade and Non trade investment is followed where capital employed in used.
Ø If “Investment” is given without using suffix “Trade” then it will be (assumed) “Non Trading Long
Investment” and give note for assumption.

(B): Total Assets to Debt Ratio = Total Assets

Long Term Debt
Total Assets= Non Current Assets + Current Assets (i.e. All Real Assets )
Total Assets = Capital Employed/Long Term Funds + CL
Total Assets= Shareholders’ Funds + Total Debt

(C): Proprietary Ratio= Shareholders’/Proprietors’ Funds ×100 = …%

Total Assets

(d): Interest Coverage Ratio = Net Profit before Interest and Tax = … Times
Interest on Long term Debt

3: TURNOVER RATIO:
(A): Stock/Inventory Turnover Ratio
= Cost of Revenue from Operations =..Times
Average Inventory (at cost)

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Cost of Goods Sold = Opening Inventory + Purchases +Direct Expenses – Closing Inventory.
Cost of Goods Sold = Net Revenue for Operations – Gross profit.
Cost of Goods Sold = Purchases + Direct Expenses – Excess of Closing Inventory over Opening Inventory.
Cost of Goods Sold = Purchases + Direct Expenses + Excess of Opening Inventory over Closing Inventory.
*Note:
Direct expenses includes:-Freight/ Carriage/Freight Inward ( Carriage on purchase); Wages; Octroi
or local taxes; Manufacturing Expenses; Productive Wages; Fuel, Power or Motive Power; Other
Factory Expenses; Lighting and Heating; Coal, Gas and Water; Import/Custom Duty; Excise Duty;
Landing/Dock/Clearing Charges; Consumable Stores; Royalty on Manufactured Goods; etc.
Average Stock = Opening Inventory + Closing Inventory
2
(B): Trade Receivable Turnover Ratio
= Net Credit Revenue from Operation /Net Revenue from Operation =… Times
Average Trade Receivable/Avg. Debtors/ Trade Receivable
Net Credit Revenue from Operation/Credit Sales
= Revenue from Operation/ Total Sales –Revenue from Operation/Cash Sales–Sales Returns.
Average Trade Receivable = (Opening Trade Receivable ) +(Closing Trade Receivable)
2
Average Debtors = Opening Debtors + Closing Debtors
2
Trade Receivable = Closing Debtors + Closing B/R
2
NOTE:
Ø Gross Debtors and B/R will be considered (i.e. before deducting provision for
Doubtful Debts)
Ø If Credit sales is not ascertainable then net sales may be used assuming all sales are
credit sales.

Average collection Period: In Days /Weeks/Months = 365 Days/52weeks/12Months

Debtors Turnover

C): Trade Payable Turnover Ratio (CTR)= Net Credit Purchases = …..Times
Average Trade Payable
Net Credit Purchases = Total Purchases – Cash Purchases – Purchases Returns
Average trade Payable = Opening Creditors & B/P + Closing Creditors & B/P
2
NOTE:
Ø Gross Creditors and B/P will be considered (i.e. before deducting provision for
Discount on creditors.
Ø If Credit Purchases is not ascertainable then net purchases may be used assuming
all purchases are “Credit purchases”.

(D): Working Capital Turnover Ratio= Net Revenue for Operations / COGS
Net working Capital

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Working Capital= Current Assets – Current Liabilities

Working Capital= Capital Employed –Net Fixed Assets – Trade Investments

4: Profitability Ratios:
(A): Gross Profit Ratio = Gross Profit X 100
Revenue for Operations

Gross Profit = Revenue for Operations – Cost of Revenue for Operations (Cost of goods sold).
Gross Profit = Sales + Closing Inventory – Opening Inventory – Purchases – Direct Expenses
(

B): Operating Ratio = Operating Cost X 100= …..%

Revenue for Operations

Operating Cost = Cost of Revenue for Operations (Cost of goods sold)+ Operating Expenses.

Operating Expenses includes Selling & Distribution exp. + Office & Administration expenses

(C): Operating Profit Ratio = Operating Profit X 100= …..%

Revenue for Operations

Operating Profit = Gross Profit - Operating Expenses.

Operating Profit= Net profit + Non Operating Expenses – Non Operating Incomes
Operating Expenses include Selling & Distribution expenses + Office & Administration expenses

D): Net Profit Ratio = Net Profit × 100 = …..%

Revenue for Operations

Net Profit= GP –Operating Expenses – Non Operating Expenses + Non Operating Incomes

E): Return on Investment = Profit before interest and Tax ×100 = …..%
Capital Employed

Profit before Interest and Tax= Net profit after Interest & tax + Tax + Interest on Long term loans.

Profit before Interest and Tax= (Net profit after Interest & tax * 100) + Interest on Long term loans
100% – % of Tax

Profit before Interest and Tax= Net profit after Interest+ Interest on Long term borrowings.