Topic 1: Introduction = Rs. Useful tool for analysis of financial statements. The operating ratio for Apple means that 78% of the company's net sales are operating expenses. Ratio is an arithmetical expression of relationship between two interdependent or related items. Total Assets It includes Ratio Analysis It is a technique which involves re-grouping of data by application of arithmetical relationship. = Rs. Contact: (M) 9898251471 E-mail: anujbhatia09@gmail.com Name of the Ratio Formula 1. Net Profit Ratio = Net profit / Revenue from Operations × 100.  Net purchases = 46,000 It must be noted that the sacrificing ratio formula is applied in case of each partner and both their old and new ratios are factored in. The operating ratio for Blue Trust Inc. is 80%. The questions involved in TS Grewal Solutions are important questions that can be asked in the final exam. Calculate the Trade receivables turnover ratio from the following information: Total Revenue from operations 4,00,000  Share Capital = Equity share capital + Preference share capital, Shareholders’ Funds (Equity) = Non-current assets + Working capital − Non-current liabilities Working Capital = Current Assets − Current Liabilities, From the following information calculate Debt equity Ratio:-, Debt to equity ratio = Debt / Equity (shareholder funds) = 1,00,000 / 1,75,000 = 0.57 : 1 2,50,000 Meaning and definition. shareholders’ funds. 10,000 73,000 + Rs. Net Purchases = Cash Purchases + Credit Purchases − Return Outwards Advantages of Ratio Analysis Liquidity Ratios Liquidity ratios measure the firm’s ability to fulfil its short-term financial obligations. = Rs. To help identify the short term liquidity of a firm, this ratio is used. 20,000 Generally, the ratio of 2 : 1 is considered as an ideal. 5. They indicate the efficiency with which business as a whole functions. Credit Revenue from operations = Total revenue from operations − Cash revenue from operations NCERT Solutions for CBSE Class 12 Commerce Accountancy Chapter Accounting Ratios at TopperLearning help students learn the chapter thoroughly.  Carriage inwards = 4,000, Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory (iii) Trade payables or Creditors turnover ratio It indicates the speed with which the amount is being paid to creditors.   Average Payment Period = No. 2,20,000 / Rs. (f) Other current assets (prepaid expenses, interest receivable, etc.) Items Included in Total Assets (v) Other current assets except prepaid expenses. It is computed to ascertain soundness of the long-term financial position of the firm. Steps of Income Method Formula. 2,50,000/Rs. 12,00,000 / Rs. = Rs. = Rs. It has mainly two types of ratio under this. = Net Credit Revenue Form Operations / Average Inventory (d) Interest Coverage Ratio: It is a ratio which deals with the servicing of interest on loan. Profitability ratios, as their name suggests, measure the organisation’s ability to deliver profits. Operating Ratio = Operating Cost / Net Revenue from Operations × 100 whether business is able to pay its long-term liabilities or not. The higher the ratio, the better it is. (v) To provide analysis of the liquidity, solvency, activity and profitability of an enterprise. 3. (Production expenses + Administrative expenses) ÷ Net sales = Operating ratio. The operating profit ratio is 55%. It may be computed directly or as a residual of operating ratio. Operating profit ratio is computed by dividing operating profit by revenue operations (net sales) and is expressed as percentage. (c) Trade Payable Turnover Ratio: Trade payables turnover ratio indicates the pattern of payment of trade payable. 4. Long term debts = total debts (Liabilities) − Current Liabilities Credit Revenue from operations = Rs. (iv) Short-term provisions. 4,000 − Rs. Operating Ratio = (Operating Expenses+Cost of Goods Sold)/Net Sales = (18575+92761)/121615 =0.914739; Advantages of Operating Ratio. 10:00 AM to 7:00 PM IST all days. 16,000 = Rs. » Non-current Assets [Fixed assets (Tangible and intangible assets) + Non-current Investments + Long-term Loans and Advances Average Trade Payables = Creditors in the beginning + Bills payables in the beginning + Creditors at the end + Bills payables at the end / 2 = Rs. or Following information is available for the year 2014-15, calculate gross profit ratio: Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Operation *Non-current Asset (Tangible assets + Intangible assets + Non-current trade investments + Long-term loans and advances) + Working Capital – Non-current Liabilities (Long-term borrowings + Long-term provisions) Return on Investment (or Capital Employed) = Profit before Interest and Tax / Capital Employed × 100. 22,000 = Rs. 2,40,000 / Rs.  Wages = 14,000 share capital, reserves and surplus). Operating efficiency - Indicates how well operating activities are carried out. (b) Trade Receivables Turnover Ratio: It expresses the relationship between credit revenue from operations and trade receivable. Current liabilities include short-term borrowings, trade payables (creditors and bills payables), other current liabilities and short-term provisions. When Liabilities Approach is Followed It is computed by adding In the absence of opening creditors and bills payable, closing creditors and bills payable can be used in the above formula. CBSE Class 12 Accountancy Chapter 13 Important Questions – Free PDF Download. If excess of current assets over quick assets represented by inventories is Rs. Higher turnover ratio means better utilisation of assets and signifies improved efficiency and profitability, and as such is known as efficiency ratios. = Rs.25, 000 + Rs.75, 000 = Rs. 50,000 Items Included in Current Liabilities = 1,00,000 + 10,000 + 30,000 + 20,000 + 40,000 = 2,00,000 The cost of goods sold which are not included in the operating expenses is $1,000. or Ratio It is an arithmetical expression of relationship between two related or interdependent items. Gross Profit Ratio, Operating Ratio & Operating Profit Ratio. (d) Short-term provisions (b) Long-term provisions 5. Ratio analysis is the more popularly and widely used technique of financial statement analysis. 1,50,000 5,000.   Average Trade Payable = (Opening Creditors and Bills Payable + Closing Creditors and Bills Payable)/2 The first step in calculating national income via income method is to identify and segregate the units of production. Return on capital employed (ROCE): operating profit ÷ (non-current liabilities + total equity) % 2. Among the three, current ratio comes in handy to analyze the liquidity and solvency of the start-ups. Net Profit before tax = Net profit after tax × 100/ (100 − Tax rate) 46,000 + Rs. The operating ratio is determined by comparing the cost of the goods sold and other operating expenses with net sales. (e) Return on Capital Employed or Investment: Capital employed means the long-term funds employed in the business and includes shareholders’ funds, debentures and long-term loans. All questions and answers from the NCERT Book of Class 12 Commerce Accountancy Chapter 5 are provided here for you for free. (d) Net Profit Ratio: It relates revenue from operations to net profit after operational as well as non-operational expenses and incomes. Operating Cost = Cost of Materials Consumed + Purchases of Stock-in-trade + Change in Inventories of Finished Goods, Work-in-progress and Stock-in-trade + Employees Benefits Expenses + Other Expenses (Other than non-operating expenses) Liabilities Approach Share Capital + Reserves and Surplus 4. (a) Short-term borrowings Items Included in Current Liabilities It expresses the relationship between profits available for payment of interest and the amount of interest payable. Download CBSE Class 12 Accountancy Accounting Ratios in pdf, Accountancy chapter notes, class notes mind maps formulas Revision Notes CBSE Class 12 Accounting Ratios. Classification of Accounting Ratios Items Included in Equity or Shareholders’ Funds Expenses Ratios: These ratios are also known as supporting ratios to operating ratio. Topic 2: Classification of Accounting Ratios  Bills Payables on 31.3.2015 = 70,000, Trade Payables Turnover Ratio = Net Credit Purchases / Average Trade Payables Objectives of Ratio Analysis 18,00,000 Ratio Analysis 1 | Prepared By: Anuj Bhatia [BBA (Gold Medalist), M.Com (Gold Medalist), CA(Inter. Inventories = Current assets − Quick assets (ii) Net profit ratio Net profit ratio shows the relationship between net profit and revenue from operations i.e. The three common liquidity ratios used are current ratio, quick ratio, and burn rate. 20,000 = Rs. Ratio analysis is a process of determining and presenting the quantities relationship between two accounting figures to calculate the strength and weaknesses of a business. Quick ratio helps us find the solvency for six months and the reason why inventory is subtracted is that inventory usually take more than six month to convert into liquid asset. 2,00,000. (vi) To provide information useful for making estimates and preparing the plans for future. 10,00,000 = Rs. (ii) Trade Receivables or Debtors turnover ratio It indicates economy and efficiency in the collection of amount due from debtors. (i) To know the areas of an enterprise which need more attention. 90,000 = Rs. 3,00,000 + Rs. Operating Expenses = Employees Benefits Expenses + Other Expenses (Other than non-operating expenses) + Depreciation and Amortisation Expenses  Inventory at the end = 22,000 (b) Inventories (Excluding loose tools, stores and spares) = Rs. 16,000 Turnover or Performance or Activity Ratios These ratios measure how efficiently a company is using its assets to generate sales. Gross Profit = Revenue from Operations − Cost of Revenue from Operation Operating Ratio = Operating Cost / Net Revenue from Operations × 100 = Rs. As per the …  Revenue from operations = 80,000 (a) Gross Profit Ratio: Gross profit ratio as a percentage of revenue from operations is computed to have an idea about gross margin. Academic Partner. Current assets = 3.5x and Can someone clue me in to the formula used to calculate the ratio? Accounting Ratios – CBSE Notes for Class 12 Accountancy. Equity = Share Capital + General Reserve + Surplus = 1,00,000 + 45,000 + 30,000 = 1,75,000, (b) Total Assets to Debt Ratio This ratio measures the extent of the coverage of long-term debts by assets, Total assets to Debt Ratio = Total assets/Long-term debts. = Rs. = Rs. (iv) Short-term loans and advances. Interest Coverage Ratio = Net Profit before Interest and Tax / Interest on long-term debts. 20,000 = 3 Times. 5,000) = Rs. (c) Proprietary Ratio: Proprietary ratio expresses relationship of proprietor’s (shareholders) funds to net assets and is calculated as follows: Proprietary Ratio = Shareholders, Funds / Capital employed (or net assets), Significance: Higher proportion of shareholders’ funds in financing the assets is a positive feature as it provides security to creditors. Shareholders’ funds Rs. Also known as Solvency Ratios, and as the name indicates, it focuses on a company’s current assets and liabilities to assess if it can pay the short-term debts. The formula for its calculation is as follows: Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory. = Rs. During 2018, the company clocked a total revenue of $450 million. 2,40,000 / Rs. 20,000 + Rs. Accounting Ratios Class 12 Accountancy MCQs Pdf. It expresses the relationship between the cost of revenue from operations and average inventory. 14,000 + Rs. 15,000 + Rs. Let us take the example of a company named ADG Ltd which is engaged in the business of manufacturing electronic parts for Tier I auto parts supplier. Equity or Shareholders’ Funds = Equity Share Capital + Preference Share Capital+ Reserves and Surplus Classification of Accounting Ratios In view of the requirements of various users, the accounting ratios may be classified as under.  Creditors on 31.3.2015 = 1,30,000 3,20,000 Current Ratio = Current assets : Current liabilities 60,000; 15% Long-term debt 10,00,000; and Tax rate 40%. Profitability Ratios These ratios measure the profitability of a business assessing the and helps in overall efficiency of the business. 1. (ii) Absence of universally accepted terminology. 60,000 Become our .  Cash Revenue from operations 20% of Total Revenue from operations Calculate the operating ratio for the company. Current Ratio = 3.5 : 1  Quick Ratio = 2 : 1 Profitability Ratios are of five types. (i) Current investments. 70,000 2 = Rs.  Advance tax = Rs. (b) Operating Ratio: It is computed to analyse cost of operation in relation to revenue from operations. CBSE quick revision note for class-12 Chemistry Physics Math’s, Accountancy and other subject are very helpful to revise the whole syllabus during exam days. »Current Assets [Current investments + Inventories (including spare parts and loose tools) + Trade Receivables + Cash and Cash Equivalents + Short-term Loans and Advances + Other Current Assets] 50,000 / 50,000 = 1 : 1. 80,000 = Rs. Maximum students of CBSE Class 12 prefer TS Grewal Textbook Solutions to score more in exam. Net Profit after Tax = Rs. These are: Gross Profit Ratio. Current ratio which let us know the short term solvency of a firm. (ii) Trade receivables (bill receivables, debtors less provisions for doubtful debts). As a general rule, a minimum Operating Reserve Ratio of 25 percent – or three months of annual operating expenses or budget – is the Nonprofit Reserve Workgroup’s suggested minimum goal. 5,000 + Rs. Operating Ratio = Operating Cost/Net Sales x 100 Where Operating Cost = Cost of goods sold + Operating Expenses 1,20,000 + 80,000 + 40,000 = Rs. 16,000 For Enquiry. (ii) To know about the potential areas which can be improved on. From the following information, calculate inventory turnover ratio: Inventory in the beginning = 18,000 This ratio is a better indicator of liquidity and 1 : 1 is considered to be ideal. * Computation of operating expenses: Cost of goods sold + Administrative expenses + Selling expenses Office expenses, administrative expenses, selling and distribution expenses, employees benefit expenses, depreciation and amortisation expenses. … = Rs.  Current assets = Rs. There is a close relationship between the profit and the efficiency with which the resources employed in the business are utilised. (i) Accounting ratios ignore qualitative factors. The revision notes covers all important formulas and concepts given in the chapter.  Creditors on 1.4.2014 = 3,00,000 Accounting Ratios It is a mathematical expression that shows the relationship between various items or groups of items shown in financial statements. From the following details, calculate interest coverage ratio: Net Profit after tax Rs. Need assistance? = 20,000 + 40,000 + 40,000 = 1, 00,000, It is the ratio of quick (or liquid) asset to current liabilities.  Where, Current Liabilities = Rs. 2,000 = Rs. Profitability ratios are calculated to analyse the earning capacity of the business which is the outcome of utilisation of resources employed in the business. Operating Ratio = (Cost of Revenue from Operations + Operating Expenses)/ Net Revenue from Operations × 100. Cost of Goods Sold = Cost of Materials Consumed + Purchases of Stock-in-trade + Change in Inventories of Finished Goods, Work-in-progress and Stock in-trade + Direct Expenses The solutions not only explain the exercise questions but also the unit-wise and page-wise questions. 1,20,000 Ratio It is an arithmetical expression of relationship between two related or interdependent items. Through the course of calculation, if the outcome is positive in value, it would indicate that the specific partners are sacrificing their share for other existing partners. The operating expenses are $3,000. Formula: Following formula is used to calculate operating ratio: [(Cost of goods sold + Operating expenses / Net sates)] × 100. Current Ratio = Current Assets : Current Liabilities or Current Assets / Current Liabilities. Items Included in Long-term Debts Types of Profitability Ratio. Capital employed may be taken as the total of non-current assets and working capital. 56,000 : Rs. 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Cost of Revenue from = Purchases + (Opening Inventory − Closing Inventory) + operations Direct Expenses long-term borrowings and long-term provisions). = Rs. 3,00,000 (i) Short-term borrowings. Two basic measures of liquidity are : (A) Inventory turnover and Current ratio (B) Current ratio and Quick ratio (C) Gross Profit ratio and Operating ratio 2,20,000 80,000 60,000 × 100/(100 − 40) (iii) Total assets to debt ratio It establishes a relationship between total assets and total long-term debts. Contact. Tax Rate = 40% Here NDPFC = Compensation of Employees + Operating Surplus + Mixed-Income. Operating Cost = Cost of Revenue from Operations + Selling Expenses + Administrative Expenses It is calculated as under: Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100, Operating Profit = Revenue from Operations − Operating Cost. 1,00,000 + Rs. It is expressed as Quick ratio = Quick Assets: Current Liabilities or Quick Assets / Current Liabilities. 2,40,000 3,40,000 × 100 = 64.71% Calculate Gross profit ratio and Operating ratio. Liquidity Assets = Current assets − (Inventories + Prepaid expenses + Advance tax) Essensially the percentage of your income that is neede to break even - ie cover costs. X Ltd., has a current ratio of 3.5 : 1 and quick ratio of 2 : 1. Alternatively operating cost may be calculated as follows: Trade Receivables Turnover Ratio = Net Credit Revenue from Operations / Average Trade Receivables 60000 Solution Use the below-given data for calculation of the operating ratio Therefore, the calculation of operating ratio is as follows, =(3000+1000)/5000 1. NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. (i) It is useful in analysis of financial statements. (b) Trade payables (bills payable and sundry creditors) 40,000 + Rs. Debt = Debentures + Long term provisions = 75,000 + 25,000 = 1,00,000 ∴ Inventory Turnover Ratio = Rs. Current Liabilities = Rs. (c) Operating Profit Ratio: It is calculated to reveal operating margin. (a) Debt-Equity Ratio: Debt-Equity Ratio measures the relationship between long-term debt and equity. ∴ Trade Payables Turnover Ratio = Rs. (v) Misleading results in the absence of absolute data. Gross Profit Ratio = Gross Profit/Net Revenue from Operations × 100 If 70% of what you make is needed to pay _your_ bills, then your operating ratio is 0.7. (iii) Operating ratio Operating ratio establishes the relationship between operating cost and revenue from operations i.e. In case, statement of profit and loss is given, cost of revenue from operations i.e. cost of goods sold is computed by adding cost of materials consumed, purchases of stock-in-trade, changes in inventories of finished goods, work-in-progress and stock-in-trade and direct expenses. Return on sales (ROS): operating profit÷ revenue % 3. Learning the important concepts is very important for every student to get better marks in examinations. 80,000 = 4 times. Published in: Business. (ii) Trade payables (bills payable and sundry creditors). 3,20,000 / Rs. Items Included in Current Assets 3,40,000 x 100 = 70.59%. It is computed as follows: Gross Profit Ratio = Gross Profit / Net Revenue of Operations × 100. Accounting Ratios class 12 Notes Accountancy. Here cost of goods sold = Operating stock + Net purchases + Manufacturing expenses - Closing stock . NOTE Since,non-operating assets are excluded while determining capital employed, income from non-operating assets should also be excluded from profit. Be clear which will help in faster learning may be classified as under with answers. 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