Classification of Accounting Ratio Types of ratios are given below: Liquidity Ratios Leverage Ratio Turnover Ratio Profitability Ratio

1. MANAGEMENT ACCOUNTING
RATIO ANALYSIS
BY:
SMT.UMA MINAJIGI REUR
HEAD, DEPT. OF COMMERCE & MANAGEMENT
SMT. V G DEGREE COLLEGE FOR WOMEN, KALABURAGI

2. MANAGEMENT ACCOUNTING
RATIO ANALYSIS
LIQUIDITY RATIOS - 1

3. An analysis of financial statements with the help of ratio is called Ratio
Analysis.
Ratio refers to Numerical or Quantitative relationship between two items.
What are Financial Ratios?
Financial ratios are created with the use of numerical values taken from financial
statements to gain meaningful information about a company. The numbers found
on a company’s financial statements – balance sheet, income statement, and cash
flow statement – are used to perform quantitative analysis and assess a
company’s liquidity, leverage, growth, margins, profitability, rates of return,
valuation, and more.

4. Ratio analysis is a process used for the calculation of financial ratios or in
other words, for the purpose of evaluating the financial wellbeing of a
company. The values used for the calculation of financial ratios of a company
are extracted from the financial statements of that same company.
Ratio analysis can be defined as the process of ascertaining the financial ratios
that are used for indicating the ongoing financial performance of a company
using few types of ratios such as liquidity, profitability, activity, debt, market,
solvency, efficiency, and coverage ratios and few examples of such ratios are
return on equity, current ratio, quick ratio, dividend payout ratio, debt-equity
ratio, and so on.

5. Classification of Accounting Ratio
Types of ratios are given below:
1. Liquidity Ratios
2. Leverage Ratio
3. Turnover Ratio
4. Profitability Ratio

6. 1. Liquidity Ratios
This type of ratio helps in measuring the ability of a company to take care of its
short-term debt obligations. A higher liquidity ratio represents that the company is
highly rich in cash.
The types of liquidity ratios are: –
1. Current Ratio or Working Capital Ratio
2. Quick Ratio or Liquidity Ratio or Acid Test Ratio
3. Absolute Liquid Ratio or Cash Ratio
4. Stock to Working Capital Ratio

7. 1. Current Ratio: The current ratio is the ratio between the current assets and current liabilities of a
company. The current ratio is used to indicate the liquidity of an organization in being able to meet its
debt obligations in the upcoming twelve months. A higher current ratio will indicate that the
organization is highly capable of repaying its short-term debt obligations.
Current Ratio = Current Assets / Current Liabilities
Current Assets:
Current Assets means cash and those assets which can be converted into cash within one year in
ordinary course of business.
Current Liabilities:
Current Liabilities are those which are to be paid by the firm in one year.
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

8. Current Ratio:
Current Ratio = Current Assets / Current Liabilities
Interpretation of Current Ratio:
Standard or Ideal Current Ratio is 2:1
If current ratio is less than the standard ratio of 2:1, it indicates that the
concern does not enjoy the sufficient liquidity and shortage of working capital.
If current ratio is more than the standard ratio of 2:1, it indicates that the
concern has sufficient liquidity.
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

9. Current Assets
I Current Investments
Marketable Securities
II Inventories
Stock
III Trade Receivable
Sundry Debtors
Bills Receivable
IV Cash & Cash Equivalent
Cash
Cash at Bank
V Short Term Loans & Advances
Loans & Advances to Staff
Money at call or short notice
Prepaid Expenses
VI Other Current Assets
Outstanding Incomes
Not included in Current Assets:
Loose Tools (Fixed Assets)
Preliminary expenses
Fictitious Assets
Trade Investments (long Term)
Doubtful debtors
Any Current Assets hypothecated
Any current asset which is not realisable
Discount on issue of shares
Discount on issue of Debentures
Other deferred expenses such as Advertisement
Suspense A/c

10. Current Liabilities
I Short Term Borrowings
Bank Overdraft
Short Term Loans & Advances
Deposits (Cr.)
II Trade Payable
Sundry Creditors
Bills Payable
III Other Current Liabilities
Income tax payable
Excise duty or VAT payable
Outstanding expenses
Income received in advance
Unclaimed dividend
Interest due or payable
Instalment payment on long term loans
IV Short Term Provisions
Provisions for taxation
Proposed dividend
Provisions for salaries, wages, bonus etc
(i.e, long term loan due for payment in current year is current
liability)
Any amount payable in short period
The current ratio measures its short term solvency
i.e, its ability to meet short term obligations.

11. 1. From the following information calculate current ratio. Stock Rs. 60,000,
Debtors Rs. 54,000, Cash Rs. 20,000, Bank Rs. 40,000, Bills receivable Rs. 24,000,
Creditors Rs. 70,000, Bill Payables Rs. 24,000, Interest receivable Rs. 1,000,
Prepaid expenses Rs. 1,000, Debentures Rs.1,00,000, Provision for taxation Rs.
6,000.
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
1. Solution:

12. Current Assets
I Current Investments
Marketable Securities
II Inventories
Stock 60,000
III Trade Receivable
Sundry Debtors 54,000
Bills Receivable 24,000 78,000
IV Cash & Cash Equivalent
Cash 20,000
Cash at Bank 40,000 60,000
V Short Term Loans & Advances
Prepaid Expenses 1,000 1,000
VI Other Current Assets
Interest Receivable 1,000 1,000
Current Assets 2,00,000
1. From the following
information calculate
current ratio. Stock Rs.
60,000, Debtors Rs.
54,000, Cash Rs. 20,000,
Bank Rs. 40,000, Bills
receivable Rs. 24,000,
Creditors Rs. 70,000,
Bill Payables Rs.
24,000, Interest
receivable Rs. 1,000,
Prepaid expenses Rs.
1,000, Debentures
Rs.1,00,000, Provision
for taxation Rs. 6,000.
Calculation of Current Assets:

13. Current Liabilities
II Trade Payable
Sundry Creditors 70,000
Bills Payable 24,000
IV Short Term Provisions
Provisions for taxation 6,000
Current Liabilities 1,00,000
1. From the following
information calculate
current ratio. Stock Rs.
60,000, Debtors Rs.
54,000, Cash Rs. 20,000,
Bank Rs. 40,000, Bills
receivable Rs. 24,000,
Creditors Rs. 70,000,
Bill Payables Rs.
24,000, Interest
receivable Rs. 1,000,
Prepaid expenses Rs.
1,000, Debentures
Rs.1,00,000, Provision
for taxation Rs. 6,000.
Calculation of Current Liabilities:
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝟐,𝟎𝟎,𝟎𝟎𝟎
𝟏,𝟎𝟎,𝟎𝟎𝟎
= 2:1

14. 2. Calculate current assets from the following information.
Current ratio = 4, Current Liabilities = 1,20,000
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
Solution:
𝟒 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝟏, 𝟐𝟎, 𝟎𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 = 𝟏, 𝟐𝟎, 𝟎𝟎𝟎 ∗ 𝟒 = 𝟒, 𝟖𝟎, 𝟎𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑹𝒔. 𝟒, 𝟖𝟎, 𝟎𝟎𝟎
By cross multiplication:

15. 3. From the following information calculate current ratio. Stock Rs. 2,00,000,
Debtors Rs. 3,00,000, Cash Rs. 3,00,000, Creditors Rs. 3,20,000, Bill Payables Rs.
60,000, Outstanding expenses Rs. 20,000.
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
1. Solution:
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝟖, 𝟎𝟎, 𝟎𝟎𝟎
𝟒, 𝟎𝟎, 𝟎𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝟐: 𝟏

16. THANK YOU