Ratio Analysis

Step 1: Classify the items.
\emph{Current Assets} Cash 20,000 Bank 42,000 Bills Receivable 18,000 Closing Stock 1,00,000 .
\emph{Quick (Liquid) Assets} Current Assets Stock .
\emph{Current Liabilities} Creditors 86,000 Bank Overdraft 34,000 .
\emph{Fixed Assets} . \quad \emph{Net Sales} (assumed sales) . (a) Current Ratio.
(b) Quick (Acid-Test) Ratio.
(c) Stock (Inventory) Turnover Ratio.
Standard formula is . As opening stock/COGS are \emph{not} given, we use the exam convention (when no other data are available). (d) Fixed Asset Turnover Ratio.

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Step 1: Recall meaning of solvency ratios.
They assess a firm’s long-term ability to meet obligations.
Step 2: Quote two standard ratios.
- \emph{Debt–Equity Ratio} . - \emph{Proprietary (Equity) Ratio} . (Other valid answers: Debt Ratio, Interest Coverage/Times Interest Earned, Capital Gearing.)
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Step 1: Recall what ratios do.
Accounting ratios relate one meaningful figure to another (e.g., Current Assets to Current Liabilities) to create insight not apparent from raw totals.
Step 2: Objectives distilled.
1) \emph{Performance and position appraisal}: Liquidity (current/quick), long-term solvency (debt-equity), profitability (gross/net profit, ROI), and efficiency (turnover ratios). 2) \emph{Comparison and control}: Express results in a standardised form that aids trend analysis (across periods) and benchmarking (across firms/industry), enabling management decisions such as pricing, credit terms, financing mix, etc.
Step 3: Conclude.
Thus, ratios chiefly help in (a) evaluation of financial health and (b) meaningful comparison for decisions.
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