Accounting Ratios

Step 1: Identify Current Assets and Current Liabilities
Current Assets include:

• Cash = ₹ 1,50,000
• Stock = ₹ 1,50,000

Current Liabilities include:

• Bank Overdraft = ₹ 2,00,000
• Outstanding expenses = ₹ 1,00,000

Step 2: Calculate Total Current Assets and Total Current Liabilities

Step 3: Apply Current Ratio Formula
Thus, the Current Ratio is 1:1.

Accounting ratios are mathematical relationships between two accounting figures which help in analyzing and interpreting the financial statements of a business. The following are two important objectives of accounting ratios explained in detail:
1. To Analyze Financial Performance:
One of the main objectives of accounting ratios is to evaluate the financial performance of a business. Ratios such as Gross Profit Ratio, Net Profit Ratio, and Return on Capital Employed help in measuring the profitability and operational efficiency of the firm.
By comparing ratios of different years, management can identify trends in income, expenses, and profits. This helps in understanding whether the business is improving or declining over time.
2. To Assess Financial Position and Solvency:
Accounting ratios also help in determining the financial position of a business. Liquidity ratios such as Current Ratio and Quick Ratio show the ability of the firm to meet its short-term obligations.
Similarly, solvency ratios like Debt-Equity Ratio indicate the long-term financial stability of the business. These ratios are useful for creditors, investors, and management to judge the risk involved in the business.

Accounting ratios help in simplifying and analyzing the information given in financial statements. They convert complex financial data into meaningful relationships which assist various stakeholders in decision-making. Two important benefits are explained below:
1. Helps in Financial Analysis and Interpretation:
Accounting ratios make it easier to understand the financial statements by expressing the relationship between different items in numerical form.
Instead of studying large figures separately, ratios present the data in a simple and summarized manner. This helps management, investors, and creditors to interpret profitability, liquidity, and solvency position effectively.
Thus, ratios improve clarity and provide a better understanding of the financial condition of the business.
2. Facilitates Comparison:
Another important benefit of accounting ratios is that they enable comparison. Ratios can be compared:
(a) Between different years of the same business (intra-firm comparison), and
(b) Between different firms operating in the same industry (inter-firm comparison).
Such comparisons help in identifying strengths and weaknesses of the business and in taking corrective measures wherever necessary.

Step 1: Calculate Gross Profit

Step 2: Calculate Gross Profit Ratio
Gross Profit Ratio = 35%