Chapter 9 Ratio Analysis
CHAPTER 9
Ratio Analysis
Introduction
The analysis of the financial statements and interpretations of financial results of a particular period of operations with the help of 'ratio' is termed as "ratio analysis." Ratio analysis used to determine the financial soundness of a business concern. Alexander Wall designed a system of ratio analysis and presented it in useful form in the year 1909.
Meaning and Definition
The term 'ratio' refers to the mathematical relationship between any two inter-related variables. In other words, it establishes relationship between two items expressed in quantitative form.
According J. Batty, Ratio can be defined as "the term accounting ratio is used to describe significant relationships which exist between figures shown in a balance sheet and profit and loss account in a budgetary control system or any other part of the accounting management."
Ratio can be used in the form of (1) percentage (20%) (2) Quotient (say 10) and (3) Rates. In other words, it can be expressed as a to b; a: b (a is to b) or as a simple fraction, integer and decimal. A ratio is calculated by dividing one item or figure by another item or figure.
Analysis or Interpretations of Ratios
The analysis or interpretations in question may be of various types. The following approaches are usually found to exist:
(a) Interpretation or Analysis of an Individual (or) Single ratio.
(b) Interpretation or Analysis by referring to a group of ratios.
(c) Interpretation or Analysis of ratios by trend.
(d) Interpretations or Analysis by inter-firm comparison.
Principles of Ratio Selection
The following principles should be considered before selecting the ratio:
A Textbook of Financial Cost and Management AccounQd~
234
(1)
Ratio should be logically inter-related.
(2)
Pseudo ratios should be avoided.
(3)
Ratio must measure a material factor of business.
(4)
Cost of obtaining information should be borne in mind.
(5)
Ratio should be in minimum numbers.
(6)
Ratio should
Ratio Analysis
Introduction
The analysis of the financial statements and interpretations of financial results of a particular period of operations with the help of 'ratio' is termed as "ratio analysis." Ratio analysis used to determine the financial soundness of a business concern. Alexander Wall designed a system of ratio analysis and presented it in useful form in the year 1909.
Meaning and Definition
The term 'ratio' refers to the mathematical relationship between any two inter-related variables. In other words, it establishes relationship between two items expressed in quantitative form.
According J. Batty, Ratio can be defined as "the term accounting ratio is used to describe significant relationships which exist between figures shown in a balance sheet and profit and loss account in a budgetary control system or any other part of the accounting management."
Ratio can be used in the form of (1) percentage (20%) (2) Quotient (say 10) and (3) Rates. In other words, it can be expressed as a to b; a: b (a is to b) or as a simple fraction, integer and decimal. A ratio is calculated by dividing one item or figure by another item or figure.
Analysis or Interpretations of Ratios
The analysis or interpretations in question may be of various types. The following approaches are usually found to exist:
(a) Interpretation or Analysis of an Individual (or) Single ratio.
(b) Interpretation or Analysis by referring to a group of ratios.
(c) Interpretation or Analysis of ratios by trend.
(d) Interpretations or Analysis by inter-firm comparison.
Principles of Ratio Selection
The following principles should be considered before selecting the ratio:
A Textbook of Financial Cost and Management AccounQd~
234
(1)
Ratio should be logically inter-related.
(2)
Pseudo ratios should be avoided.
(3)
Ratio must measure a material factor of business.
(4)
Cost of obtaining information should be borne in mind.
(5)
Ratio should be in minimum numbers.
(6)
Ratio should