Understanding Ratio Analysis in accounts

A ratio means a specific number that is express in terms of another number. It can be found when we divide one number from the other. It may be express in the following ways, which must be keep in mind while taking accounting assignment help or even any other assignment help: 

1. ‘Proportion’ or Pure Ratio or Simple Ratio: 

 

It refer to the ratio that can be express through the simple division of one number by the other. 

For instance, if the current liability of the business are rupee 100,000 and their current asset are 200,000, then the ratio of current asset to current liability will be 2:1. 

1. ‘Rate’ or ‘So Many Times’:

 

 In this type of ratio, in order to calculate the ratio, the two figure are compare to each other.

 For example, if the credit sale of the firm during a specific year are 200,000 and its debtor at the end of the year are 40,000, the turnover ratio of the debtor will be 5 time. 

1. Percentage: 

This ratio shows us the relation between the two figures that are express in hundredth. 

For example, if the profit of the firm is 200,000 and its capital is 10,00,000, then the ratio of profit to the capital, in percentage, will be 20%.

1. Fraction: 

Let us make an assumption that the net profit is two-fifth of the capital.

Objectives of Ratio Analysis: –

• The weak spots of the business are identifier, that needs more attention.

• The deeper investigation of the solvency, profitability, liquidity, activity of the business is do.

• The information to make cross-sectional analysis that is, to make comparison with some select firms in the industry, is provide.

• The information regarding the time-series analysis that is, to compare the present ratios of the firm with its past ratios, is provide.

• The information to draw the estimates and for the preparation of the pans for future, is provided.

Advantages of Accounting Ratios: –

1. Helpful in Analysis of Financial Statements: 

 

The financial statements can be easily analyzed by taking the help of the extremely useful device known as Ratio Analysis. 

 

It gives help to the creditors, shareholders, bankers, investors, etc. to acquire enough knowledge about the financial health of the business and its profitability. 

1. Simplification of Accounting Data: 

 

A long array of accounting data is summarized and simplified with the help of accounting ratio which also makes it understandable. 

 

The relationship of the two figures which have a cause-and-effect relationship with each other, is disclosed by it.

1. Helpful in Comparative Study: 

 

The comparison between the profitability and financial soundness can be make between one firm and the other in the same industry, with the help of ratio analysis. 

 

Likewise, the comparison between the current year figures with that of the previous year can be made with the help of ratio analysis.

1. Helpful in Locating the Weak Spots of the Business: 

 

The comparison between the ratio of the current year with that of the previous year is done and remedial measures are taken to rectify them if some weak spots are located.

1. Helpful in Forecasting: 

 

Its help to forecast and to prepare the plans for the future. The estimates for the future can be take out if we establish a relationship between debtors and revenue from operations, capital and revenue from operations, expenses and revenue from operations, etc.

1. Estimate about the Trend of the Business: 

 

The accounting ratios will reveal the revenue from operations, trend of costs, profits and other important facts, if  these are prepare for number of years.

1. Fixation of Ideal Standards: 

 

With the help of the ratio, we can establish the ideal standard of the different item of the business. If we compare the actual ratio that are calculate at the end of the year, with the ideal ratio, it will be easy to measure the efficiency of the business.

1. Effective Control: 

 

The solvency, liquidity and profitability of the business is disclose with the help of the ratio analysis. The change that take  place during a period of time in the financial activity of the business, can be assess with the help of such information.

1. Study of Financial Soundness: 

 

The position of the business with different viewpoints can be disclose with the help of ratio analysis. 

It discloses the business’s position with the solvency point of view, liquidity point of view, profitability pint of view, etc. The conclusions about the financial health of the business enterprise can be draw with the help of such study.

Limitations of Accounting Ratios: –

• Limited use of a Single Ratio: 

 

The analysis should not be merely base on the single ratio. The analyst should learn about the other connect ratios as well before they reach to any conclusion. 

 

For instance, the Quick Ratio of the firm must be satisfactory while the Current Ratio might be unsatisfactory.

• Ignores Qualitative Factors: 

 

Ratio analysis refers to the quantitative measurement of the business. The qualitative factors which are essential for interpretation is disregard  it. 

 

For example, the managerial ability and the character of the customer must be take into account while granting him credit on the basis of certain ratios of his business.

• Effect of Personal Ability and Bias of the Analyst: 

 

Different persons have different meaning about the different terms. Analyst A might calculate the ratios on the basis of the profit after interest and tax, 

 

while, analyst B might consider the profits before interest and tax, analyst C might consider profits after interest

but before tax. Hence, before making any kind of comparisons, one must assure that the ratios are calculate on the same basis.

Account ratio help us in analyze the performance of any company and these point can assist us in account assignment help or any such assignment help,

 

but on the contrary, these ratio are calculate with the help of the Balance Sheet on a specific date. So, it might not reflect the company’s financial position during other period of the year.