Accounting Ratios Class 12 all Formulas - Description
Dear readers, here we are presenting Accounting Ratios Class 12 all Formulas PDF to all of you. Ratio analysis is one of the most important parts of that accounting because it plays a very vital role in the calculation of various types of dividends and profits in the partnership chapter.
Here you can read the essential Accounting Ratios Class 12 all Formulas that will help you a lot in preparing for your exams and in various exercises of the accounting principle. The accounting ratio formulas are also useful in day-to-day life.
Accounting Ratios Class 12 all Formulas PDF
- Tool for analysis of Financial Statements: It helps the users of financial statements to analyze the financial position of an enterprise. Such users can be bankers, investors, creditors, etc. who are concerned about the performance of an enterprise.
- Simplifies Accounting Data: It simplifies the understanding of accounting information presented in the financial statement. Calculation of ratios summarises briefly the results of detailed and complicated information.
- Assessment of Operating Efficiency of Business: Operating efficiency can be determined by assessing and evaluating liquidity, solvency, and profitability of an enterprise. Calculation of ratios helps in determining and evaluating such aspects.
Accountancy Accounting Rratios
- Assists in Forecasting: Calculation, analysis, and comparison of ratios help in business planning and forecasting. This is because the trend of ratios being calculated acts as a guide for future planning.
- Identifies Weak Areas: Calculation and analysis of various ratios help to identify and interpret the favorable and unfavorable ratios which can be used to identify the weak areas or unfavorable factors in the enterprise. Enterprise can then work upon such areas or factors to improve the performance.
- Facilitates Inter-firm and Intra-firm Comparison: When a firm compares its performance with that of other firms or with its industry standards in general, it is known as Inter-firm Comparison or Cross-Sectional Analysis. On the other hand, if the performance of different units is belonging to the same firm is to be compared, it is known as Intra-firm Comparison. Accounting ratios are widely used for such comparisons.
Limitations of Ratio Analysis
- Reliability of Ratios: Since, ratios are calculated based on the financial information, if the information available is not correct ratios calculated using such information will also be incorrect. Therefore, such ratios are not completely reliable to make any future decisions for an enterprise.
- Only Quantitative Factors considered: Calculation of ratios takes into consideration only quantitative factors and all the related qualitative factors are ignored, which may be important for future decision making of an enterprise.
- No Standard Ratio: In order to determine whether a ratio is favorable or adverse, there should be a standard with which the ratio can be compared. However, there is no single standard against which the ratio can be compared.
- Non-Comparable: It is possible that different firms belonging to the same industry may follow different policies and procedures for the purpose of accounting. The amounts computed using such different policies and procedures will also be different. Therefore, ratios calculated by such firms will not be comparable as the information used in calculating such ratios by the different firms is not the same.
- Price Level Changes Ignored: It is necessary to understand that the comparability of the ratios depends upon the change in the price levels. However, such a change in price levels is not considered in accounting variables from which ratios are computed.
- Window Dressing: If the accounts are manipulated in order to window dress the financial performance and position of the business, the information available for computing ratios will not be accurate. This will lead to incorrect ratios being computed which in turn will affect the decisions taken based on analysis of such incorrect ratios.
- Personal Bias: Since the preparation of financial statements is highly influenced by personal judgments, accounting ratios computed based on such information is also not free from such limitation.
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