Wa0014.

Class XII
Formulae of Accounting Ratios

Classification or Types of ratios : Ratios are classified into 4 categories
1. Liquidity Ratios also called as short term solvency ratios.
2. Solvency Ratios
3. Activity ratios also known as Turnover ratios or Performance ratios
4. Profitability ratios
1. Liquidity Ratios :
a) Current Ratio = Current Assets

Current Liabilities
Current Assets = Current Investments + Inventories (Excluding Spare Parts and Loose Tools) + Trade
Receivables + Cash and Cash Equivalents +Short Term Loans and Advances + Other Current Assets.
Current Liabilities=Short-Term Borrowings +Trade Payables +Other Current Liabilities+ Short-term Provisions.
(Standard or Ideal Current Ratio:- 2:1)
b) Liquid Ratio = Liquid Assets (Also Known as Quick Ratio & Acid Test Ratio)
Current Liabilities
Liquid Assets = Current Assets - Inventories- Prepaid expenses
or
Current Assets – (Inventories + Prepaid expenses)
Current Liabilities=Short-Term Borrowings +Trade Payable + Other Current Liabilities + Short - term Provision
2. Solvency Ratios :
a) Debt Equity Ratio = Debt
Equity
Debt = Long Term Borrowings + Long Term Provisions
Equity/Shareholder’s Funds = Share Capital + Reserves and Surplus
OR
Non-Current Assets= (Tangible Assets + Intangible Assets + Non-Current Trade Investments + Long-Term
Loans & Advances) + Working Capital – Non-Current Liabilities (Long-Term Borrowings + Long-Term
Provisions)
Standard of Ideal Debt Equity Ratio:- 2:1
Working Capital = Current Assets–Current Liabilities
Total Assets to Debt Ratio = Total Assets

b)
Debt
Total Assets = Non-Current Assets(Tangible Assets + Intangible Assets +Non-Current Investments) Investments +
Long-Term Loans & Advances) + Current Assets (Current Investments + Inventories Trade Receivables + Cash
&Cash Equivalent + Short-Term Loans & Advances+ Other Current Assets).
Debt = Long Term Borrowings + Long Term Provisions
c) Proprietary Ratio = Proprietors Funds

Total Assets
Proprietors Funds = Share Capital + Reserves and Surplus
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OR
Non-Current Assets (Tangible Assets + Intangible Assets + Non-Current Trade Investments + Long- Term Loans &
Advances) + Working Capital–Non-Current Liabilities (Long-Term Borrowings + Long-Term 'Provisions)
Total Assets = Non-Current Assets (Tangible Assets + Intangible Assets + Non- Current Investments + Long –Term
Loans &Advances)+ Current Assets (Current Investments + Inventories including Spare Parts & Loose Tools +
Trade Receivables + Cash & Cash Equivalent + Short-Term Loans & Advances + Other Current Assets).
d) Interest Coverage Ratio = Net Profit before interest and tax / Interest on Long term debt
Formula of Capital Employed Liabilities side approach :
Shareholder’s Fund (Share Capital + Reserves & surpluses) + Non-Current liabilities (Long term-
borrowing + long term Provisions
Assets Side Approach :
Non-Current Assets (Tangible Assets + Intangible Assets + Non-Current investment + Long- term Loans &
Advances) + Working Capital
It is assumed that all Non-Current Investments are Trade Investments only. Interest on Non-Trade Investments
should be deducted from Profit before Interest, Tax and Dividend. Therefore it cannot be a part of Non-Current
Investments.
3. Activity Turnover Ratio

a) Inventory Turnover Ratio:
Cost of Revenue from operations / Average Inventory
Cost of Revenue from Operation = Revenue from Operations–Gross Profit OR
Opening Inventory + Net Purchases + Direct Expenses (Assume to be given) – Closing Inventories
OR
Cost of materials consumed + purchase of stock- in-trade + change in Inventory (Finished Goods; Work in
Progress & Stock-in-trade) + Direct Expenses (Assume given)
Average Inventory = Opening Inventory + Closing Inventory/2
b) Trade Receivable Turnover Ratio=
Net credit revenue from operations / Average Trade Receivable
Net Credit Sales=Total Sales – Cash Sales ` OR

Credit Revenue from Operation = Revenue from Operation – Cash Revenue from Operation
Average Trade Receivables = Opening Debtors + Trade Receivable +Closing Debtors+ trade Receivable /2
Trade Receivables = Debtors + Bills Receivables
c) Trade payable Turnover Ratio=

Net Credit Purchases / Average Trade Payables
Net Credit Purchase = Total Purchases – Cash Purchases
Average Trade Payables = Opening Trade Payables + Closing trade Payables/2
Trade Payables =Creditors + Bills Payable
d) Working Capital Turnover Ratio = Net Revenue from Operations / Working Capital
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*Working Capital =Current Assets – Current Liabilities
Current Asset = Current Investments + Inventories (Excluding Spare Parts and Loose Tools) +Trade Receivables +
Cash and Cash Equivalents + Short Term Loans and Advances + Other Current Assets
Current Liabilities = Short-Term Borrowings + Trade Payables + Other Current Liabilities+ Short-term Provisions
4. Profitability Ratios
.
a) Gross Profit Ratio= Gross profit x 100

Net Revenue from Operations
Gross Profit = Revenue from Operation – Cost of Revenue from Operations
Cost of Revenue from Operation = Opening Inventory (excluding Spare Parts and Loose Tools) + Net
Purchases + Direct Expenses – Closing Inventory (excluding Spare Parts and Loose Tools)
OR
Revenue from Operation – Gross Profit
c) Operating Ratio=
(Cost of Revenue from operation+ Operating Expenses) X100
Net Revenue from operations
Cost of Revenue from Operation = Opening Inventory (excluding Spare Parts and Loose Tools) + Net
Purchases + Direct Expenses– Closing Inventory (excluding Spare Parts and Loose Tools)
OR
Revenue from Operation – Gross Profit
Operating Expenses = Office, Administrative, Selling and Distribution Expenses, Employees Benefit
expenses, Depreciation & Amortisation
d) Operating Profit Ratio=

Operating Profit x 100
Revenue from operations
Operating Profit = Net Profit (After Tax) + Non-Operating Expenses/Losses– Non Operating Incomes
OR
Gross Profit + Operating Income–Operating Expenses Non-Operating Expenses = Interest on Long Term
Borrowing + Loss on sale of Fixed or Non-Current Assets
Non-Operating Income = Interest received on investments + Profit of sale on Fixed Assets or Non-Current
Assets
e) Net Profit Ratio= Net Profit x 100
Net Revenue from operations
Net Profit before Interest &Tax= Gross Profit + Other Incomes – Indirect Expenses
4. Return on Investment (ROI) or Yield on Capital or Return on Capital Employed / Invested=

NET PROFIT before interest, tax & dividend x 100
Capital Employed
Net Profit before Interest, Tax and Dividend
= Gross Profit + other Income–Indirect Expenses
Page 3 of 3

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Class XII

Formulae of Accounting Ratios

a) Current Ratio = Current Assets

Working Capital = Current Assets–Current Liabilities

Total Assets to Debt Ratio = Total Assets

c) Proprietary Ratio = Proprietors Funds

Formula of Capital Employed Liabilities side approach :

3. Activity Turnover Ratio

Net credit revenue from operations / Average Trade Receivable

Net Credit Sales=Total Sales – Cash Sales ` OR

c) Trade payable Turnover Ratio=

a) Gross Profit Ratio= Gross profit x 100

d) Operating Profit Ratio=

4. Return on Investment (ROI) or Yield on Capital or Return on Capital Employed / Invested=

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