Ratio Analysis Bcom Notes

Ratio Analysis Bcom Notes:- In this post, you will get the notes of B.com 3rd year Financial Management, by reading this post you can score well in the exam, hope that this post has helped you with this post to all your friends and all groups right now I must share it so that every student can read this post and it can also be helped in this post.

Ratio Analysis

Meaning of Ratio: Ratio is an arithmetical expression of relationship between two related or interdependent items. Ratios, when calculated on the basis of accounting information, are called ‘Accounting Ratios’. Accounting ratio is, thus, an arithmetical relationship between two accounting variables.

According to R. N. Anthony, “A ratio is simply one number, expressed in terms of another. It is found by dividing one number by the other.”

According to Kennedy and McMullar, “The relationship of one term to another, expressed in simple mathematical form is known as ratio.”

Expression of Ratios: 1. In form of Simple Ratio or Pure Ratio e.g.,2:1, 2. In form of Percentage and 3. In form of number of times i.e.,so many times.

Meaning and Definition of Ratio Analysis

Ratio Analysis is a technique of Financial Statements Analysis and is the most widely used tool to interpret quantitative relationship between two variables of the Financial Statements.

“Ratio analysis is a study of relationship among various financial factors in a business.”

-Myres

“Ratio analysis is the establishment of a reasoned relationship of a fixed or variable character between measurement of certain phenomena having some kind of linkage.”

-Om Prakash

Steps Involved in Ratio Analysis: 1. Selection of Relevant Data, 2. Calculation of Appropriate Ratios, 3. Comparative Study of Ratios and 4. Interpretation of Ratios.

Objects/Significance or Utility of Ratio Analysis: 1. Useful in Simplifying Accounting Figures, 2. Useful in Analysis of Financial Statements, 3. Useful in Assessing the Operating Efficiency of Business, 4. Helpful in Financial Forecasting and Planning, 5. Useful in Locating the Weak spots of the Business, 6. Useful in Comparative Study, 7. Useful in Communication and Co-ordination and 8. Useful in Inter-firm and Intra-firm Comparison.

Limitations of Ratio Analysis: 1. Limited use of a Single Ratio: One single ratio used without reference to other ratios may produce misleading results. According to Kennedy and Medullar, “A single ratio in itself is meaningless, it does not furnish a complete picture.” 2. Historical Analysis, 3. Possibility of Window Dressing, 4. Lack of Qualitative Analysis, 5. Effect of Incorrect Original Data, 6. Different accounting practices render ratios in comparable, 7. Misleading Results in the absence of absolute data, 8. Lack of uniformity in definitions of various terms used in computation of ratios, 9. Effect of personal ability and bias of the analyst, 10. Effect of Price Level Changes are not taken into account, 11. Lack of Adequate Standard Ratio and 12. Limited Comparability.

Classification or Types of Ratios

Various individuals and business firms use the ratios according to their purposes of analysis. Famous ratio analysts Spensor and Trucker in their book “Successful Managerial Control by Ratio Analysis” have analysed and defined 429 ratios. The explanation of all these ratios is neither possible nor desirable. In short, ratios may be classified as follows:

(a) Structural Classification or Classification according to Financial Statements: 1. Balance Sheet Ratios, 2. Profit and Loss Account Ratios or Income Statement Ratios or Operating Ratios, 3. Composite or Mixed Ratios.

(b) Functional Classification: 1. Liquidity Ratios, 2. Activity or Turnover Ratios, 3. Profitability Ratios and 4. Capital Structure Ratios or Long-term Solvency Analysis Ratios.