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Class 12 Accounting Ratios: cheat sheet
CBSE Accountancy. Liquidity, solvency, activity and profitability ratios: current, quick, debt-equity, proprietary, interest coverage, turnover, gross and net profit, operating ratio and ROI.
Key ideas
- Liquidity ratios (current, quick) test short-term solvency; solvency ratios (debt-equity, proprietary, interest coverage) test long-term solvency.
- Activity ratios (inventory, trade receivables, trade payables and working capital turnover) show how fast assets are used; profitability ratios relate profit to sales or capital.
- Quick assets are current assets less inventories and prepaid expenses.
- Debt means long-term borrowings, and equity means shareholders’ funds.
- Turnover ratios use averages, (opening + closing) ÷ 2, and inventory turnover uses the cost of revenue from operations, not the revenue.
- Interest coverage and return on investment use profit before interest and tax: profit before tax + interest on long-term debt.
Remember
| Current ratio | current assets ÷ current liabilities |
| Quick ratio | (current assets − inventories − prepaid expenses) ÷ current liabilities |
| From the current ratio and working capital | current liabilities = working capital ÷ (current ratio − 1) |
| Debt-equity ratio | long-term debts ÷ shareholders’ funds |
| Proprietary ratio | shareholders’ funds ÷ total assets |
| Interest coverage ratio | profit before interest and tax ÷ interest on long-term debt |
| Inventory turnover | cost of revenue from operations ÷ average inventory |
| Trade receivables turnover | credit revenue from operations ÷ average trade receivables; collection period = 365 ÷ turnover days |
| Gross and net profit ratios | gross profit (or profit after tax) ÷ revenue from operations × 100 |
| Operating ratio | (cost of revenue from operations + operating expenses) ÷ revenue from operations × 100 |
| Return on investment | profit before interest and tax ÷ capital employed × 100 |
Watch out
- Leaving inventory or prepaid expenses in quick assets.
- Using revenue instead of the cost of revenue for inventory turnover.
- Using profit after tax in return on investment instead of profit before interest and tax.
Worked example
Maple Ltd has revenue from operations of ₹48,00,000, profit after tax of ₹5,76,000 (tax 25%), interest on long-term debt of ₹28,000 and capital employed of ₹63,68,000. Find (a) the net profit ratio (b) the profit before interest and tax (c) the return on investment.
Working: (a) ₹5,76,000 ÷ ₹48,00,000 × 100 (b) ₹5,76,000 × 100/75 = ₹7,68,000; + ₹28,000 (c) ₹7,96,000 ÷ ₹63,68,000 × 100
Answer: (a) 12%; (b) ₹7,96,000; (c) 12.5%
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