Question

Financial Sataements

What are the classifications of ratios (List them and explain what information they provide)

Answer 1

Ans: Classification of ratios:

1. Liquidity ratio

2. Profitability Ratios

3.Working Capital Ratios

Liquidity Ratios: Liquidity ratios are comprises of Two ratios i.e. Current ratio and Quick Ratio

Current Ratio is the ratio between Current Assets and Current Liabilities

Quick Ratio is the ratio between Quick Assets and Current Liabilities it has the ability to pay bills due within 90 Days.

Profitability Ratios : Profitability ratios comprises of Gross profit , Operating profit ratio , Net profit ratio and return On Investment ratio

Gross profit Ratio is the ratio between gross Profit and Net Sales

Net Profit ratio is the ratio between Net Profit and Net Sales

Operating profit Ratio is the ratio between operating profit and Net Sales

Return On Investment is the ratio between Return on Investment and Cost of Investment

Working Capital ratios are Comprises of Inventory turnover ratio , Creditors turnover ratio, Debtors turnover ratio Fixed Assets turnover Ratio

Inventory turnover ratio is the ratio between Net Sales and inventory

Creditors Turnover ratio is the ratio between Net Credit Purchases and Average Accounts payable

Debtors Turnover ratio is the ratio between Total Sales and Accounts Receivable

Fixed Assets turnover Ratio is the ratio between cost of goods Sold and total Fixed Assets