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P2 C5 ACCOUNTNG RATIOS AND ANALYSIS — Elements of Account STD 12 Commerce — Question

Gujarat BoardEnglish MediumSTD 12 CommerceElements of AccountP2 C5 ACCOUNTNG RATIOS AND ANALYSIS3 Marks
Question
Explain the functional classification of ratios.
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Answer

Functional classification of ratios are as under :
$1.$ Profitability Ratio: The earning capacity of a business unit is known as profitability. Following are the different ratios to measure profitability.
  • Gross profit ratio
  • Operating ratio
  • Operating profit ratio
  • Net profit ratio.
$2.$ Liquidity Ratio: Liquidity means the ability of business unit to pay short-term liabilities or current liabilities. Following ratios are included in liquidity ratio :
  • Current ratio
  • Liquidity ratio.
$(3)$ Solvency Ratio: The capacity of a business unit to pay the long-term liabilities is known as financial or economic solvency. Following ratio are included insolvency ratio :
  • Debt to equity ratio
  • Total assets to debt ratio
  • Proprietary ratio
  • Interest coverage ratio.
$(4)$ Efficiency $($Activity$)$ Ratios: The profitability of the business increases, when all resources and equipment acquired by the business entity are used efficiently. Following ratios are included in efficiency ratio :
  • Stock turnover
  • Working capital turnover
  • Debtor turnover
  • Creditors turnover.

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