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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 three objectives of ratio analysis.
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Answer

Following are the objectives of ratio analysis.
$1.$ To know profitability status of the entity: In accounting, the profitability of the business can be measured by applying the ratio analysis in different forms.
$2.$ For financial statement analysis: Ratio analysis works as indicator to the users of financial statements. Different stakeholders undertake analysis of profit and loss statements and balance sheet. I make this analysis meaningful and useful ratio analysis is used.
$3.$ To know the liquidity status of the entity: The liquidity ratio explains the capacity to meet short term liabilities of the entity. From the liquidity, short term solvency of the business can be measured.
$4.$ To know operating efficiency of business entity: Different types of assets are acquired by the business entity, for measurement of effective and efficient use of assets, ratio analysis is useful. For this turnover ratio is used.
$5.$ For forecasting: The trend of respective items can be seen by ratio analysis. This trend can be useful to the company to undertake planning and forecast.
$6.$ The information about weak aspects: There may be overall good results of the business entity. Out of different aspects like profitability, liquidity, solvency or efficiency, there may be weak performance of anyone aspects and good performance of other aspects. By ratio analysis, each aspect is evaluated personally. So the information for weak aspects can be obtained and necessary remedies can be undertaken.

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