Accountancy 1 Marks

Ratios are only means: Ratios are not ended in themselves but they are only means to achieve a particular purpose. Analysis of related items must be done by the management or experts with the help of ratios. Change in price level: Ratio analysis may not reflect price level changes and current values as they are calculated based on historical data given in the financial statement.

Return on investment shows the proportion of net profit before interest and tax to capital employed (shareholders’ funds and long-term debts). This ratio measures how efficiently the capital employed is used in the business. It is an overall measure of the profitability of a business concern.

It is calculated to assess the long-term solvency position of a business concern. The debt-equity ratio expresses the relationship between long-term debt and shareholder’s funds.

Debt equity ratio \(=\frac{\text { Long term debt }}{\text { Shareholders funds }}\)

Capital employed = Shareholder’s funds + Noncurrent liabilities

Greater the return on investment better is than the profitability of a business and vice versa.

The quick ratio gives the proportion of quick assets to current liabilities. It indicates whether the business concern is in a position to pay its current liabilities and when they become due, out of its quick assets.

The ratio is a mathematical expression of the relationship between two related or interdependent items. It is the numerical or quantitative relationship between two items. It is calculated by dividing one item by the other related item. When ratios are calculated on the basis of accounting information, these are called ‘accounting ratios