Meaning of Ratio analysis
Ratio analysis is a process of determining and interpreting relationships between the items of financial statements to provide a meaningful understanding of the performance and financial position of an enterprise. Thus, it is a technique of analyzing the financial statements by computing ratios.
Ratio analysis serves the purpose of various users who are interested in the financial statements. It simplifies, summarize and systematize the figures in the financial statements
OBJECTIVES OF RATIO ANALYSIS
1.To simplify the accounting information.
2.To determine liquidity, i.e., Short-term solvency (Ability of the enterprise to meet its short-term financial obligations) and Long-term solvency (Ability of the enterprise to pay its long-term liabilities) of the business.
3.To assess the operating efficiency of the business.
4.To analyze the profitability of the business.
5.To help in comparative analysis, i.e., inter-firm and intra-firm comparisons.
Classification of Accounting Ratio
1.Liquidity ratio
2.Solvency ratio
3.Activity ratio
4.Profitability ratio
Practical problem solutions ts grewal 2024-25