Accounting Ratios 5

F inancial statements aim at providing financial

information about a business enterprise to meet
the information needs of the decision-makers.
Financial statements prepared by a business
enterprise in the corporate sector are published and
are available to the decision-makers. These
statements provide financial data which require
analysis, comparison and interpretation for taking
decision by the external as well as internal users of
accounting information. This act is termed as
financial statement analysis. It is regarded as an
integral and important part of accounting. As
indicated in the previous chapter, the most
commonly used techniques of financial statements
analysis are comparative statements, common size
LEARNING OBJECTIVES
statements, trend analysis, accounting ratios and
After studying this chapter,
you will be able to : cash flow analysis. The first three have been
• explain the meaning, discussed in detail in the previous chapter. This
objectives and limitations chapter covers the technique of accounting ratios
of accounting ratios; for analysing the information contained in financial
• identify the various statements for assessing the solvency, efficiency and
types of ratios commonly profitability of the enterprises.
used ;
• calculate various ratios 5.1 Meaning of Accounting Ratios
to assess solvency,
liquidity, efficiency and As stated earlier, accounting ratios are an important
profitability of the firm; tool of financial statements analysis. A ratio is a
• interpret the various mathematical number calculated as a reference to
ratios calculated for relationship of two or more numbers and can be
intra-firm and inter- expressed as a fraction, proportion, percentage and
firm comparisons. a number of times. When the number is calculated
by referring to two accounting numbers derived from