Looking Good Understanding Accounting Ratios
Definition of Accounting Ratios Accounting ratios which are also known as financial ratios are one part of financial statement analysis.
Understanding accounting ratios. Liquidity Current ratio also known as the working capital ratio The formula for calculating this ratio is Current assets OR Current assets. The current ratio is also called the working capital ratio as working capital is the difference between current assets and current liabilities. Accounting ratios will often relate one financial statement amount to another financial statement amount.
Liquidity or Acid test ratio Current Assets minus Stock Current Liabilities This is a measure of how well a business can meet its short-term debts and assuming the worst was to happen and you couldnt sell any of your stock eg. Our explanation will involve the following 15 common financial ratios. Ad Develop financial skills to unlock critical insights into performance.
Ratio Analysis is done to compare the current year performance of the business with its past years performance the companys current years performance with its expected or budgeted performance and the companys current years performance with the competitors current year performance until and unless performance appraisal is done the standing of the company cannot be known. Financial ratios using income statement amounts. This ratio measures the ability of a company to pay its current obligations using current assets.
Calculation of ratios is comparatively simple routine clerical in nature but interpretation of ratios is highly sophisticated and intricate phenomenon. Financial ratios using balance sheet amounts. Ad Develop financial skills to unlock critical insights into performance.
Accounting ratios are one of the important tools of financial statement analysis. Ratio 4 Debt to equity ratio. Current liabilities Current liabilities You should note that this ratio is not expressed as a percentage.
Interpretation of Accounting Ratios. Ratio 3 Quick acid test ratio. Financial ratios are mathematical comparisons of financial statement accounts or categories.