d Ratio analysis questions and answers for interview
  • Ratio analysis questions and answers for interview
  •  Ratio analysis questions and answers for interview
  •  Ratio analysis questions and answers for interview

Ratio analysis questions and answers for interview

Accounting Ratios express the relationship between two financial variables of the financial statements. They are expressed in anyone of the following forms:-

Meaning of Liquidity Ratio

Liquidity ratios measure the short‑term solvency, i.e., the firm's ability to pay off current dues. They comprise
  1. Current ratio,
  2. Quick ratio.

Meaning of Current Ratio

This ratio is used to assess the short‑term financial position of the enterprise. In other words, it is an indicator of the enterprise's ability to meet its short‑term obligations. The relationship of current assets to current liabilities is known as current ratio, 'Current assets' mean the assets are either in form of Cash or Cash equivalents or can be converted into Cash or Cash equivalents in the short time (say, within a year's time) and 'current liabilities' means liabilities repayable in the short, time. This ratio is calculated as follows:

Current Ratio ‑ Current Assets/ Current Liabilities

Debt Equity Ratio

The debt‑equity ratio is worked out to ascertain soundness of the long‑term financial policies of the firm. This ratio expresses a relationship between debt and the equity debt means long‑term loans, i.e., debenture, loans (long‑term) from financial institutions. Equity means shareholders' funds, i.e., preference share capital, equity share capital, reserves less losses and fictitious assets like preliminary expenses. The ratio is ascertained as follows:

Debt‑Equity Ratio ‑ Debt (long-term Loans)/ Equity (Shareholders' Funds)

Gross Profit Ratio

The main object of an enterprise is to earn profit. In general terms, efficiency in business is measured by profitability. Profit as compared to the capital employed indicates profitability of the concern. Thus, profitability is of utmost importance for a concern. If a concern goes on losing, its financial condition will definitely be bad sooner or later. Thus, a measure of 'profitability' is the overall measure of efficiency. Following are the important 'profitability’ ratios.

This ratio establishes relationship of gross profit on sales to net sales of a firm, which is calculated in percentage. Its formula is:-

Gross Profit Ratio = Gross Profit / Sales

Net Profit ratio

Net Profit is arrived at, after considering the other administrative costs incurred for the period. It is expressed as:-

Net Profit = (Gross Profit + Other Income) – (Selling & Administrative
Expenses + Depreciation +
Interest + Taxes +)

Net Profit Ratio = Net Profit / Sales

Read more about ratio in accounting course offered by IPA