A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions. According to Accountant's Handbook by Wixon, Kell and Bedford, "a ratio is an expression of the quantitative relationship between two numbers".
Ratio Analysis is the process of determining and presenting the relationship of items and group of items in the statements. According to Batty J. Management Accounting "Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication"." It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is helpful tool to aid in applying judgment, otherwise complex situations.
Ratio is an expression of relationship between two values.
Ratio Analysis is the process of analyzing the financial statement with the help of various ratios.
Objectives of Ratio Analysis.
1. Ratio helps in simplifying the complicated financial information.
2. Ratio analysis helps to know the trends in costs, sales and profits.
3. It facilitates communication of information in the form of ratios.
4. Ratio analysis facilitates inter firm comparison.
Advantages/Importance of Ratio Analysis.
1. It simplifies, summarizes and systematizes a long array of accounting figures.
2. The contribution of ratio analysis lies in bringing the interrelationship which exists between various segments.
as expressed through accounting statements.
3. It is an instrument for diagnosis of the financial health of an enterprise.
4. It facilitates easy communication of information.
5. It also facilitates inter firm comparison.
Classification of Accounting Ratio.
The Accounting Ratios are classified in various categories:.
1. Profitability Ratio.
A. Gross Profit Ratio.
Gross profit indicates excess of sales over the cost of goods sold. Gross profit Ratio is the ratio of Gross profit to Net sales.