CLASSIFICATION OF RATIOS - Accounts and Finance for Managers

The accounting ratios are classified into various categories on the basis of

  1. Financial statements
  2. Functions

On the basis of Financial Statements:

  1. Income statement Ratios: These ratios are computed from the statements of Trading, Profit & Loss account of the enterprise. Some of the major ratios are: GP ratio, NP ratio, Expenses Ratio, and so on.
  2. Balance sheet or Positional Statement Ratios: These type of ratios are calculated from the balance sheet of the enterprise which normally reveals the financial status of the position i.e. short term, Long term financial position, Share of the owners on the total assets of the enterprise and so on.
  3. Inter statement or Composite Mixture of Ratios: Theses ratios are calculated by extracting the accounting information from the both financial statements, in order to identify stock turnover ration, debtor turnover ratio, return on capital employed and so on.

On the basis of Functions:

  1. On the basis of Solvency position of the firms: Short term and Long term solvency position of the firms.
  2. On the basis of Profitability of the firms: The profitability of the firms are studied on the basis of the total capital employed, total asset employed and so on.
  3. On the basis of Effectiveness of the firms: The effectiveness is studied through the turnover ratios – Stock turnover ratio, Debtor turnover ratio and so on.
  4. Capital Structure ratios: The capital structure position are analysed through leverage ratios as well as coverage ratios.

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