Meaning of Ratio & its objectives

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Offline Shekh Moniruzzaman

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Meaning of Ratio & its objectives
« on: July 15, 2017, 02:23:13 PM »
Ratio: A ratio is one figure expressed in terms of another figure.  It is mathematical yardstick of measuring relationship of two figures or items or group of items, which are related, is each other and mutually inter-dependent.  It is simply the quotient of two numbers.  It can be expressed in fraction or in decimal point or in pure number.
 
Accounting ratio is an expression relating to two figures or two accounts or two set accounting heads or group of items stated in financial statement.

2. Objectives of Ratios

The accounting ratios are very useful in assessing the performance of business enterprise i.e. financial position and profitability. This  is possible to achiever by comparison of ratios of the year or with the previous year.
 
The ratios are worked out to analyse the following aspect or areas of business organization.
 
1.   Solvency: -

a.   Long-term solvency
b.   Short-term solvency
c.   Immediate solvency

2.   Stability
3.   Profitability
4.   Operational efficiency
5.   Credit standing 
6.   Structural analysis.
7.   Utilization of resources and 
8.   Leverage or external financing.

3. Classification of Ratios

The ratios are used for different purposes, for different users and for different analysis.
 
The ratios can be classified as under:
a.   Traditional classification
b.   Functional classification
c.   Classification from user‘s point of view