Match List I with List II: Choose the correct answer from the options given below:LIST I LIST II A. Liquidity Ratio I. Operating Ratio B. Solvency Ratio II. Working Capital Turnover Ratio C. Activity Ratio III. Quick Ratio D. Profitability Ratio IV. Interest Coverage Ratio
A-III, B-IV, C-II, D-I
Understanding Financial Ratios: Matching Types and Examples
The correct answer is option (1) : A-III, B-IV, C-II, D-I.
* Liquidity Ratio- Quick Ratio. Liquidity ratios gauge a company's ability to meet its short-term financial obligations promptly. Liquidity ratios are calculated to measure the short-term solvency of the business, i.e. the firm’s ability to meet its current obligations. These are analysed by looking at the amounts of current assets and current liabilities in the balance sheet. Two common liquidity ratios are the current ratio and the acid-test ratio or quick ratio.
* Solvency Ratio- Interest Coverage Ratio. Solvency ratios focus on assessing a business's capability to fulfill its long-term debt obligations rather than short-term ones. Solvency ratios are calculated to determine the ability of the business to service its debt in the long run. Examples of solvency ratios include the debt equity ratio, total assets to debt ratio, proprietary ratio, and interest coverage ratio.
* Activity Ratio- Working Capital Turnover Ratio. Activity ratios provide insights into a company's operational efficiency and its ability to generate sales or turnover. Key turnover ratios encompass Inventory Turnover, Trade Receivables Turnover, Trade Payables Turnover, Working Capital Turnover, Fixed Assets Turnover, and Current Assets Turnover.
* Profitability Ratio- Operating Ratio. Profitability ratios delve into a company's capacity to generate earnings based on the utilization of its resources. Prominent profitability ratios include the Gross Profit ratio, Operating ratio, Net Profit Ratio, Return on Investment (ROI) or Capital Employed, Earnings per Share (EPS), Book Value per Share, Dividend per Share, and Price/Earnings (P/E) ratio.
Summary of Financial Ratio Matches
Based on the provided options, the correct matching is:
| List I (Category) | List II (Ratio) | Match |
|---|---|---|
| A. Liquidity Ratio | II. Working Capital Turnover Ratio | A-III |
| B. Solvency Ratio | IV. Interest Coverage Ratio | B-IV |
| C. Activity Ratio | III. Quick Ratio | C-II |
| D. Profitability Ratio | I. Operating Ratio | D-I |
This mapping corresponds to option A-II, B-IV, C-III, D-I.
Revision Table: Financial Ratio Classifications
Here's a quick summary of common financial ratio categories and examples, keeping in mind that some ratios can fit into multiple categories or be interpreted differently depending on the context.
| Ratio Category | What it Measures | Common Examples |
|---|---|---|
| Liquidity Ratios | Short-term ability to meet obligations | Current Ratio, Quick Ratio, Cash Ratio |
| Solvency Ratios | Long-term ability to meet obligations | Debt-to-Equity Ratio, Debt-to-Assets Ratio, Interest Coverage Ratio |
| Activity (Efficiency) Ratios | How efficiently assets are used to generate sales | Inventory Turnover, Accounts Receivable Turnover, Accounts Payable Turnover, Working Capital Turnover |
| Profitability Ratios | Ability to generate earnings/profit | Gross Profit Margin, Net Profit Margin, Operating Margin, Return on Assets (ROA), Return on Equity (ROE), Operating Ratio |
Additional Information on Ratio Analysis
Ratio analysis is a crucial part of financial statement analysis, but it's important to use it correctly. Here are some points to consider:
- Comparison is Key: Ratios are most useful when compared over time (trend analysis for the same company) or against industry averages or competitors. A single ratio in isolation provides limited insight.
- Industry Specifics: Ratios vary significantly across different industries. What is considered a good ratio in one industry might be poor in another.
- Consistency: Ensure consistent accounting methods and definitions are used when comparing ratios.
- Limitations: Ratios are based on historical data. They do not predict the future. Also, accounting practices can sometimes distort ratios.
- Holistic View: Ratio analysis should be part of a broader analysis, considering qualitative factors like management quality, economic conditions, and competitive landscape.
Understanding how different ratios relate to the financial health and performance of a business is fundamental in finance and accounting.
Important Questions from Accounting Ratios
Calculate the amount of fixed obligation of the company.
The return on investment will be:
Earning Per Share (EPS) will be:
The Price Earning (P/E) ratio will be:
Gross Profit Ratio of a company was 25%. If credit revenue from operation was ₹20,00,000 and cash revenue from operation is 20% of total revenue. If indirect expense of the company was ₹50,000. Calculate Net Profit Ratio?
