## operating ratio formula class 12

= Rs. Liquidity Ratios Liquidity ratios measure the firm’s ability to fulfil its short-term financial obligations. Let us take the example of a company named ADG Ltd which is engaged in the business of manufacturing electronic parts for Tier I auto parts supplier. (b) Non-current liabilities (i.e. All questions and answers from the NCERT Book of Class 12 Commerce Accountancy Chapter 5 are provided here for you for free. This version yields a much lower ratio, and is useful for determining the amount of fixed administrative costs that must be covered by sales. Ratio analysis is a process of determining and presenting the quantities relationship between two accounting figures to calculate the strength and weaknesses of a business. It is expressed as Quick ratio = Quick Assets: Current Liabilities or Quick Assets / Current Liabilities. 3,40,000 x 100 = 70.59% (d) Net Profit Ratio: It relates revenue from operations to net profit after operational as well as non-operational expenses and incomes. Items Included in Current Liabilities Also known as Solvency Ratios, and as the name indicates, it focuses on a company’s current assets and liabilities to assess if it can pay the short-term debts. To analyse the profitability of the business. *Non-current Assets (Tangible assets + Intangible assets + Non-current trade (b) Operating Ratio: It is computed to analyse cost of operation in relation to revenue from operations. Total Debts (Liabilities) Rs. Operating profit ratio is computed by dividing operating profit by revenue operations (net sales) and is expressed as percentage. Calculate the operating ratio for the company. As trade payable arise on account of credit purchases, it expresses relationship between credit purchases and trade payable. 56,000 : Rs. Current Ratio = Current Assets / Current Liabilities = 2, 00,000 / 1, 00,000 = 2 : 1 1,50,000 = Rs. Gross Profit Ratio, Operating Ratio & Operating Profit Ratio. current assets – current liabilities. Working Capital = Current Assets – Current Liabilities 16,000 1,00,000 − Rs. = Rs. It is a measure of security of interest payable on long-term debts. Ratios when calculated on the basis of accounting information are called accounting Ratios. 1.  Where, (d) Net Profit Ratio: It relates revenue from operations to net profit after operational as well as non-operational expenses and incomes. (e) Return on Capital Employed or Investment: Capital employed means the long-term funds employed in the business and includes shareholders’ funds, debentures and long-term loans. 60,000 − Rs. Unlike the operating ratio, the net profit ratio includes the total revenue of the firm. Interest Coverage Ratio = Net Profit before Interest and Tax / Interest on long-term debts. »Current Assets [Current investments + Inventories (including spare parts and loose tools) + Trade Receivables + Cash and Cash Equivalents + Short-term Loans and Advances + Other Current Assets] In the absence of opening creditors and bills payable, closing creditors and bills payable can be used in the above formula. (ii) Trade receivables (bill receivables, debtors less provisions for doubtful debts). net sales. = Rs. 5,000 Expenses Ratios: These ratios are also known as supporting ratios to operating ratio. Inventories = Current assets − Quick assets  Trade receivables as at 31.3.2015 1,20,000. Generally, the ratio of 2 : 1 is considered as an ideal. 20,000 = 3 Times. The ideal coverage ratio is 6 to 7 times. Profitability ratios, as their name suggests, measure the organisation’s ability to deliver profits. (c) Operating Profit Ratio: It is calculated to reveal operating margin. During 2018, the company clocked a total revenue of \$450 million. Following information is available for the year 2014-15, calculate gross profit ratio: Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Operation 3,20,000 Credit Revenue from operations = Total revenue from operations − Cash revenue from operations Let us take the example of Apple Inc. and calculate its operating ratio for the year 2018. 15,000 + Rs. Ratio analysis is the more popularly and widely used technique of financial statement analysis. Formula: Following formula is used to calculate operating ratio: [(Cost of goods sold + Operating expenses / Net sates)] × 100. Shareholders’ funds Rs. (i) Short-term borrowings. Net profit before interest and tax = Net profit before tax + Interest = Rs. (ii) Working capital, i.e. 4,00,000 × 20 / 100 = Rs. Current Ratio = Current assets : Current liabilities Operating Cost means Cost of goods sold plus Operating Expenses.  Cash Revenue from operations 20% of Total Revenue from operations This ratio can also be computed in relation to total assets instead of net assets (capital employed). 5,000) = Rs. = Rs. Gross margin: gross profit÷ revenue % Return on capital employed Return on capital employed (sometimes known as return … 24,000 = 1.5x Topic 1: Introduction 1. 10,00,000 = Rs. = Rs. 24,000 = 3.5x − 2x Need assistance? (i) Stock turnover ratio or Inventory turnover ratio The ratio indicates the number of times the stock is turned in sales during the accounting period, i.e. Return on capital employed (ROCE): operating profit ÷ (non-current liabilities + total equity) % 2. Cost of Revenue from = Purchases + (Opening Inventory − Closing Inventory) + operations Direct Expenses 16,000 1,00,000 + Rs. It means 55% of the sales revenue would be used to cover cost of goods sold and other operating expenses of Good Luck Company Limited. Gross Profit = Revenue from Operations − Cost of Revenue from Operation  Revenue from operations = 80,000 20,000 + Rs. net sales. (a) Inventory Turnover Ratio: It determines the number of times inventory is converted into revenue from operations during the accounting period under consideration. (ii) Absence of universally accepted terminology. Accounting Ratios It is a mathematical expression that shows the relationship between various items or groups of items shown in financial statements. From the following information, calculate inventory turnover ratio: Inventory in the beginning = 18,000 6.  Bills Payables on 31.3.2015 = 70,000, Trade Payables Turnover Ratio = Net Credit Purchases / Average Trade Payables Accounting Ratios – CBSE Notes for Class 12 Accountancy. Advantages of Ratio Analysis These ratios indicate the speed at which, activities of the business are being performed. Steps of Income Method Formula. shareholders’ funds. It is computed as follows: Gross Profit Ratio = Gross Profit / Net Revenue of Operations × 100. OR = Net sales - Gross profit. »Non-current Assets [Fixed assets (Tangible and intangible assets) + Non-current Investments + Long-term Loans and Advances (i) Gross profit ratio Gross profit ratio shows the relationship between the net sales gross profit to net sales (revenue from operations) (a) Current investments It may be computed directly or as a residual of operating ratio. 5. 18,000 + Rs. Contact: (M) 9898251471 E-mail: anujbhatia09@gmail.com Name of the Ratio Formula 1. 4,00,000 − Rs. 60,000/ Rs. 1,20,000 + 80,000 + 40,000 = Rs. (a) Debt-Equity Ratio: Debt-Equity Ratio measures the relationship between long-term debt and equity. Quick Ratio = Quick assets : Current liabilities 20,000 1,20,000 / 2 = Rs. Net profit ratio is an indicator of overall operational efficiency of the business. … = Rs. (iv) Effects of inherent limitations of accounting. The operating profit ratio is 55%. = Rs. Total Assets Total assets include (iii) Helpful in comparative analysis of the performance.  Creditors on 1.4.2014 = 3,00,000 Calculate the Trade receivables turnover ratio from the following information: Total Revenue from operations 4,00,000 (vii) Affected by personal bias and ability of the analyst. Ratio It is an arithmetical expression of relationship between two related or interdependent items. 1,00,000 (ii) Trade Receivables or Debtors turnover ratio It indicates economy and efficiency in the collection of amount due from debtors. (v) To provide analysis of the liquidity, solvency, activity and profitability of an enterprise.  Net purchases = 46,000 (iii) Other short-term liabilities.  Bills Payables on 1.4.2014 = 1,00,000 (v) Helpful in comparative analysis. = Rs. When Liabilities Approach is Followed It is computed by adding A higher ratio ensures safety of interest on debts. (ii) Net profit ratio Net profit ratio shows the relationship between net profit and revenue from operations i.e. 90,000 = Rs. 60,000 Cost of Revenue from Operations, Explanation: Operating cost is calculated by adding cost of goods sold and operating expenses.Therefore operating cost – operating expenses = cost of revenue from operations; Fraction, Explanation: Debt Equity Ratio is expressed in Fraction, the formula will be debt/ equity Quick ratio, Explanation: Quick Ratio is also known as liquid ratio. Current Liabilities = Rs. ∴ Inventory Turnover Ratio = Rs. It has mainly two types of ratio under this. = Rs. Cost of Revenue from Operations = Inventory in the beginning + Net Purchases + Wages + Carriage inwards − Inventory at the end Let Current liabilities = x Revenue from Operations – Gross Profit. 1. (vi) Price level changes ignored. Items Included in Long-term Debts It includes long-term borrowings and long-term provisions. Profit is necessary to give investors the return they require, and to provide funds for reinvestment in the business. 60000 16,000 = Rs. Current Ratio = 3.5 : 1  Quick Ratio = 2 : 1 Profitability Ratios – Question 2 : – The following information is given If Revenue from Operations of XYZ Ltd is Rs. Capital employed may be taken as the total of non-current assets and working capital. It is calculated as under: Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100, Operating Profit = Revenue from Operations − Operating Cost. Limitations of Ratio Analysis 3,40,000 − Rs. To help identify the short term liquidity of a firm, this ratio is used. = Rs. You will also love the ad-free experience on … Net Profit Ratio = Net profit / Revenue from Operations × 100. Trade Payables Turnover ratio = Net Credit purchases / Average trade payable 73,000 + Rs. 1000000 Cost of Revenue from Operations is Rs. Objectives of Ratio Analysis 12,00,000 / Rs. (c) Other current liabilities (current maturities of long-term debts, interest, accrued but not due on borrowings, interest accrued and due on borrowings, outstanding expenses, unclaimed dividend, calls-in-advance, etc) = 18,00,000 − 2,00,000 = 16,00,000 Assets Approach Working capital turnover ratio = Net Revenue from Operation / Working Capital. (a) Gross Profit Ratio: Gross profit ratio as a percentage of revenue from operations is computed to have an idea about gross margin. Meaning and definition. = Rs. (i) It is useful in analysis of financial statements. Quick ratio helps us find the solvency for six months and the reason why inventory is subtracted is that inventory usually take more than six month to convert into liquid asset. 1,00,000 (ii) Helps in simplifying accounting figures. 1800-212-7858 / 9372462318. Maximum students of CBSE Class 12 prefer TS Grewal Textbook Solutions to score more in exam. = 3.5: 1 investments + Long-term loans and advances) + Working Capital – Non-current Liabilities (Long-term borrowings + Long-term provisions) It is computed to ascertain soundness of the long-term financial position of the firm. 2,000 = Rs. = Rs. (b) Trade Receivables Turnover Ratio: It expresses the relationship between credit revenue from operations and trade receivable. (iii) Trade payables or Creditors turnover ratio It indicates the speed with which the amount is being paid to creditors. (b) Non-current trade investments. Office expenses, administrative expenses, selling and distribution expenses, employees benefit expenses, depreciation and amortisation expenses. Useful tool for analysis of financial statements. 2. Profitability ratios are calculated to analyse the earning capacity of the business which is the outcome of utilisation of resources employed in the business. Equity = Share Capital + General Reserve + Surplus = 1,00,000 + 45,000 + 30,000 = 1,75,000, (b) Total Assets to Debt Ratio This ratio measures the extent of the coverage of long-term debts by assets, Total assets to Debt Ratio = Total assets/Long-term debts. Current Liabilities = Rs. 1,30,000 + Rs. Become our . X Ltd., has a current ratio of 3.5 : 1 and quick ratio of 2 : 1. Items Included in Current Liabilities  Prepaid expenses = Rs. Also, if credit purchases are not given, then all purchases are deemed to be on credit. 1,40,000 Academic Partner. 3,00,000 + Rs. Operating Cost = Cost of Materials Consumed + Purchases of Stock-in-trade + Change in Inventories of Finished Goods, Work-in-progress and Stock-in-trade + Employees Benefits Expenses + Other Expenses (Other than non-operating expenses) 56,000.  = Rs. Turnover or Performance or Activity Ratios These ratios measure how efficiently a company is using its assets to generate sales. (a) Fixed assets (tangible fixed assets, intangible fixed assets). Items Included in Equity or Shareholders’ Funds 2,40,000 / Rs. Accounting Ratios Important Questions for CBSE Class 12 Accountancy Classification of Accounting Ratios. (c) Proprietary Ratio: Proprietary ratio expresses relationship of proprietor’s (shareholders) funds to net assets and is calculated as follows: Proprietary Ratio = Shareholders, Funds / Capital employed (or net assets), Significance: Higher proportion of shareholders’ funds in financing the assets is a positive feature as it provides security to creditors. 80,000 = Rs. 80,000 (b) Trade payables (bills payable and sundry creditors) Cost of Goods Sold = Cost of Materials Consumed + Purchases of Stock-in-trade + Change in Inventories of Finished Goods, Work-in-progress and Stock in-trade + Direct Expenses Solvency Ratios Solvency ratios judge the long-term financial position of an enterprise i.e. 50,000 / 50,000 = 1 : 1. Return on sales (ROS): operating profit÷ revenue % 3. 10,000 + (Rs. CBSE Class-12 Revision Notes and Key Points. 2,50,000 ∴ Trade Payables Turnover Ratio = Rs.  Trade receivables as at 1.4.2014 40,000 Ratio analysis formula sheet cbse accounting 1. 2,50,000/Rs. 2. NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. Education Franchise × Contact Us. Here Operating Surplus = Rent + Interest + Profit. ), CMA(INTER), G-SLET, UGC NET-JRF, Ph.D (Pur.)] = 32,00,000 / 16,00,000 = 2 : 1 (b) Inventories (Excluding loose tools, stores and spares) Items Included in Liquid/Quick Assets 80,000 = 4 times. Liquidity Assets = Current assets − (Inventories + Prepaid expenses + Advance tax) Net Profit Ratio. (vi) To provide information useful for making estimates and preparing the plans for future. Tax Rate = 40% Solution Use the below-given data for calculation of the operating ratio Therefore, the calculation of operating ratio is as follows, =(3000+1000)/5000 1. (i) Debt to Equity ratio It establishes the relationship between long-term debt (external equities) and the equity (internal equities) i.e. Cost / revenue (income). Formula: Operating expenses include administration, selling and distribution expenses. = Rs. or whether business is able to pay its long-term liabilities or not. Published in: Business. The operating ratio for Apple means that 78% of the company's net sales are operating expenses. Current assets include current investments, inventories, trade receivables (debtors and bills receivables), cash and cash equivalents, short-term loans and advances and other current assets such as prepaid expenses, advance tax and accrued income, etc. Types of Profitability Ratio. = 20,000 + 40,000 + 40,000 = 1, 00,000, It is the ratio of quick (or liquid) asset to current liabilities. 16,000 = 2 : 1. (c) Trade receivables (bills receivable and sundry debtors less provision for doubtful debts) = Rs.10,000/Rs.1,00,000 × 100 = 10%. or When ratios are calculated on the basis of accounting information, they are called accounting ratios. (v) Return on investment/Capital employed It establishes the relationship between net profit before interest, tax and preference dividend and capital employed (equity + debts). 10,000 Trade Receivables Turnover Ratio = Net Credit Revenue from operation / Average Trade Receivable, Average Collection Period = 365 / Trade Receivables Turnover Ratio = 365 / 8.18 = 45 days, Trade Payable Turnover Ratio = Purchases / Average Trade Payables, Chapter 1 - Accounting for Partnership Firms Fundamental, Chapter 2 - Accounting for share capital, Chapter 6 - Change in profit sharing Ratio for Existing, Chapter 7 - Dissolution of a partner firm, Chapter 8 - Financial statement analysis, Chapter 9 - Financial statements of Not-for-profits, Chapter 10 - Financial statements of a company, Chapter 11 - Goodwill Nature and Valuation, Chapter 14 - Retirement, Death of a partner, STUDY MATERIAL FOR CBSE CLASS 12 ACCOUNTS. 3,00,000 = 4 times, From the following information, calculate –. 60,000 73,000 The cost incurred includes the raw material cost of \$200 million, the direct labor cost of \$120 million, the manufacturing overhead cost of \$50 million, the selling expense of \$30 million and the administrative expense of \$10 mil… of days/month in a year ÷Trade Payables Turnover Ratio. (iii) Useful in judging the operating efficiency of business. (c) Trade Payable Turnover Ratio: Trade payables turnover ratio indicates the pattern of payment of trade payable. (b) Long-term provisions (ii) Trade payables (bills payable and sundry creditors). Current Assets = 3.5x = 3.5 × Rs. The cost of goods sold which are not included in the operating expenses is \$1,000. (i) Non-current assets, i.e. Using TS Grewal Class 12 solutions Accounting Ratios exercise by students are an easy way to prepare for the exams, as they involve solutions arranged chapter-wise also page wise. Download CBSE Class 12 Accountancy Accounting Ratios in pdf, Accountancy chapter notes, class notes mind maps formulas Revision Notes CBSE Class 12 Accounting Ratios. (iv) Short-term provisions. 14,000 + Rs.  Carriage inwards = 4,000, Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory When Assets Approach is Followed It is computed by adding (d) Cash and cash equivalents (cash in hand, cash at bank, cheques/drafts in hand) 2,000 + Rs. Net Purchases = Cash Purchases + Credit Purchases − Return Outwards 2,40,000 In case, statement of profit and loss is given, cost of revenue from operations i.e. (i) Accounting ratios ignore qualitative factors. Calculate the Trade payables turnover ratio from the following figures: Credit purchases during 2014-15 = 12,00,000 (d) Short-term provisions Average Trade Payables = Creditors in the beginning + Bills payables in the beginning + Creditors at the end + Bills payables at the end / 2 (revenue from operations) net sales.  Advance tax = Rs. (iv) Helps in identification of problem areas. A variation on the formula is to exclude production expenses, so that only administrative expenses are matched against net sales. The formula for its calculation is as follows: Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory. 3,40,000 x 100 = 70.59%. Free PDF download of Important Questions for CBSE Class 12 Accountancy Chapter 13 Accounting Ratios prepared by expert Accountancy teachers from latest edition of CBSE(NCERT) books, On CoolGyan.Org to score more marks in CBSE board examination. As a general rule, a minimum Operating Reserve Ratio of 25 percent – or three months of annual operating expenses or budget – is the Nonprofit Reserve Workgroup’s suggested minimum goal. share capital, reserves and surplus). = Net Credit Revenue Form Operations / Average Inventory Liquidity Ratio = Liquid Assets/Current Liabilities 4,000 − Rs. (A) Liquidity Ratios 1. NOTE Since,non-operating assets are excluded while determining capital employed, income from non-operating assets should also be excluded from profit. Accounting Ratios class 12 Notes Accountancy. Topic 2: Classification of Accounting Ratios Get Accounting Ratios, Accountancy Chapter Notes, Questions & Answers, Video Lessons, Practice Test and more for CBSE Class 10 at TopperLearning. 1,20,000 Ratio Analysis It is a technique which involves re-grouping of data by application of arithmetical relationship.   Average Trade Payable = (Opening Creditors and Bills Payable + Closing Creditors and Bills Payable)/2 Ratio It is an arithmetical expression of relationship between two related or interdependent items. The net sales for Blue Trust Inc. are \$5,000. Current ratio which let us know the short term solvency of a firm. Profit refers to the Profit before Interest and Tax (PBIT) for computation of this ratio. Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on long-term debt Multiple Choice Questions Select the best alternate and check your answer with the answers given at the end of the book. It must be noted that the sacrificing ratio formula is applied in case of each partner and both their old and new ratios are factored in. (a) Shareholders’ funds (i.e. 4,00,000 Proprietors’ Funds or Shareholders’ Funds This ratio is a better indicator of liquidity and 1 : 1 is considered to be ideal. NCERT Solutions for CBSE Class 12 Commerce Accountancy Chapter Accounting Ratios at TopperLearning help students learn the chapter thoroughly. Can someone clue me in to the formula used to calculate the ratio? Operating Ratio = Operating Cost / Net Revenue from Operations × 100 CBSE quick revision note for class-12 Chemistry Physics Math’s, Accountancy and other subject are very helpful to revise the whole syllabus during exam days.   Average Payment Period = No. » Non-current Assets [Fixed assets (Tangible and intangible assets) + Non-current Investments + Long-term Loans and Advances 3,20,000 / Rs. Operating Expenses = Employees Benefits Expenses + Other Expenses (Other than non-operating expenses) + Depreciation and Amortisation Expenses (iii) Cash and cash equivalents. (d) Interest Coverage Ratio: It is a ratio which deals with the servicing of interest on loan. Here cost of goods sold = Operating stock + Net purchases + Manufacturing expenses - Closing stock . = 1.67 times. In view of the requirements of various users, the accounting ratios may be classified as under It is calculated as follows: Trade Receivable Turnover ratio = Net Credit Revenue from Operations / Average Trade Receivable, Where Average Trade Receivable = (Opening Debtors and Bills Receivable + Closing Debtors and Bills Receivable)/2.  Inventory at the end = 22,000 The activity ratios express the number of times assets employed. If debt component of the total long-term funds employed is small, outsiders feel more secure. Net Profit after Tax = Rs. Capital employed can be calculated from liabilities side approach and assets side approach as follows: The higher the ratio, the better it is. Operating efficiency - Indicates how well operating activities are carried out. These solutions for Accounting Ratios are extremely popular among Class 12 Commerce students for Accountancy Accounting Ratios Solutions come handy for quickly completing your homework and preparing for exams. Trade Receivables Turnover Ratio = Net Credit Revenue from Operations / Average Trade Receivables (f) Other current assets (prepaid expenses, interest receivable, etc.) 60,000 × 100/(100 − 40) = Rs. From the following information, calculate current ratio. 24,000, calculate current assets and current liabilities. Cash Revenue from operations = 20% of Rs. These are: Gross Profit Ratio. 4. (a) Long-term borrowings Net Profit before tax = Net profit after tax × 100/ (100 − Tax rate) Return on Investment (or Capital Employed) = Profit before Interest and Tax / Capital Employed × 100.  Inventories = Rs. 80,000 − (Rs. 80,000  Wages = 14,000 From the following details, calculate interest coverage ratio: Net Profit after tax Rs. Finance expenses are generally excluded. The detailed notes by our subject experts help students perform well in the CBSE board exams and competitive exams. 5,000) The revision notes covers all important formulas and concepts given in the chapter. 2,20,000 50,000 Operating Ratio: Operating Ratio matches the operating cost to the net sales of the business. (iv) Interest coverage ratio This ratio expresses the relationship between net profit before interest and tax and interest payable on long-term debts. 5,000. Among the three, current ratio comes in handy to analyze the liquidity and solvency of the start-ups. = 1,00,000 + 10,000 + 30,000 + 20,000 + 40,000 = 2,00,000 (iii) Operating ratio Operating ratio establishes the relationship between operating cost and revenue from operations i.e. To assess the operating efficiency of the business. Answer. (i) To know the areas of an enterprise which need more attention. Average Trade Receivables = Opening Trade Receivables + Closing Trade Receivables / 2 Current Assets = Trade Receivables (sundry Debtors) + prepaid Expenses + cash and cash Equivalents + short term Investments + inventories Classification of Accounting Ratios In view of the requirements of various users, the accounting ratios may be classified as under. Debt-Equity Ratio = Long term Debts / Shareholders' Funds, Shareholders’ Funds (Equity) = Share capital + Reserves and Surplus + Money received against share warrants If 70% of what you make is needed to pay _your_ bills, then your operating ratio is 0.7.  Share Capital = Equity share capital + Preference share capital, Shareholders’ Funds (Equity) = Non-current assets + Working capital − Non-current liabilities Working Capital = Current Assets − Current Liabilities, From the following information calculate Debt equity Ratio:-, Debt to equity ratio = Debt / Equity (shareholder funds) = 1,00,000 / 1,75,000 = 0.57 : 1 Gross Profit Ratio = Gross Profit/Net Revenue from Operations × 100 (a) Short-term borrowings Quick assets = 2x Essensially the percentage of your income that is neede to break even - ie cover costs. The three common liquidity ratios used are current ratio, quick ratio, and burn rate. 3. The first step in calculating national income via income method is to identify and segregate the units of production. Items Included in Current Assets (iv) Short-term loans and advances. The questions involved in TS Grewal Solutions are important questions that can be asked in the final exam. 