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Accounting Ratios Class 12 All Formulas
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Accounting Ratios Class 12 All Formulas

In the partnership chapter, ratio analysis is one of the most significant aspects of accounting because it is used to calculate various sorts of dividends and profits.

You can study the fundamental Accounting Ratios Class 12 all Formulas here, which will assist you much in preparation for your exams and in other accounting concept activities. The formulas for accounting ratios are also relevant in everyday life.

Accounting Ratios Class 12 all Formulas PDF

  • Financial Statement Analysis Tool: It assists users of financial statements in analysing the financial status of a company. Bankers, investors, creditors, and other stakeholders who are worried about a company’s performance are examples of such users.
  • Accounting Data is Simplified: It makes accounting data given in financial statements easier to comprehend. The outcomes of detailed and difficult information are summarised using ratios.
  • Evaluation of a Company’s Operating Efficiency: An organization’s operating efficiency can be measured by assessing and evaluating its liquidity, solvency, and profitability. Ratio calculations assist in calculating and analysing such factors.

Accountancy Accounting Rratios

  • Calculation, analysis, and comparison of ratios are helpful in business planning and forecasting. This is because the estimated ratios’ trend serves as a reference for future planning.
  • Calculation and analysis of various ratios assist in the identification and interpretation of positive and unfavourable ratios that can be used to discover weak areas or unfavourable elements in the enterprise. The company can then focus on these areas or elements to increase performance.
  • Facilitates Inter-firm and Intra-firm Comparison: Inter-firm Comparison or Cross-Sectional Analysis is when a company compares its performance to that of other companies or to industry standards in general. Intra-firm comparison, on the other hand, occurs when the performance of different units within the same firm is compared. For such comparisons, accounting ratios are commonly utilised.

Limitations of Ratio Analysis

  • Ratios’ Reliability: Because ratios are derived using financial data, if the data is erroneous, the ratios calculated using it will be incorrect as well. As a result, such ratios are not totally reliable for making future business decisions.
  • Only quantitative factors were taken into account: When calculating ratios, only quantitative aspects are considered, while all connected qualitative factors, which may be essential for an enterprise’s future decision-making, are omitted.
  • There is no standard ratio: There should be a standard against which a ratio can be measured in order to decide whether it is favourable or unfavourable. There is, however, no single benchmark against which the ratio may be measured.
  • Non-Comparable: Distinct companies in the same industry may have different accounting policies and practises. The sums calculated utilising such disparate policies and procedures will be disparate as well. As a result, the ratios estimated by such firms will not be comparable because the information used to generate such ratios by different firms differs.
  • Changes in Price Levels are Ignored: It’s important to realise that the ratios’ comparability is affected by changes in price levels. However, such a change in pricing levels is not taken into account when accounting variables are used to calculate ratios.
  • Window Dressing: The information provided for computing ratios will be inaccurate if the accounts are changed to disguise the financial performance and position of the organisation. This will result in the computation of wrong ratios, which will have an impact on the judgments made based on the analysis of such incorrect ratios.
  • Personal Bias: Because personal judgments heavily influence the preparation of financial statements, accounting ratios calculated using such data are not immune to this constraint.

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