by Conversion of Financial Statements into Ratios and Ratios into Financial Statements is an important application of Ratio Analysis in Management Accounting. Financial statements provide accounting figures, while ratios establish meaningful relationships between these figures. In some problems, given financial statement information is used to calculate different ratios such as Current Ratio, Quick Ratio, Gross Profit Ratio, and Debt Equity Ratio. In other problems, certain ratios are given and the required financial figures are calculated or reconstructed using algebraic relationships and accounting formulas. These problems help students understand the practical relationship between financial statements and accounting ratios. They are useful for analysing financial position, profitability, liquidity, solvency, and overall business performance.
A. Conversion of Financial Statements into Ratios
Question: From the following information, calculate Current Ratio, Quick Ratio, Gross Profit Ratio and Net Profit Ratio:
| Particulars | Amount (₹) |
|---|---|
| Current Assets | 2,00,000 |
| Inventory | 50,000 |
| Current Liabilities | 1,00,000 |
| Net Sales | 4,00,000 |
| Cost of Goods Sold | 2,80,000 |
| Operating Expenses | 60,000 |
Solution:
1. Current Ratio
Current Ratio = Current Assets / Current Liabilities
= 2,00,000 / 1,00,000
= 2 : 1
2. Quick Ratio
Quick Assets = Current Assets − Inventory
= 2,00,000 − 50,000
= ₹1,50,000
Quick Ratio = Quick Assets / Current Liabilities
= 1,50,000 / 1,00,000
= 1.5 : 1
3. Gross Profit Ratio
Gross Profit = Net Sales − Cost of Goods Sold
= 4,00,000 − 2,80,000
= ₹1,20,000
Gross Profit Ratio = Gross Profit / Net Sales × 100
= 1,20,000 / 4,00,000 × 100
= 30%
4. Net Profit Ratio
Net Profit = Gross Profit − Operating Expenses
= 1,20,000 − 60,000
= ₹60,000
Net Profit Ratio = Net Profit / Net Sales × 100
= 60,000 / 4,00,000 × 100
= 15%
B. Conversion of Ratios into Financial Statements
Question: The following ratios are available:
Current Ratio = 2 : 1
Quick Ratio = 1 : 1
Net Profit Ratio = 20%
Net Sales = ₹5,00,000
Current Liabilities = ₹1,50,000
Calculate Current Assets, Quick Assets, Inventory and Net Profit.
Solution:
1. Current Assets
Current Ratio = Current Assets / Current Liabilities
Therefore,
Current Assets = Current Ratio × Current Liabilities
= 2 × 1,50,000
= ₹3,00,000
2. Quick Assets
Quick Ratio = Quick Assets / Current Liabilities
Therefore,
Quick Assets = 1 × 1,50,000
= ₹1,50,000
3. Inventory
Quick Assets = Current Assets − Inventory
Therefore,
Inventory = Current Assets − Quick Assets
= 3,00,000 − 1,50,000
= ₹1,50,000
4. Net Profit
Net Profit Ratio = Net Profit / Net Sales × 100
Therefore,
Net Profit = 20% × 5,00,000
= ₹1,00,000
Final Answer
| Particulars | Amount |
|---|---|
| Current Assets | ₹3,00,000 |
| Quick Assets | ₹1,50,000 |
| Inventory | ₹1,50,000 |
| Current Liabilities | ₹1,50,000 |
| Net Sales | ₹5,00,000 |
| Net Profit | ₹1,00,000 |
These examples show how financial statement figures can be converted into ratios and how given ratios can be used to determine missing financial statement figures.
