CBSE Class 12 Accountancy Financial Statement Analysis Notes | All Ratios
CBSE Class 12 Accountancy Part B – Financial Statement Analysis
Unit 3: Analysis of Financial Statements
Financial Statement Analysis + Accounting Ratios + All Important Ratios
CBSE Class 12 Accountancy | Easy Language | Student-Friendly Notes | Formulas | Solved Examples | PYQs
๐ Introduction
Financial statements contain many numbers.
For example, a company's financial statements may show:
Sales ₹20 lakh
Profit ₹3 lakh
Current Assets ₹8 lakh
Current Liabilities ₹4 lakh
Debt ₹10 lakh
Equity ₹20 lakh
But simply looking at these numbers does not tell us the complete story.
We need to analyse these figures.
Financial Statement Analysis helps us understand:
Is the company profitable?
Can it pay its short-term liabilities?
Is it highly dependent on debt?
Is inventory moving efficiently?
Are customers paying their dues quickly?
Is the company using its assets efficiently?
Is the overall financial performance improving?
This is where Ratio Analysis becomes very important.
๐ CBSE Syllabus Note
According to the official CBSE Class XII Accountancy 2026–27 syllabus, Part B is Financial Statement Analysis and carries 20 marks.
It contains:
Unit 3 – Analysis of Financial Statements
12 Marks
Unit 4 – Cash Flow Statement
8 Marks
So, the topics covered in this post—Financial Statement Analysis, Comparative Statements, Common Size Statements and Accounting Ratios—belong to Unit 3: Analysis of Financial Statements in the current syllabus.
1. Meaning of Financial Statement Analysis
Definition
Financial Statement Analysis is the process of analysing and interpreting the information contained in financial statements to understand the financial performance and financial position of a business.
In Easy Language
Financial Statement Analysis means studying the financial figures of a company and finding out what those figures actually mean.
Example
Suppose:
| Year | Profit |
|---|---|
| 2025 | ₹4 lakh |
| 2026 | ₹6 lakh |
Profit increased by ₹2 lakh.
But analysis will help us ask:
Why did profit increase?
Did sales increase?
Did expenses decrease?
Is the increase sustainable?
Is the company performing better than before?
Therefore:
Financial Statements → Analysis → Interpretation → Decision
2. Significance of Financial Statement Analysis
Financial Statement Analysis is important for different users of financial information.
1. Helps in Decision-Making
Management can use financial analysis to make better decisions.
For example, if operating expenses are increasing rapidly, management can investigate the reason.
2. Helps to Measure Profitability
It helps determine whether the company is:
earning sufficient profit
improving profitability
experiencing declining profitability
3. Helps to Measure Liquidity
It helps determine whether the company can pay its short-term obligations.
For example:
Current Ratio and Quick Ratio are liquidity ratios.
4. Helps to Measure Solvency
It helps understand the company's ability to meet long-term obligations.
For example:
Debt-Equity Ratio
5. Helps in Comparison
Financial analysis allows:
Intra-firm comparison
Comparison of the same company over different years.
Inter-firm comparison
Comparison between different companies.
6. Helps Investors
Investors can analyse:
profitability
financial position
efficiency
growth
before taking investment-related decisions.
7. Helps Lenders and Creditors
Banks and lenders can assess the company's ability to repay loans.
Creditors can assess whether the company can pay its short-term dues.
3. Objectives of Financial Statement Analysis
The main objectives are:
1. To assess profitability
To determine whether the company is earning sufficient profit.
2. To assess liquidity
To determine the ability to pay short-term liabilities.
3. To assess solvency
To determine the ability to meet long-term obligations.
4. To measure efficiency
To understand how efficiently assets and working capital are being used.
5. To identify trends
To identify increases or decreases in important financial figures.
6. To facilitate comparison
To compare performance:
between different years
between different companies
7. To help decision-making
It provides useful information to management and other users.
4. Limitations of Financial Statement Analysis
Financial Statement Analysis is useful, but it is not perfect.
1. Based on Historical Data
Financial analysis generally uses past information.
Past performance does not automatically guarantee future performance.
2. Different Accounting Policies
Different companies may use different accounting policies or estimates where permitted.
This can affect comparison.
3. Inflation
Changes in the purchasing power of money may affect comparisons over different periods.
4. Qualitative Factors are Ignored
Financial statements mainly contain quantitative information.
Factors such as:
employee morale
customer satisfaction
management quality
brand image
may not be adequately reflected.
5. Window Dressing
Sometimes financial statements may be presented in a way that creates a more favourable picture.
Therefore, users should not depend on only one ratio.
6. Personal Judgement
Interpretation of financial information may involve judgement.
Two people may interpret the same financial information differently.
7. Difficult Inter-Company Comparison
Companies may differ in:
size
accounting policies
business models
operating conditions
Therefore, comparison may not always be perfect.
5. Tools of Financial Statement Analysis
The major tools are:
1. Comparative Statements
Used to study changes between periods.
2. Common Size Statements
Used to express items as percentages of a common base.
3. Ratio Analysis
Used to study relationships between accounting figures.
4. Cash Flow Analysis
Used to study cash inflows and outflows.
Easy Memory Trick
C – C – R – C
Comparative → Common Size → Ratio → Cash Flow
6. Comparative Statements
Meaning
A Comparative Statement presents financial information of two or more years side by side.
It helps identify:
increase
decrease
absolute change
percentage change
Formula
Absolute Change = Current Year – Previous Year
Percentage Change = (Absolute Change ÷ Previous Year) × 100
Example
Sales:
Previous Year = ₹10,00,000
Current Year = ₹12,00,000
Absolute Change
= ₹12,00,000 – ₹10,00,000
= ₹2,00,000
Percentage Change
= ₹2,00,000 ÷ ₹10,00,000 × 100
= 20%
Therefore:
Sales increased by ₹2,00,000 or 20%.
7. Common Size Statements
Meaning
A Common Size Statement expresses each item as a percentage of a common base.
Easy Meaning
Common Size Statement = Financial figures converted into percentages.
Formula
Common Size Percentage = (Particular Item ÷ Common Base) × 100
Example
Revenue from Operations = ₹10,00,000
Employee Benefits Expense = ₹2,00,000
Percentage:
= ₹2,00,000 ÷ ₹10,00,000 × 100
= 20%
Therefore:
Employee Benefits Expense = 20% of Revenue from Operations
8. Ratio Analysis
Meaning
Ratio Analysis is a technique of analysing financial statements by establishing relationships between different accounting figures.
Simple Meaning
Ratio Analysis means comparing related figures to understand the financial performance and position of a company.
Example
Current Assets = ₹6,00,000
Current Liabilities = ₹3,00,000
Current Ratio:
= ₹6,00,000 ÷ ₹3,00,000
= 2 : 1
This gives information about the company's short-term liquidity.
9. Accounting Ratio – Meaning
An Accounting Ratio is a mathematical relationship between two accounting figures.
Example
Current Assets = ₹5 lakh
Current Liabilities = ₹2.5 lakh
Current Ratio:
₹5 lakh ÷ ₹2.5 lakh = 2 : 1
10. Objectives of Accounting Ratios
Accounting Ratios are calculated to:
Measure financial performance.
Measure financial position.
Assess liquidity.
Assess solvency.
Measure profitability.
Measure operational efficiency.
Facilitate comparison.
Help management in decision-making.
11. Advantages of Ratio Analysis
1. Simplifies Financial Statements
Large amounts of financial information can be presented in simple ratios.
2. Helps Comparison
Ratios facilitate comparison between:
different years
different companies
3. Helps Measure Performance
Ratios help evaluate profitability and efficiency.
4. Helps in Decision-Making
Management can use ratios for planning and control.
5. Helps Investors
Investors can analyse profitability and financial position.
6. Helps Lenders
Lenders can assess liquidity and solvency.
12. Classification of Accounting Ratios
Accounting Ratios can be classified into four major categories:
1. Liquidity Ratios
Measure short-term financial position.
Current Ratio
Quick Ratio
2. Solvency Ratios
Measure long-term financial stability.
Debt-Equity Ratio
Total Assets to Debt Ratio
Proprietary Ratio
Interest Coverage Ratio
Debt to Capital Employed Ratio
3. Activity Ratios
Measure operational efficiency.
Inventory Turnover Ratio
Trade Receivables Turnover Ratio
Trade Payables Turnover Ratio
Fixed Asset Turnover Ratio
Net Asset Turnover Ratio
Working Capital Turnover Ratio
4. Profitability Ratios
Measure earning capacity.
Gross Profit Ratio
Operating Ratio
Operating Profit Ratio
Net Profit Ratio
Return on Investment
๐ต PART A – LIQUIDITY RATIOS
13. Meaning of Liquidity Ratios
Liquidity means the ability of a business to meet its short-term obligations.
The two important liquidity ratios are:
Current Ratio
Quick Ratio
14. Current Ratio
Meaning
Current Ratio shows the relationship between Current Assets and Current Liabilities.
Formula
Current Ratio = Current Assets / Current Liabilities
It is generally expressed as:
X : 1
Example
Current Assets = ₹8,00,000
Current Liabilities = ₹4,00,000
Current Ratio:
= ₹8,00,000 ÷ ₹4,00,000
= 2 : 1
Interpretation
The company has ₹2 of current assets for every ₹1 of current liabilities.
15. Quick Ratio
Meaning
Quick Ratio measures the company's ability to pay current liabilities using its quick assets.
Formula
Quick Ratio = Quick Assets / Current Liabilities
Quick Assets
Quick Assets = Current Assets – Inventory – Prepaid Expenses
Therefore:
Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities
Example
Current Assets = ₹10,00,000
Inventory = ₹3,00,000
Prepaid Expenses = ₹1,00,000
Current Liabilities = ₹4,00,000
Step 1: Calculate Quick Assets
= ₹10,00,000 – ₹3,00,000 – ₹1,00,000
= ₹6,00,000
Step 2: Quick Ratio
= ₹6,00,000 ÷ ₹4,00,000
= 1.5 : 1
16. Current Ratio vs Quick Ratio
| Basis | Current Ratio | Quick Ratio |
|---|---|---|
| Formula | Current Assets / Current Liabilities | Quick Assets / Current Liabilities |
| Inventory included? | Yes | No |
| Prepaid expenses included? | Yes | No |
| Measures | General liquidity | More immediate liquidity |
Easy Trick
Current Ratio → All Current Assets
Quick Ratio → Current Assets minus less-liquid items
๐ PART B – SOLVENCY RATIOS
17. Meaning of Solvency Ratios
Solvency means the ability of a company to meet its long-term obligations.
Important solvency ratios:
Debt to Equity Ratio
Total Asset to Debt Ratio
Proprietary Ratio
Interest Coverage Ratio
Debt to Capital Employed Ratio
18. Debt to Equity Ratio
Meaning
Debt-Equity Ratio shows the relationship between long-term debt and shareholders' funds/equity.
Formula
Debt-Equity Ratio = Long-Term Debt / Shareholders' Funds
Depending on the information given, debt generally includes long-term borrowings and other long-term debt obligations as prescribed for the question.
Example
Long-Term Debt = ₹6,00,000
Shareholders' Funds = ₹12,00,000
Debt-Equity Ratio:
= ₹6,00,000 ÷ ₹12,00,000
= 0.5 : 1
Interpretation
The company has ₹0.50 of long-term debt for every ₹1 of shareholders' funds.
19. Total Assets to Debt Ratio
Meaning
This ratio shows the relationship between total assets and long-term debt.
Formula
Total Assets to Debt Ratio = Total Assets / Long-Term Debt
Example
Total Assets = ₹20,00,000
Long-Term Debt = ₹5,00,000
Ratio:
= ₹20,00,000 ÷ ₹5,00,000
= 4 : 1
20. Proprietary Ratio
Meaning
Proprietary Ratio shows the relationship between shareholders' funds and total assets.
Formula
Proprietary Ratio = Shareholders' Funds / Total Assets
Example
Shareholders' Funds = ₹8,00,000
Total Assets = ₹20,00,000
Proprietary Ratio:
= ₹8,00,000 ÷ ₹20,00,000
= 0.4
Or 40%
Interpretation
40% of total assets are financed by shareholders' funds.
21. Interest Coverage Ratio
Meaning
Interest Coverage Ratio measures the ability of a company to pay interest on its debt.
Formula
Interest Coverage Ratio = EBIT / Interest on Long-Term Debt
Where:
EBIT = Earnings Before Interest and Tax
Example
EBIT = ₹5,00,000
Interest = ₹1,00,000
Interest Coverage Ratio:
= ₹5,00,000 ÷ ₹1,00,000
= 5 times
Interpretation
The company's EBIT is 5 times its interest obligation.
22. Debt to Capital Employed Ratio
Meaning
This ratio shows the proportion of long-term debt in the total long-term capital employed in the business.
Formula
Debt to Capital Employed Ratio = Long-Term Debt / Capital Employed × 100
Where:
Capital Employed = Shareholders' Funds + Long-Term Debt
Alternatively, depending on the information available:
Capital Employed = Total Assets – Current Liabilities
Example
Long-Term Debt = ₹4,00,000
Shareholders' Funds = ₹16,00,000
Capital Employed:
= ₹4,00,000 + ₹16,00,000
= ₹20,00,000
Debt to Capital Employed Ratio:
= ₹4,00,000 ÷ ₹20,00,000 × 100
= 20%
๐ข PART C – ACTIVITY RATIOS
23. Meaning of Activity Ratios
Activity Ratios measure how efficiently a business uses its assets and working capital.
They are also called Turnover Ratios.
Important Activity Ratios:
Inventory Turnover Ratio
Trade Receivables Turnover Ratio
Trade Payables Turnover Ratio
Fixed Asset Turnover Ratio
Net Asset Turnover Ratio
Working Capital Turnover Ratio
24. Inventory Turnover Ratio
Meaning
Inventory Turnover Ratio shows how many times inventory is converted into sales during a period.
Formula
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Average Inventory
Average Inventory = (Opening Inventory + Closing Inventory) / 2
Example
Opening Inventory = ₹2,00,000
Closing Inventory = ₹3,00,000
Cost of Revenue from Operations = ₹10,00,000
Average Inventory:
= (₹2,00,000 + ₹3,00,000) ÷ 2
= ₹2,50,000
Inventory Turnover Ratio:
= ₹10,00,000 ÷ ₹2,50,000
= 4 times
25. Trade Receivables Turnover Ratio
Meaning
It shows how efficiently the company collects money from its credit customers.
Formula
Trade Receivables Turnover Ratio = Net Credit Revenue from Operations / Average Trade Receivables
Average Trade Receivables
Average Trade Receivables = (Opening Trade Receivables + Closing Trade Receivables) / 2
If opening/closing provisions for doubtful debts are given, apply the treatment required by the question.
Example
Net Credit Revenue from Operations = ₹12,00,000
Opening Trade Receivables = ₹2,00,000
Closing Trade Receivables = ₹4,00,000
Average Trade Receivables:
= (₹2,00,000 + ₹4,00,000) ÷ 2
= ₹3,00,000
Ratio:
= ₹12,00,000 ÷ ₹3,00,000
= 4 times
26. Trade Payables Turnover Ratio
Meaning
Trade Payables Turnover Ratio shows how efficiently the company pays its suppliers.
Formula
Trade Payables Turnover Ratio = Net Credit Purchases / Average Trade Payables
Average Trade Payables
Average Trade Payables = (Opening Trade Payables + Closing Trade Payables) / 2
Example
Credit Purchases = ₹8,00,000
Opening Trade Payables = ₹1,50,000
Closing Trade Payables = ₹2,50,000
Average Trade Payables:
= (₹1,50,000 + ₹2,50,000) ÷ 2
= ₹2,00,000
Ratio:
= ₹8,00,000 ÷ ₹2,00,000
= 4 times
27. Fixed Asset Turnover Ratio
Meaning
It measures how efficiently fixed assets are used to generate revenue.
Formula
Fixed Asset Turnover Ratio = Revenue from Operations / Net Fixed Assets
Example
Revenue from Operations = ₹15,00,000
Net Fixed Assets = ₹5,00,000
Ratio:
= ₹15,00,000 ÷ ₹5,00,000
= 3 times
28. Net Asset Turnover Ratio
Meaning
Net Asset Turnover Ratio measures the efficiency with which net assets are used to generate revenue.
Formula
Net Asset Turnover Ratio = Revenue from Operations / Net Assets
Example
Revenue from Operations = ₹20,00,000
Net Assets = ₹10,00,000
Ratio:
= ₹20,00,000 ÷ ₹10,00,000
= 2 times
29. Working Capital Turnover Ratio
Meaning
It shows how efficiently working capital is used to generate revenue.
Formula
Working Capital Turnover Ratio = Revenue from Operations / Working Capital
Where:
Working Capital = Current Assets – Current Liabilities
Example
Revenue from Operations = ₹12,00,000
Current Assets = ₹6,00,000
Current Liabilities = ₹3,00,000
Working Capital:
= ₹6,00,000 – ₹3,00,000
= ₹3,00,000
Working Capital Turnover Ratio:
= ₹12,00,000 ÷ ₹3,00,000
= 4 times
๐ด PART D – PROFITABILITY RATIOS
30. Meaning of Profitability Ratios
Profitability Ratios measure the earning capacity of a business.
They help answer:
How efficiently is the company earning profit from its sales and capital?
Important profitability ratios:
Gross Profit Ratio
Operating Ratio
Operating Profit Ratio
Net Profit Ratio
Return on Investment
31. Gross Profit Ratio
Meaning
Gross Profit Ratio shows the relationship between Gross Profit and Revenue from Operations.
Formula
Gross Profit Ratio = Gross Profit / Revenue from Operations × 100
Example
Gross Profit = ₹4,00,000
Revenue from Operations = ₹10,00,000
Ratio:
= ₹4,00,000 ÷ ₹10,00,000 × 100
= 40%
32. Operating Ratio
Meaning
Operating Ratio shows the percentage of operating cost in relation to Revenue from Operations.
Formula
Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) / Revenue from Operations × 100
Important
Operating Ratio generally includes:
Cost of Revenue from Operations + Operating Expenses
It does not include non-operating expenses/incomes.
Example
Cost of Revenue from Operations = ₹5,00,000
Operating Expenses = ₹2,00,000
Revenue from Operations = ₹10,00,000
Operating Ratio:
= (₹5,00,000 + ₹2,00,000) ÷ ₹10,00,000 × 100
= 70%
33. Operating Profit Ratio
Meaning
Operating Profit Ratio shows the relationship between operating profit and Revenue from Operations.
Formula
Operating Profit Ratio = Operating Profit / Revenue from Operations × 100
Also:
Operating Profit Ratio = 100 – Operating Ratio
Example
Operating Ratio = 70%
Therefore:
Operating Profit Ratio:
= 100 – 70
= 30%
34. Net Profit Ratio
Meaning
Net Profit Ratio shows the relationship between net profit and Revenue from Operations.
Formula
Net Profit Ratio = Net Profit / Revenue from Operations × 100
CBSE Note
Net Profit Ratio can be calculated on the basis of profit before tax as well as profit after tax, depending on what the question asks. The CBSE syllabus specifically notes this treatment.
Example
Net Profit = ₹2,00,000
Revenue from Operations = ₹10,00,000
Ratio:
= ₹2,00,000 ÷ ₹10,00,000 × 100
= 20%
35. Return on Investment
Meaning
Return on Investment, or ROI, measures the return earned on the capital employed in the business.
Formula
ROI = Operating Profit / Capital Employed × 100
Where:
Capital Employed = Shareholders' Funds + Long-Term Debt
or
Capital Employed = Total Assets – Current Liabilities
depending on the information given.
Example
Operating Profit = ₹3,00,000
Capital Employed = ₹15,00,000
ROI:
= ₹3,00,000 ÷ ₹15,00,000 × 100
= 20%
36. Complete Ratio Formula Chart ⭐
This is the most important revision section.
| Ratio | Formula |
|---|---|
| Current Ratio | Current Assets / Current Liabilities |
| Quick Ratio | Quick Assets / Current Liabilities |
| Debt-Equity Ratio | Long-Term Debt / Shareholders' Funds |
| Total Assets to Debt Ratio | Total Assets / Long-Term Debt |
| Proprietary Ratio | Shareholders' Funds / Total Assets |
| Interest Coverage Ratio | EBIT / Interest |
| Debt to Capital Employed Ratio | Long-Term Debt / Capital Employed × 100 |
| Inventory Turnover Ratio | Cost of Revenue from Operations / Average Inventory |
| Trade Receivables Turnover Ratio | Net Credit Revenue from Operations / Average Trade Receivables |
| Trade Payables Turnover Ratio | Net Credit Purchases / Average Trade Payables |
| Fixed Asset Turnover Ratio | Revenue from Operations / Net Fixed Assets |
| Net Asset Turnover Ratio | Revenue from Operations / Net Assets |
| Working Capital Turnover Ratio | Revenue from Operations / Working Capital |
| Gross Profit Ratio | Gross Profit / Revenue from Operations × 100 |
| Operating Ratio | Operating Cost / Revenue from Operations × 100 |
| Operating Profit Ratio | Operating Profit / Revenue from Operations × 100 |
| Net Profit Ratio | Net Profit / Revenue from Operations × 100 |
| Return on Investment | Operating Profit / Capital Employed × 100 |
37. Important Supporting Formulas
Students should remember these formulas before solving ratio questions.
Average Inventory
(Opening Inventory + Closing Inventory) / 2
Average Trade Receivables
(Opening Trade Receivables + Closing Trade Receivables) / 2
Average Trade Payables
(Opening Trade Payables + Closing Trade Payables) / 2
Working Capital
Current Assets – Current Liabilities
Quick Assets
Current Assets – Inventory – Prepaid Expenses
Capital Employed
Shareholders' Funds + Long-Term Debt
or
Total Assets – Current Liabilities
Operating Cost
Cost of Revenue from Operations + Operating Expenses
Gross Profit
Revenue from Operations – Cost of Revenue from Operations
38. One Complete Solved Ratio Example
Suppose ABC Ltd. provides the following information:
Current Assets = ₹8,00,000
Current Liabilities = ₹4,00,000
Inventory = ₹2,00,000
Prepaid Expenses = ₹50,000
Long-Term Debt = ₹6,00,000
Shareholders' Funds = ₹12,00,000
Total Assets = ₹20,00,000
EBIT = ₹3,00,000
Interest = ₹50,000
Calculate:
1. Current Ratio
= ₹8,00,000 ÷ ₹4,00,000
= 2 : 1
2. Quick Ratio
Quick Assets:
= ₹8,00,000 – ₹2,00,000 – ₹50,000
= ₹5,50,000
Quick Ratio:
= ₹5,50,000 ÷ ₹4,00,000
= 1.375 : 1
3. Debt-Equity Ratio
= ₹6,00,000 ÷ ₹12,00,000
= 0.5 : 1
4. Proprietary Ratio
= ₹12,00,000 ÷ ₹20,00,000
= 0.6
or 60%
5. Interest Coverage Ratio
= ₹3,00,000 ÷ ₹50,000
= 6 times
39. How to Solve Ratio Questions in the Board Exam
Follow these steps:
Step 1 – Read the question carefully
Identify what ratio is being asked.
Step 2 – Write the formula
Do not directly start calculation.
Step 3 – Identify the correct figures
For example:
Current Ratio needs:
Current Assets + Current Liabilities
Step 4 – Make necessary adjustments
For Quick Ratio:
Remove:
Inventory
Prepaid Expenses
Step 5 – Substitute the figures
Show the working clearly.
Step 6 – Write the final answer
Example:
Current Ratio = 2 : 1
Step 7 – Give interpretation if asked
For example:
The company has ₹2 of current assets for every ₹1 of current liabilities.
40. Important Exam Questions – 1 Mark
Q1. What is Ratio Analysis?
Answer:
Ratio Analysis is the technique of analysing financial statements by establishing relationships between different accounting figures.
Q2. Which ratio measures short-term liquidity?
Answer: Current Ratio and Quick Ratio.
Q3. Which ratio measures the relationship between long-term debt and shareholders' funds?
Answer: Debt-Equity Ratio.
Q4. Which ratio measures the ability to pay interest?
Answer: Interest Coverage Ratio.
Q5. Which ratio measures inventory efficiency?
Answer: Inventory Turnover Ratio.
Q6. Which ratio measures profitability in relation to revenue from operations?
Answer: Profitability ratios such as Gross Profit Ratio and Net Profit Ratio.
41. Important 3-Mark Questions
Q1. Explain any three objectives of Ratio Analysis.
Answer:
To measure profitability.
To assess liquidity and solvency.
To facilitate comparison between different periods or companies.
Q2. State any three advantages of Ratio Analysis.
Answer:
It simplifies financial information.
It facilitates comparison.
It helps management and other users in decision-making.
Q3. Name the four classifications of Accounting Ratios.
Answer:
Liquidity Ratios
Solvency Ratios
Activity Ratios
Profitability Ratios
42. Important 4-Mark Questions
Question 1
Explain Current Ratio and Quick Ratio with formulas.
Answer
Current Ratio measures the relationship between Current Assets and Current Liabilities.
Formula:
Current Ratio = Current Assets / Current Liabilities
Quick Ratio measures the relationship between Quick Assets and Current Liabilities.
Formula:
Quick Ratio = Quick Assets / Current Liabilities
Quick Assets = Current Assets – Inventory – Prepaid Expenses.
Question 2
Explain any four types of Accounting Ratios.
Answer:
Liquidity Ratios: Measure short-term solvency.
Solvency Ratios: Measure long-term financial stability.
Activity Ratios: Measure efficiency of asset utilisation.
Profitability Ratios: Measure earning capacity.
43. Important 6-Mark Question
Question
Explain the classification of Accounting Ratios with examples.
Answer
Accounting Ratios are classified into four major groups:
1. Liquidity Ratios
Measure short-term financial position.
Examples:
Current Ratio
Quick Ratio
2. Solvency Ratios
Measure long-term financial stability.
Examples:
Debt-Equity Ratio
Proprietary Ratio
Interest Coverage Ratio
3. Activity Ratios
Measure operational efficiency.
Examples:
Inventory Turnover Ratio
Trade Receivables Turnover Ratio
Working Capital Turnover Ratio
4. Profitability Ratios
Measure earning capacity.
Examples:
Gross Profit Ratio
Operating Profit Ratio
Net Profit Ratio
Return on Investment
44. PYQ / Board-Pattern Questions
The following questions are useful PYQ-based practice questions based on the CBSE pattern and syllabus. They are presented for revision and are not claimed as verbatim reproduction of every past board question.
PYQ 1 – Liquidity
Current Assets of a company are ₹6,00,000 and Current Liabilities are ₹3,00,000.
Calculate Current Ratio.
Answer
Current Ratio
= ₹6,00,000 / ₹3,00,000
= 2 : 1
45. PYQ 2 – Quick Ratio
Current Assets = ₹8,00,000
Inventory = ₹2,00,000
Prepaid Expenses = ₹50,000
Current Liabilities = ₹2,50,000
Calculate Quick Ratio.
Answer
Quick Assets:
= ₹8,00,000 – ₹2,00,000 – ₹50,000
= ₹5,50,000
Quick Ratio:
= ₹5,50,000 / ₹2,50,000
= 2.2 : 1
46. PYQ 3 – Debt-Equity Ratio
Long-Term Debt = ₹9,00,000
Shareholders' Funds = ₹18,00,000
Calculate Debt-Equity Ratio.
Answer
= ₹9,00,000 / ₹18,00,000
= 0.5 : 1
47. PYQ 4 – Proprietary Ratio
Shareholders' Funds = ₹10,00,000
Total Assets = ₹25,00,000
Calculate Proprietary Ratio.
Answer
= ₹10,00,000 / ₹25,00,000
= 0.4
or
40%
48. PYQ 5 – Interest Coverage Ratio
EBIT = ₹8,00,000
Interest = ₹2,00,000
Calculate Interest Coverage Ratio.
Answer
= ₹8,00,000 / ₹2,00,000
= 4 times
49. PYQ 6 – Inventory Turnover Ratio
Opening Inventory = ₹2,00,000
Closing Inventory = ₹4,00,000
Cost of Revenue from Operations = ₹12,00,000
Calculate Inventory Turnover Ratio.
Answer
Average Inventory:
= (₹2,00,000 + ₹4,00,000) / 2
= ₹3,00,000
Inventory Turnover Ratio:
= ₹12,00,000 / ₹3,00,000
= 4 times
50. PYQ 7 – Trade Receivables Turnover Ratio
Credit Revenue from Operations = ₹15,00,000
Opening Trade Receivables = ₹2,00,000
Closing Trade Receivables = ₹3,00,000
Calculate Trade Receivables Turnover Ratio.
Answer
Average Trade Receivables:
= (₹2,00,000 + ₹3,00,000) / 2
= ₹2,50,000
Ratio:
= ₹15,00,000 / ₹2,50,000
= 6 times
51. PYQ 8 – Working Capital Turnover Ratio
Revenue from Operations = ₹20,00,000
Current Assets = ₹8,00,000
Current Liabilities = ₹3,00,000
Calculate Working Capital Turnover Ratio.
Answer
Working Capital:
= ₹8,00,000 – ₹3,00,000
= ₹5,00,000
Ratio:
= ₹20,00,000 / ₹5,00,000
= 4 times
52. PYQ 9 – Gross Profit Ratio
Gross Profit = ₹5,00,000
Revenue from Operations = ₹20,00,000
Calculate Gross Profit Ratio.
Answer
= ₹5,00,000 / ₹20,00,000 × 100
= 25%
53. PYQ 10 – Operating Ratio
Cost of Revenue from Operations = ₹12,00,000
Operating Expenses = ₹3,00,000
Revenue from Operations = ₹20,00,000
Calculate Operating Ratio.
Answer
Operating Cost:
= ₹12,00,000 + ₹3,00,000
= ₹15,00,000
Operating Ratio:
= ₹15,00,000 / ₹20,00,000 × 100
= 75%
54. PYQ 11 – Operating Profit Ratio
Operating Ratio = 75%
Calculate Operating Profit Ratio.
Answer
Operating Profit Ratio:
= 100 – Operating Ratio
= 100 – 75
= 25%
55. PYQ 12 – Net Profit Ratio
Profit Before Tax = ₹3,00,000
Revenue from Operations = ₹15,00,000
Calculate Net Profit Ratio.
Answer
= ₹3,00,000 / ₹15,00,000 × 100
= 20%
56. PYQ 13 – Return on Investment
Operating Profit = ₹4,00,000
Capital Employed = ₹20,00,000
Calculate ROI.
Answer
ROI:
= ₹4,00,000 / ₹20,00,000 × 100
= 20%
57. Case Study – Board Exam Practice
Question
ABC Ltd. has the following information:
Current Assets = ₹10 lakh
Current Liabilities = ₹5 lakh
Inventory = ₹2 lakh
Prepaid Expenses = ₹1 lakh
Long-Term Debt = ₹6 lakh
Shareholders' Funds = ₹12 lakh
Answer:
(a) Calculate Current Ratio.
(b) Calculate Quick Ratio.
(c) Calculate Debt-Equity Ratio.
(d) Identify the category of each ratio.
Solution
(a) Current Ratio
= ₹10 lakh / ₹5 lakh
= 2 : 1
(b) Quick Ratio
Quick Assets:
= ₹10 lakh – ₹2 lakh – ₹1 lakh
= ₹7 lakh
Quick Ratio:
= ₹7 lakh / ₹5 lakh
= 1.4 : 1
(c) Debt-Equity Ratio
= ₹6 lakh / ₹12 lakh
= 0.5 : 1
(d) Classification
Current Ratio → Liquidity Ratio
Quick Ratio → Liquidity Ratio
Debt-Equity Ratio → Solvency Ratio
58. Assertion-Reason Practice
Assertion (A)
Current Ratio measures the short-term liquidity position of a business.
Reason (R)
Current Ratio is calculated by dividing Current Assets by Current Liabilities.
Answer
Both A and R are correct and R is the correct explanation of A.
59. Important MCQs
Q1. Which ratio measures short-term liquidity?
A. Debt-Equity Ratio
B. Current Ratio
C. Net Profit Ratio
D. Inventory Turnover Ratio
Answer: B. Current Ratio
Q2. Quick Ratio excludes:
A. Cash
B. Trade Receivables
C. Inventory
D. Bank Balance
Answer: C. Inventory
Q3. Debt-Equity Ratio is a:
A. Liquidity Ratio
B. Solvency Ratio
C. Activity Ratio
D. Profitability Ratio
Answer: B. Solvency Ratio
Q4. Inventory Turnover Ratio is a:
A. Liquidity Ratio
B. Solvency Ratio
C. Activity Ratio
D. Profitability Ratio
Answer: C. Activity Ratio
Q5. Gross Profit Ratio is a:
A. Profitability Ratio
B. Solvency Ratio
C. Liquidity Ratio
D. Activity Ratio
Answer: A. Profitability Ratio
Q6. Which ratio measures the ability to pay interest?
A. Current Ratio
B. Interest Coverage Ratio
C. Inventory Turnover Ratio
D. Proprietary Ratio
Answer: B. Interest Coverage Ratio
60. Ratio Classification – One Page Revision
| Category | Ratios |
|---|---|
| ๐ต Liquidity | Current Ratio, Quick Ratio |
| ๐ Solvency | Debt-Equity, Total Assets to Debt, Proprietary, Interest Coverage, Debt to Capital Employed |
| ๐ข Activity | Inventory Turnover, Trade Receivables Turnover, Trade Payables Turnover, Fixed Asset Turnover, Net Asset Turnover, Working Capital Turnover |
| ๐ด Profitability | Gross Profit, Operating, Operating Profit, Net Profit, ROI |
61. Most Important Formulas to Memorise ⭐
Liquidity
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = Quick Assets / Current Liabilities
Solvency
Debt-Equity = Long-Term Debt / Shareholders' Funds
Total Assets to Debt = Total Assets / Long-Term Debt
Proprietary = Shareholders' Funds / Total Assets
Interest Coverage = EBIT / Interest
Debt to Capital Employed = Long-Term Debt / Capital Employed × 100
Activity
Inventory Turnover = Cost of Revenue from Operations / Average Inventory
Trade Receivables Turnover = Net Credit Revenue from Operations / Average Trade Receivables
Trade Payables Turnover = Net Credit Purchases / Average Trade Payables
Fixed Asset Turnover = Revenue from Operations / Net Fixed Assets
Net Asset Turnover = Revenue from Operations / Net Assets
Working Capital Turnover = Revenue from Operations / Working Capital
Profitability
Gross Profit Ratio = Gross Profit / Revenue from Operations × 100
Operating Ratio = Operating Cost / Revenue from Operations × 100
Operating Profit Ratio = Operating Profit / Revenue from Operations × 100
Net Profit Ratio = Net Profit / Revenue from Operations × 100
ROI = Operating Profit / Capital Employed × 100
62. CBSE Board Exam Strategy
For numerical ratio questions, follow this order:
Formula → Working → Calculation → Answer → Interpretation
For example:
Current Ratio
Formula:
Current Assets / Current Liabilities
Working:
₹8,00,000 / ₹4,00,000
Answer:
2 : 1
Interpretation:
The company has ₹2 of current assets for every ₹1 of current liabilities.
This presentation makes your answer clear and easy to check.
63. CBSE Syllabus 2026–27
The official CBSE Accountancy (055), Class XII, 2026–27 syllabus specifies:
Theory – 80 Marks
Project – 20 Marks
Time – 3 Hours
Part B is Financial Statement Analysis – 20 marks, consisting of:
Unit 3: Analysis of Financial Statements – 12 marks
Unit 4: Cash Flow Statement – 8 marks
The Analysis of Financial Statements unit includes Financial Statement Analysis, comparative statements, common-size statements, ratio analysis and the specified liquidity, solvency, activity and profitability ratios.
Official CBSE Syllabus
CBSE Class XII Accountancy 2026–27 Syllabus – Official PDF
64. CBSE Sample Question Paper
The official CBSE Class XII Accountancy Sample Question Paper available for 2025–26 has:
80 marks
3 hours
34 questions
Part A – Partnership and Company Accounts
Part B – Analysis of Financial Statements OR Computerised Accounting
The official SQP specifies the distribution of 1-, 3-, 4- and 6-mark questions.
Official CBSE Sample Paper
CBSE Class XII Accountancy Sample Question Paper 2025–26
Official Marking Scheme
CBSE Class XII Accountancy Marking Scheme 2025–26
Important: The syllabus for 2026–27 is official, while the Accountancy SQP identified here is for 2025–26. Students should use the official CBSE Academic website for the 2026–27 SQP when CBSE releases it.
65. Final Quick Revision
Before the exam, remember:
Financial Statement Analysis
Study + Analyse + Interpret financial information
Comparative Statement
→ Shows change
Common Size Statement
→ Shows percentage
Ratio Analysis
→ Shows relationship
Liquidity Ratios
→ Short-term position
Solvency Ratios
→ Long-term position
Activity Ratios
→ Efficiency
Profitability Ratios
→ Earning capacity
๐ฏ Final Exam Mantra
Liquidity = Can the company pay its short-term dues?
Solvency = Can the company meet its long-term obligations?
Activity = How efficiently is the company using its resources?
Profitability = How much profit is the company earning?
If these four concepts are clear, the classification and calculation of Accounting Ratios become much easier.
Study the formula → Understand the meaning → Practise the numerical → Interpret the answer.
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