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C H A P T E R

Accounting Ratios

MEANING OF KEY TERMS USED IN THE CHAPTER

1. Ratio It is an arithmetical expression of relationship between two
interdependent or related items.

2. Accounting Ratio Accounting Ratio means ratio calculated on the basis of
accounting information.

3. Pure Ratio It is a ratio expressed as quotient. For example, 2 : 1.

4. Percentage It is a ratio expressed in percentage. For example, 25%.

5. Times It is a ratio expressed in number of times. For example, 3 Times.

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6. Fraction It is a ratio expressed as fraction. For example, or .75.
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7. Liquidity Ratios These ratios measure the ability of the enterprise to meet its
short-term financial commitments. These include: Current Ratio
and Quick Ratio/Liquid Ratio/Acid Test Ratio.

8. Solvency Ratios These ratios measure long-term financial position of the enterprise.
These include: Debt to Equity Ratio; Total Assets to Debt Ratio;
Proprietary Ratio; Interest Coverage Ratio and Debt to Capital
Employed Ratio.

9. Activity or Turnover Ratios These ratios measure efficiency in use of assets of the enterprise
in generating sales. These include: Inventory Turnover Ratio;
Trade Receivables Turnover Ratio; Trade Payables Turnover
Ratio; Working Capital Turnover Ratio; Fixed Assets Turnover
Ratio and Net Assets Turnover Ratio.

10. Profitability Ratios These ratios show the profitability of the enterprise. These include:
Gross Profit Ratio; Operating Ratio; Operating Profit Ratio;
Net Profit Ratio and Return on Investment (ROI).