Accounting Ratios  Important Questions for CBSE Class 12 Accountancy Introduction

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

2.Accounting Ratios It is a mathematical expression that shows the relationship between various items or groups of items shown in financial statements. When ratios are calculated on the basis of accounting information, they are called accounting ratios.

3.Ratio Analysis It is a technique which involves re-grouping of data by application of arithmetical relationship.

4.Objectives of Ratio Analysis
(i)To know the areas of an enterprise which need more attention.
(ii)To know about the potential areas which can be improved on.
(iii)Helpful in comparative analysis of the performance.
(iv)Helpful in budgeting and forecasting.
(v)To provide analysis of the liquidity, solvency, activity and profitability of an enterprise.
(vi)To provide information useful for making estimates and preparing the plans for future.

5.Advantages of Ratio Analysis
(i)It is useful in analysis of financial statements.
(ii)Helps in simplifying accounting figures.
(iii)Useful in judging the operating efficiency of business.
(iv)Helps in identification of problem areas.
(v)Helpful in comparative analysis.

6.Limitations of Ratio Analysis
(i)Accounting ratios ignore qualitative factors.
(ii)Absence of universally accepted terminology.
(iii)Ratios are affected by window-dressing.
(iv)Effects of inherent limitations of accounting.
(v)Misleading results in the absence of absolute data.
(vi)Price level changes ignored.
(vii)Affected by personal bias and ability of the analyst.

Previous Years’Examination Questions

1 Mark Questions

1.State how personal bias can get reflected in ratio analysis. (All India 2011)
Ans. In many situations, the accountant has to make the choice out of various alternatives available e.g. choice in the method of depreciation (straight line or written down), choice in the method of inventory valuation (LIFO, FIFO or HIFO). Since the subjectivity is inherent in personal judgement, the financial statements are therefore not free from personal bias. As a result, ratio analysis cannot be said to be free from bias.

2.State any two limitations of ratio analysis. (All India 2010)
Ans. The two limitations of ratio analysis are:
(i) Accounting ratios ignore qualitative factors.
(ii) Impressed by personal bias and ability of the analyst.

3.What is meant by accounting ratios? (Delhi 2010 c)
Ans. An accounting ratio is a mathematical expression of the relationship between two items or group of items shown in the financial statements.
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