Cbse Class 12 Accountancy Part 2 Notes Chapter 5

1. What are Accounting Ratios?

Accounting ratios are mathematical figures that represent the relationship between two or more numbers. These ratios can be shown as fractions, proportions, or multiples. When these figures are derived from financial statement numbers, they are called accounting ratios.

2. Objectives of Ratio Analysis:
The goals of ratio analysis are:

• To identify parts of the business that need more attention.

• To find areas that can improve with focused effort.

• To give a detailed look at the business’s profitability, liquidity, solvency, and efficiency.

• To compare the business’s performance with the best in the industry.

• To use information from financial statements to help make future predictions and estimates.

3. Advantages of Ratio Analysis:

The benefits of ratio analysis include:

• Evaluating the effectiveness of decisions

• Simplifying complex data and identifying relationships

• Assisting in comparative analysis

• Identifying areas of concern

• Facilitating SWOT analysis

• Supporting various types of comparisons

4. Limitations of Ratio Analysis: 

The limitations of ratio analysis include the following:

• Limitations of Accounting Data

• Overlooking Changes in Price Levels

• Disregard for Qualitative or Non-monetary Factors

• Differences in Accounting Practices

• Forecasting is not possible based solely on historical data

• Serves as a Tool, Not a Solution

• Inability to Solve Problems

• Absence of Standardized Definitions

• No Universally Accepted Benchmark Levels

• Ratios Derived from Unrelated Figures

5. Types of Ratios: Ratios are categorized into two main types, each with various sub-categories:

• Traditional Classification: This type includes three categories:

• Statement of Profit and Loss Ratios: These ratios involve two variables from the profit and loss statement.

• Balance Sheet Ratios: These ratios involve two variables from the balance sheet.

• Composite Ratios: These ratios involve one variable from the profit and loss statement and another from the balance sheet.

• Functional Classification: There are four types:

• Liquidity Ratios: These show how easily a business can pay its short-term debts.

• Solvency Ratios: These measure a company's ability to pay long-term debts.

• Activity or Turnover Ratios: These assess how efficiently a business uses its resources.

• Profitability Ratios: These evaluate how well a company makes a profit from its operations and assets.

5 Important Topics of Accounting Ratios Notes Class 12 Chapter 5 Accountancy

Importance of Accounting Ratios Notes Chapter 5 Accountancy

• These notes help quickly review key concepts and formulas before exams, saving valuable study time.

• Learning accounting ratios allows students to assess a company's financial stability and performance effectively.

• The revision notes provide a concise summary of important topics, making it easier for students to prepare for exams.

• Students enhance their ability to analyse financial statements and interpret various ratios by studying accounting ratios.

• Knowledge of accounting ratios aids students in making informed financial decisions based on thorough ratio analysis.

• Focusing on important topics and commonly asked questions through these notes increases the chances of scoring high exam marks.

Tips for Learning the Class 12 Accountancy Chapter 5 Accounting Ratios Notes

• Start by understanding the basic definitions and formulas for each type of ratio.

• Practice calculating ratios using sample financial statements to get comfortable with the process.

• Focus on interpreting each ratio, not just the calculation, to understand what they reveal about a company's financial health.

• Use flashcards to memorise important formulas and their meanings.

• Solve past exam questions related to accounting ratios to get a feel for the questions that might be asked.

• Regularly review and revise the key concepts to ensure you retain the information.

Conclusion

Class 12 Accountancy Chapter 5 on Accounting Ratios Notes covers different ratios like liquidity, solvency, activity, and profitability. These ratios help students understand a company's financial health and performance. These ratios will help them make better financial decisions and excel in exams. Vedantu provides clear and simple notes for this chapter, making it easier to understand and study. With Vedantu's help, students can prepare well for their board exams and score high marks.

Chapter-wise Revision Notes Links for 12 Accountancy Part II

Chapter-wise Revision Notes Links for 12 Accountancy Part I 

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