ratio analysis – part 4 – activity · pdf fileratio analysis – part 4...
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Ratio Analysis – Part 4 – Activity Ratios Paper 3B: Financial Management Chapter 3 Unit I
CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT
Learning Objectives
1. Gain Knowledge on Activity Ratios
2. Usage of various Activity Ratios
3. Preparation of various Activity Ratios
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Capital Turnover Ratio
Higher the ratio, more efficient is the utilization of owner’s and long term creditor’s funds
Formulae: Sales / Capital Employed
Indicates the firm’s ability of generating sales per Rupee of long term investment
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Fixed Assets Turnover Ratio
Indicate the efficient utilization of fixed assets in generating sales
Formulae: Sales / Fixed assets
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Working Capital Turnover Ratio
Formulae: Sales / Working Capital
Indicate the efficient utilization of working capital in generating sales
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Segregation of Working Capital Turnover Ratio
Working Capital ratio is further segregated in to
Inventory Turnover ratio
Debtors Turnover ratio
Creditors Turnover ratio
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Inventory Turnover Ratio
This ratio is also known as Stock Turnover ratio
Establishes the relationship between Sales during the period and average inventory held
Formulae: Sales / Average Inventory
Average Inventory = (Opening Inventory + Closing Inventory) / 2
A low ratio indicates that the inventory is not used or sold or lost or stays in warehouse for long time
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Debtor’s Turnover Ratio
Formulae: Credit Sales / Average Receivables
Receivables pertains to credit sales. Hence, it is recommended to calculate this ratio with reference to
Credit sales alone
Formulae: Sales / Average Receivables
This ratio throws light on collection and credit policies of the firm
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Creditor’s Turnover Ratio
A low ratio indicates liberal credit terms granted by the suppliers, whereas a high ratio shows that accounts are
settled rapidly
Formulae: Credit Purchases/ Average Accounts Payables
This ratio shows the velocity of debt payment by the firm.
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MCQ – 1
Activity Ratios are also called as –
C. Liquidity Ratios D. Turnover Ratios
Answer: D. Turnover Ratios
A. Coverage Ratios B. Leverage Ratios
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MCQ – 2
______ ratio indicates the firm’s ability of generating sales per rupee of long term investment
A. Capital Turnover Ratio
C. Inventory Turnover Ratio
B. Fixed Assets Turnover Ratio
D. Interest Coverage Ratios
Answer : A. Capital Turnover Ratio
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MCQ – 3
The relationship between Sales & Capital Assets is expressed as __________ A. Working Capital Turnover Ratio
C. Fixed Assets Turnover Ratio
B. Inventory Turnover Ratio
D. Capital Turnover Ratio
Answer : C. Fixed Assets Turnover Ratio
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MCQ – 4
_______ ratio is also known as Stock Turnover Ratio
A. Working Capital Turnover Ratio
C. Fixed Assets Turnover Ratio
B. Inventory Turnover Ratio
D. Capital Turnover Ratio
Answer : B. Inventory Turnover Ratio
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MCQ – 5
The ratio, which indicates the speed with which the inventory is used or sold, is
A. Debtors Turnover Ratio
C. Fixed Assets Turnover Ratio
B. Inventory Turnover Ratio
D. Creditors Turnover Ratio
Answer : B. Inventory Turnover Ratio
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MCQ – 6
______ ratio shows the velocity of debt payment by the firm
A. Debtors Turnover Ratio
C. Fixed Assets Turnover Ratio
B. Inventory Turnover Ratio
D. Creditors Turnover Ratio
Answer : D. Creditors Turnover Ratio
Lesson Summary
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2. We had discussed various Activity ratios in detail and their usage and method of calculation.
1. We have learnt the meaning and purpose of Activity or Turnover ratios
Follow the below Presentations
Ratio Analysis Part 1 – Overview
Ratio Analysis Part 2 - Liquidity Ratios
Ratio Analysis Part 3 - Leverage Ratios
Ratio Analysis Part 5 - Profitability Ratios
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