Class 12 Accounting-II Notes | RATIO ANALYSIS | Principles of Accounting-II XII

Class 12 Accounting-II Notes, RATIO ANALYSIS, Principles of Accounting-II XII

RATIO ANALYSIS

26) Ratio Analysis

In Mathematics, a ratio indicates how many times one number contains another. In Accounts, Ratio analysis is used as technique to quantity the relationship between two or more sets of financial data taken from financial statements like income statement and balance sheet. It provides the information relating to strengthen and weakness of a financial data in relation to other.

27) Two Objectives of Ratio Analysis

The two objectives of Ratio analysis are:

•     Judge the operating efficiency of the firm.

•     Measure the short-term and long-term financial position of the firm.

28) Limitations of ratio analysis.

The limitations of ratio analysis are as follows:

•     Ignores the Qualitative factors

•     Difficulties in adjusting Price level changes

•     Based on past facts

•     Limitation of accounting period

29) Current Assets

Current assets: Those assets, which are held for their conversion into cash normally within year or immediately or already in cash. For example, cash, bank balance, inventory, debtors, etc.

30) Fixed Assets

Fixed assets are those assets which are purchased for long-term use and are not likely to be converted quickly into cash. For example, land, buildings, and equipment.

31) Current Liabilities.

Current liabilities: Those liabilities which to be paid normally within year or immediately. For example, creditors, account payable, etc.

 

32) Long Term Liabilities

Long Term liabilities are those accounts which can be repaid after the period of one year. It affects the long-term financial position of the firm. Long term loans, debentures, bonds, etc. are the examples of long-term liabilities.

 

33) Write about gross profit margin and net profit margin.

• Goss profit margin: This ratio measures the relationship between gross profit and net sales. Computing this ratio determine the efficiency which production and or purchase operation and selling operation carried on. Gross Profit Margin = Gross Profit/ Net Sales x100%

• Net profit margin: This ratio shows the relationship between net profit and net sales. Computing this ratio determine the overall profitability due to various factors such as operational efficiency. Net Profit Margin = Net Profit/ Net Sales x100%

34) Average Collection Period

It refers to the period in which the debtors are collected on an average basis. It is also named as receivable collection period. It shows the period within which debts are collected. Average Collection Period = Days in a year/ Debtor turnover ratio

 

FUND FLOE STATEMENT

35) Define Fund Flow Statement

The funds flow statement is a statement that presents the movement of funds and is a report of financial operation of the business undertaking. It is prepared to know the sources and application of the funds during an accounting period. It is prepared by comparing two years' balance sheet figures and additional information. For knowing the financial activities of a company is known as funds flow statement.

36) Fund from Operation

It is fund generated in a business as a result of carrying out the operations during the normal course of business. It is calculated through the difference between operating revenue and operating expenses. It is different from Net Profit which is calculated considering both operating and non-operating activities.

COST ACCOUNTING

37) Cost Accounting

• Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a rent expense.
• Cost accounting is used internally by management in order to make fully informed business decisions.
• This helps the organization in cost controlling and making strategic planning.

38) Difference between Cost and Financial Accounting

Cost Accounting

Cost Accounting	Financial accounting
It is an accounting system through which an organization keeps the track of various costs in correct in production.	It is an accounting system that captures the record of financial information about the business to show the correct financial position of the company.
Both historical and pre-determined cost are used.	Only historical cost are used.
It is mostly used by manufacturing concern.	It is maintained in almost all types of business concern
Its objective is determine the cost of production and facilitate your cost control and decision. Making.	Its objective is to determine the profit/loss and financial position of the firm.

39) Importance/ Advantage/Need of Cost Accounting

• Classification of Costs (prime cost, direct cost, factory cost, selling cost etc.)
• Price Determination
• Control Cost

40)  Four Objectives of Cost Accounting

• Determine cost of production and per unit cost
• Determine the selling price per unit (SPPU).
• To help control the cost
• To evaluate efficiency of the firm

41) Three Functions of Cost Accounting

• To ascertain the cost of product
• Determine SPPU of the product
• To analyze and control the cost