# Interpretation of financial statements questions and answers

 Ratio analysis is a systematic technique of analysis and interpretation of financial statements… The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparisons… Reliability of the financial statements should be checked first as the ratio analysis is based on financial statements…. The ratios can be classified under following different groups:… The different benchmarks against which ratios are compared as follows:… Liquid Ratio or Acid Test Ratio or Quick Ratio indicates the backing available to liquid liabilities in the form of liquid assets… Fixed Assets Turnover Ratio,Current Assets Turnover Ratio indicates that the current assets are turned over in the form of sales… Solvency Group: Under this group following ratios are calculated which indicates the long term financial prospects of the company… Gross Profit Ratio indicates the relation between production cost and sales and the efficiency with which… Return of Assets (ROA) measures the profitability of the investments in a firm. A higher ROA is always preferred…. Capital Gearing Ratio,Earning Per Share (EPS),Formula for calculation P/E Ratio,Dividend Payment Ratio (D/P Ratio)… Formula to calculate current ratio = Current Assets/ Current Liabilities...Following precautions are required before drawing a conclusion from current ratio.. Liquid Ratio or Acid Test Ratio or Quick Ratio is a liquidity ratio, indicates the backing available to liquid liabilities...Formula to calculate current ratio = Liquid Assets/ Liquid Liabilities … Formula to calculate Fixed assets turnover ratio = Net Sales/ Fixed Assets… Formula to calculate current assets turnover ratio = Liquid Assets/ Liquid Liabilities… Working Capital Turnover Ratio indicates that working capital i.e difference between current assets and current liabilities… Formula to calculate inventory turnover ratio = Cost of goods sold/ Average inventory… Debtors Turnover Ratio indicates the number of times average debtors are turned over during a year Capital Turnover Ratio indicates the efficiency of the organization with which the capital employed is being utilized… Debt Equity Ratio is one of the ratios of solvency group. It indicates the stake of shareholders and creditors in the organization… Proprietary Ratio also known as equity ratio indicates the relationship between the owners’ funds and total assets. … Fixed Assets/ Capital Employed Ratio indicate the extent to which the long term funds are sunk in fixed assets… Interest Coverage Ratio indicate protection available to the lenders of long term capital in the form of funds available… Debt Service Coverage Ratio (DSCR) is one of the most important ratios calculated by the financial institutions… Gross Profit Ratio indicates the relation between production cost and sales and the efficiency with which the goods.. Formula to calculate EPS = (Net profit after taxes - Preference Dividend) / No. of equity shares outstanding … Price Earning Ratio (P/E Ratio) measures the expectation of the investors. It basically indicated… Net Profit Ratio indicates that portion of the sales which is left out with the owners after considering all types of expenses… Operating Ratio indicates the percentage of net sales which is absorbed by the operating costs…. Return on Assets (ROA) measures the profitability of the investments in a firm. It is an indicator of the profitability… Return of Capital Employed (ROCE) is one of the ratios of overall profitability group, which measures the profitability… Return on Shareholders’ Funds is one of the ratios of overall profitability group, which indicates the profitability … Capital Gearing Ratio is one of the ratios of miscellaneous group, which measures the fixed income bearing …