# Classification of Turnover/Activity/Performance Ratios

Length: 1929 words (5.5 double-spaced pages)

Rating: Excellent

#### Essay Preview

Classify the various Turnover/Activity/Performance Ratios. Also explain the meaning, method of calculation and objective of these ratios.

Answer:

Classification of Turnover/Activity/Performance Ratios: -

1. Capital Turnover Ratio
2. Fixed Assets Turnover Ratio (CBSE 1998, 2000, Outside Delhi 2001)
3. Working Capital Turnover Ratio (CBSE Outside Delhi 2001)
4. Stock Turnover Ratio (CBSE 1989, 2000, Outside Delhi 2001)
5. Debtors Turnover Ratio (CBSE Outside Delhi 2001, Delhi 2002)
6. Debt Collection Period

Meaning, Objective and Method of Calculation: -

1. Capital Turnover Ratio: Capital turnover ratio establishes a relationship between net sales and capital employed. The ratio indicates the times by which the capital employed is used to generate sales. It is calculated as follows: -

Capital Turnover Ratio = Net Sales/Capital Employed

Where Net Sales = Sales – Sales Return

Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus + Long-term Loans – Fictitious Assets.

Objective and Significance: The objective of capital turnover ratio is to calculate how efficiently the capital invested in the business is being used and how many times the capital is turned into sales. Higher the ratio, better the efficiency of utilisation of capital and it would lead to higher profitability.
2. Fixed Assets Turnover Ratio: Fixed assets turnover ratio establishes a relationship between net sales and net fixed assets. This ratio indicates how well the fixed assets are being utilised.

Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets

In case Net Sales are not given in the question cost of goods sold may also be used in place of net sales. Net fixed assets are considered cost less depreciation.

Objective and Significance: This ratio expresses the number to times the fixed assets are being turned over in a stated period. It measures the efficiency with which fixed assets are employed. A high ratio means a high rate of efficiency of utilisation of fixed asset and low ratio means improper use of the assets.
3. Working Capital Turnover Ratio: Working capital turnover ratio establishes a relationship between net sales and working capital. This ratio measures the efficiency of utilisation of working capital.

### How to Cite this Page

MLA Citation:
"Classification of Turnover/Activity/Performance Ratios." 123HelpMe.com. 07 Apr 2020
<https://www.123helpme.com/view.asp?id=159122>.

## Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

## Classification Of Restaurant Tippers Essay

- “Kids eat free on Sunday right?!” “Can I substitute this juice for a Bloody Mary?” “Can I taste that first?” “Oh!. I’m sorry we haven’t even looked at the menu yet. We’ll just be a bit . . . (45 minutes later) . . . ok, were ready.” “Yeah, were ready. Let me have . . . uh . . . oh where was it. Here. Wait no. Where did it go. I can’t find it. You know it has the thing with the thing on it . . .” “Can we get some more of your FREE bread!” These quotes, among a plethora of others, are common occurrences with the serving field....   [tags: Classification Essay]

Research Papers
919 words (2.6 pages)

## Essay about Physical Activity on Academic Performance

- In today’s society, having a good education ensures a stable and prosperous future. Much pressure is inflicted upon students in order to have excellent grades, thus resulting in less time for extracurricular activities, such as sport. However, does consistent physical activity ensure an improved academic performance among peers at Marianopolis. Research has shown that being involved in fitness does improve grades. People who, in school, do not participate in extracurricular affairs tend to obtain lower grades than people who participate in sports....   [tags: Educational Issues, health, wellness, exercise]

Research Papers
1335 words (3.8 pages)

## Classification Essay: The Types of Drinkers

- “I drink to make other people more interesting.” ― Ernest Hemingway In the great world of tending bar there is a myriad selection of customers one would encounter; The Social Drinker, The Self Defined Outcast, The Fish Out of Water, and last but never the least, The Freshman. Each level of drinker has its advantages in social circles and also has equal negative repercussions. Most of these classes aren't built from years of drinking, rather are formed through the personality traits they already have developed through their childhood and young adulthood....   [tags: Classification Essay]

Research Papers
1017 words (2.9 pages)

## Classification of Dog Personalities Essay

- As the owner of three unique pups, I know that dogs’ variances are numerous. Any one who owns a dog knows that it has a mind of its own, and therefore a unique personality. Having had many dogs throughout my life, I have found that dogs fit into three classifications. Annie dogs As princesses of the canine universe, Annie type dogs have a loving yet manipulative personality. An Annie dog assumes the role of queen bee. As leader of the pack, she keeps everybody in line. She dominates all of the other dogs, often by physical herding or malicious growl....   [tags: Classification Essay]

Research Papers
912 words (2.6 pages)

## Classifications of Beer Essay

- Classifications of Beer What's more refreshing on a hot summer day than an ice cold beer. How about drinking a cold one with some friends at a local bar after a hard day's work, sounds satisfying doesn't it. Beer has been around for hundreds years and will be around for hundreds more. A beer is any variety of alcoholic beverages produced by the fermentation of starchy material derived from grains or other plant sources....   [tags: Classification Essay]

Research Papers
1332 words (3.8 pages)

## Classification Essay - Exercise Partners

- Classification of Exercise Partners Every woman's magazine I've ever read gives its readers advice on exercising, and one of the most common tips I've seen is to find a partner to exercise with. In my experience, however, having an exercise partner is not a good idea. I have encountered five types of exercise partners, and I have concluded that it is definitely best to exercise alone. The Drill Sergeant My ex-boyfriend represents the Drill Sergeant. He is one of those people whose motto is "No pain, no gain." Of course, he assumes that everyone else follows this decree as well....   [tags: Classification Essays]

Research Papers
948 words (2.7 pages)

## Classification of Movie Goers Essay

- Classification of Movie Goers Many people go to the movies. The movies are an escape into a fantasy world. Everyone has a different preference on what kind of movie is the best. Romance, horror, action, and comedy are different types of movies. The kind of movie someone goes to see can give clues to what kind of person they are. People who prefer horror films obviously like to be grossed out or like to be frightened. The horror fans probably tend to enjoy suspense and anxiety. One might suspect these people love to go on frightening roller coaster rides or do other things that would cause suspense and anxiousness....   [tags: Classification Essay ]

Free Essays
523 words (1.5 pages)

## Classification of Restaurant Customers Essay

- Classification of Restaurant Customers “I’ve been here for ten minutes and my server hasn’t taken my order yet!” This is a direct quote from me before I worked at a restaurant. I never looked to see how many tables my server actually had or how much running I made them do. The sad truth is most people do not notice these details either, which may affect the tip their server will receive. By looking at the attitude and maintenance of restaurant customers, you can classify them into three categories according to their tipping patterns: the “hmm…how good were they....   [tags: Classification Essay]

Free Essays
578 words (1.7 pages)

## Classification of Psychic Experiences Essay

- Classification of Psychic Experiences Generally speaking, psychic experiences which deal with receiving information from an outside source, either living or passed on can be classified into the following categories: psychometry, telepathy, clairvoyance, clairaudience, automatic writing and channeling. Two more psychic techniques, assumption and projection, deal with transferring the personality to a remote location. Psychometry is the art of receiving information about someone by touching an object commonly carried by that person such as a key chain or jewelry....   [tags: Classification Essays]

Research Papers
1105 words (3.2 pages)

## Classification of Beer Essay

- Classification of Beer What's more refreshing on a hot summer day than a nice cold beer. Or how about drinking a nice cold one with some buddies after work at a local bar, sound nice doesn?t it. Beer has been around for many years and will probably be around for many more. A beer is any variety of alcoholic beverages produced by the fermentation of starchy material derived from grains or other plant sources. The production of beer and some other alcoholic beverages is often called brewing. Most every culture has there own tradition and the own take on beer, thus producing many different styles and variations....   [tags: Classification Essays Beer Alcohol Essays]

Free Essays
1307 words (3.7 pages)

### Popular Essays

Working Capital Turnover Ratio = Net Sales or Cost of Goods Sold/Net Working Capital

Where Net Working Capital = Current Assets – Current Liabilities

Objective and Significance: This ratio indicates the number of times the utilisation of working capital in the process of doing business. The higher is the ratio, the lower is the investment in working capital and the greater are the profits. However, a very high turnover indicates a sign of over-trading and puts the firm in financial difficulties. A low working capital turnover ratio indicates that the working capital has not been used efficiently.
4. Stock Turnover Ratio: Stock turnover ratio is a ratio between cost of goods sold and average stock. This ratio is also known as stock velocity or inventory turnover ratio.

Stock Turnover Ratio = Cost of Goods Sold/Average Stock

Where Average Stock = [Opening Stock + Closing Stock]/2

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock

Objective and Significance: Stock is a most important component of working capital. This ratio provides guidelines to the management while framing stock policy. It measures how fast the stock is moving through the firm and generating sales. It helps to maintain a proper amount of stock to fulfill the requirements of the concern. A proper inventory turnover makes the business to earn a reasonable margin of profit.
5. Debtors’ Turnover Ratio: Debtors turnover ratio indicates the relation between net credit sales and average accounts receivables of the year. This ratio is also known as Debtors’ Velocity.

Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables

Where Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and B/R]/2

Credit Sales = Total Sales – Cash Sales

Objective and Significance: This ratio indicates the efficiency of the concern to collect the amount due from debtors. It determines the efficiency with which the trade debtors are managed. Higher the ratio, better it is as it proves that the debts are being collected very quickly.
6. Debt Collection Period: Debt collection period is the period over which the debtors are collected on an average basis. It indicates the rapidity or slowness with which the money is collected from debtors.

Debt Collection Period = 12 Months or 365 Days/Debtors Turnover Ratio

Or

Debt Collection Period = Average Trade Debtors/Average Net Credit Sales per day

Or

365 days or 12 months x Average Debtors/Credit Sales

It may be noted that some authors prefer to use 360 days instead of 365 days for the sake of convenience.

Objective and Significance: This ratio indicates how quickly and efficiently the debts are collected. The shorter the period the better it is and longer the period more the chances of bad debts. Although no standard period is prescribed anywhere, it depends on the nature of the industry.

Q.5. Classify the various Liquidity Ratios. Also explain the meaning, method of calculation and objective of these ratios.

Answer:

Classification of Liquidity Ratios:

1. Current Ratio (CBSE 1989, 2000, Outside Delhi 2001)
2. Liquid Ratio (CBSE Outside Delhi 2001, Delhi 2002)

Meaning, Objective and Method of Calculation:

1. Current Ratio: Current ratio is calculated in order to work out firm’s ability to pay off its short-term liabilities. This ratio is also called working capital ratio. This ratio explains the relationship between current assets and current liabilities of a business. Where current assets are those assets which are either in the form of cash or easily convertible into cash within a year. Similarly, liabilities, which are to be paid within an accounting year, are called current liabilities.

Current Ratio = Current Assets/Current Liabilities

Current Assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Stock of Goods, Short-term Investments, Prepaid Expenses, Accrued Incomes etc.

Current Liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc.

Objective and Significance: Current ratio shows the short-term financial position of the business. This ratio measures the ability of the business to pay its current liabilities. The ideal current ratio is suppose to be 2:1 i.e. current assets must be twice the current liabilities. In case, this ratio is less than 2:1, the short-term financial position is not supposed to be very sound and in case, it is more than 2:1, it indicates idleness of working capital.
2. Liquid Ratio: Liquid ratio shows short-term solvency of a business in a true manner. It is also called acid-test ratio and quick ratio. It is calculated in order to know how quickly current liabilities can be paid with the help of quick assets. Quick assets mean those assets, which are quickly convertible into cash.

Liquid Ratio = Liquid Assets/Current Liabilities

Where liquid assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Short-term Investments etc. In other words, all current assets are liquid assets except stock and prepaid expenses.

Current liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc.

Objective and Significance: Liquid ratio is calculated to work out the liquidity of a business. This ratio measures the ability of the business to pay its current liabilities in a real way. The ideal liquid ratio is suppose to be 1:1 i.e. liquid assets must be equal to the current liabilities. In case, this ratio is less than 1:1, it shows a very weak short-term financial position and in case, it is more than 1:1, it shows a better short-term financial position.

Q.6. Classify the various Solvency Ratios. Also explain the meaning, method of calculation and objective of these ratios.

Answer:

Classification of Solvency Ratios:

1. Debt-Equity Ratio (CBSE 1989, 2000, Outside Delhi 2001)
2. Debt to Total Funds Ratio
3. Fixed Assets Ratio
4. Proprietary Ratio (CBSE Outside Delhi 2001)
5. Interest Coverage Ratio (CBSE 1999)

Meaning, Objective and Method of Calculation: -

1. Debt-Equity Ratio: Debt equity ratio shows the relationship between long-term debts and shareholders funds’. It is also known as ‘External-Internal’ equity ratio.

Debt Equity Ratio = Debt/Equity

Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc.

Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious Assets

Objective and Significance: This ratio is a measure of owner’s stock in the business. Proprietors are always keen to have more funds from borrowings because:

(i) Their stake in the business is reduced and subsequently their risk too

(ii) Interest on loans or borrowings is a deductible expenditure while computing taxable profits. Dividend on shares is not so allowed by Income Tax Authorities.

The normally acceptable debt-equity ratio is 2:1.
2. Debt to Total Funds Ratio: This ratio gives same indication as the debt-equity ratio as this is a variation of debt-equity ratio. This ratio is also known as solvency ratio. This is a ratio between long-term debt and total long-term funds.

Debt to Total Funds Ratio = Debt/Total Funds

Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc.

Total Funds = Equity + Debt = Capital Employed

Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious Assets

Objective and Significance: - Debt to Total Funds Ratios shows the proportion of long-term funds, which have been raised by way of loans. This ratio measures the long-term financial position and soundness of long-term financial policies. In India debt to total funds ratio of 2:3 or 0.67 is considered satisfactory. A higher proportion is not considered good and treated an indicator of risky long-term financial position of the business. It indicates that the business depends too much upon outsiders’ loans.
3. Fixed Assets Ratio: Fixed Assets Ratio establishes the relationship of Fixed Assets to Long-term Funds.

Fixed Assets Ratio = Long-term Funds/Net Fixed Assets

Where Long-term Funds = Share Capital (Equity + Preference) + Reserves and Surplus + Long- term Loans – Fictitious Assets

Net Fixed Assets means Fixed Assets at cost less depreciation. It will also include trade investments.

Objective and Significance: This ratio indicates as to what extent fixed assets are financed out of long-term funds. It is well established that fixed assets should be financed only out of long-term funds. This ratio workout the proportion of investment of funds from the point of view of long-term financial soundness. This ratio should be equal to 1. If the ratio is less than 1, it means the firm has adopted the impudent policy of using short-term funds for acquiring fixed assets. On the other hand, a very high ratio would indicate that long-term funds are being used for short-term purposes, i.e. for financing working capital.
4. Proprietary Ratio: Proprietary Ratio establishes the relationship between proprietors’ funds and total tangible assets. This ratio is also termed as ‘Net Worth to Total Assets’ or ‘Equity-Assets Ratio’.

Proprietary Ratio = Proprietors’ Funds/Total Assets

Where Proprietors’ Funds = Shareholders’ Funds = Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious Assets

Total Assets include only Fixed Assets and Current Assets. Any intangible assets without any market value and fictitious assets are not included.

Objective and Significance: This ratio indicates the general financial position of the business concern. This ratio has a particular importance for the creditors who can ascertain the proportion of shareholder’s funds in the total assets of the business. Higher the ratio, greater the satisfaction for creditors of all types.
5. Interest Coverage Ratio: Interest Coverage Ratio is a ratio between ‘net profit before interest and tax’ and ‘interest on long-term loans’. This ratio is also termed as ‘Debt Service Ratio’.

Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on Long-term Loans

Objective and Significance: This ratio expresses the satisfaction to the lenders of the concern whether the business will be able to earn sufficient profits to pay interest on long-term loans. This ratio indicates that how many times the profit covers the interest. It measures the margin of safety for the lenders. The higher the number, more secure the lender is in respect of periodical interest.