NCERT Class 12 Accountancy Accountancy Part-II: Chapter 5 — Accounting Ratios
This chapter introduces Accounting Ratios as a crucial technique for financial statement analysis, building upon previous discussions of comparative statements, common size statements, and trend analysis. It explains that ratios are mathematical relationships between two or more accounting numbers, derived from financial statements, and can be expressed as fractions, proportions, percentages, or multiples. The chapter highlights the importance of using meaningfully correlated accounting numbers for accurate ratio calculation. It details the objectives of ratio analysis, including identifying areas needing attention, potential improvements, assessing profitability, liquidity, solvency, and efficiency, facilitating cross-sectional analysis against industry standards, and aiding in future projections. The text emphasizes that effective ratio analysis provides vital insights for decision-making by both internal and external users.
Quick info
| Board | CBSE / NCERT |
|---|---|
| Class | Class 12 |
| Subject | Accountancy |
| Book | Accountancy Part-II |
| Chapter | Chapter 5 — Accounting Ratios |
| Language | English |
| PDF type | NCERT Textbook |
| Session | CBSE 2026 |
| Reading time | 4 minutes |
| Word count | 678 |
Learning outcomes
- Explain the meaning, objectives, and limitations of accounting ratios.
- Identify various types of commonly used ratios.
- Calculate ratios to assess solvency, liquidity, efficiency, and profitability.
- Interpret calculated ratios for intra-firm and inter-firm comparisons.
Vocabulary
| Word | Meaning |
|---|---|
| Financial Statements | Reports that provide financial information about a business enterprise. |
| Financial Statement Analysis | The process of examining financial statements to understand a business's performance and position. |
| Accounting Ratios | Mathematical relationships between two or more accounting numbers derived from financial statements. |
| Solvency | A firm's ability to meet its long-term financial obligations. |
| Liquidity | A firm's ability to meet its short-term financial obligations. |
| Efficiency | How effectively a firm utilizes its assets to generate revenue. |
| Profitability | A firm's ability to generate earnings relative to its revenue, assets, or equity. |
| Revenue from Operations | The total income generated from the primary business activities of a firm. |
| Gross Profit Ratio | A ratio indicating the percentage of revenue remaining after deducting the cost of goods sold. |
| Inventory Turnover Ratio | A ratio measuring how many times a company's inventory is sold and replaced over a period. |
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Practice questions
- What is a ratio in the context of accounting? Answer: A ratio is a mathematical number calculated as a reference to the relationship of two or more numbers, expressed as a fraction, proportion, percentage, or number of times.
- Define accounting ratio. Answer: An accounting ratio is a ratio calculated by referring to two accounting numbers derived from the financial statements.
- Why is it important that accounting numbers used for ratios are meaningfully correlated? Answer: Ratios calculated using unrelated numbers would hardly serve any purpose and would present an erroneous scenario.
- List two objectives of ratio analysis. Answer: Two objectives are: 1. To know the areas of the business which need more attention. 2. To know about the potential areas which can be improved.
Practice MCQs
Q1. Which of the following is NOT a technique of financial statement analysis mentioned in the chapter?
Explanation: Balance Sheet Analysis is not explicitly listed as one of the commonly used techniques alongside comparative statements, common size statements, trend analysis, accounting ratios, and cash flow analysis in this chapter.
Q2. An accounting ratio is calculated by referring to:
Explanation: Accounting ratios are defined as mathematical relationships calculated by referring to two or more accounting numbers derived from financial statements.
Q3. If Gross Profit is Rs. 20,000 and Revenue from Operations is Rs. 2,00,000, the Gross Profit Ratio is:
Explanation: Gross Profit Ratio = (Gross Profit / Revenue from Operations) * 100 = (20,000 / 2,00,000) * 100 = 10%.
Q4. Which of the following aspects of a firm's performance is assessed by ratio analysis?
Explanation: The chapter states that ratio analysis helps in assessing the profitability, liquidity, solvency, and efficiency levels of a business.
Q5. A ratio calculated using two unrelated numbers from financial statements:
Explanation: The text explicitly mentions that a ratio calculated by using two unrelated numbers would hardly serve any purpose.
Frequently asked questions
What is the primary goal of financial statements?
Financial statements aim at providing financial information about a business enterprise to meet the information needs of decision-makers.
What are the commonly used techniques of financial statement analysis?
The commonly used techniques include comparative statements, common size statements, trend analysis, accounting ratios, and cash flow analysis.
How is an accounting ratio defined?
An accounting ratio is a mathematical number calculated as a reference to the relationship of two or more accounting numbers derived from financial statements.
What is the significance of using meaningfully correlated numbers for ratio calculation?
Using meaningfully correlated numbers ensures that the calculated ratio is relevant and serves a purpose in analyzing the business's performance.
What are the key areas that ratio analysis helps assess?
Ratio analysis helps assess the profitability, liquidity, solvency, and efficiency levels of a business.
How does ratio analysis aid in comparing a firm's performance?
It provides information for making cross-sectional analysis by comparing the performance with the best industry standards.
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NCERT Class 12 Accountancy — Accountancy Part-II — Chapter 5 — Accounting Ratios. Verified by NCERT Help Editorial Team. Reviewed on 29 Jul 2026. Last updated 10 Aug 2026.