Which of the following ratio are included in traditional classification?
Answers
Answer:
1. Traditional classification. Traditional classification of ratios is done on the basis of the financial statements from which the ratios are calculated. Under the traditional classification, the ratios are classified as: (i) Balance sheet ratios, (ii) Income statement ratios and (iii) Inter-statement ratios.
Complete Question
"Which of the following are included in the traditional classification of ratios?
(i) Liquidity Ratios.
(ii) Statement of Profit and loss Ratios.
(iii) Balance Sheet Ratios.
(iv) Profitability Ratios.
(v) Composite Ratios.
(vi) Solvency Ratios.
(A) (ii), (iii) and (v)
(B) (i), (iv) and (vi)
(C) (i), (ii) and (vi)
(D) All (i), (ii), (iii), (iv), (v), (vi)"
Answer:
(A) (ii), (iii) and (v)
Explanation:
1] Profit-loss ratio
When both figures are derived from the income statement A/c, we call it the PnL ratio. Sometimes referred to as income statement ratio. One such example is gross margin. This is the ratio of gross profit to sales or revenue. Other examples include utilization rates, net profit margins, and inventory turns.
2] Balance sheet ratio
If both variables come from the balance sheet as above, then one talks about the balance sheet ratio. When such ratios describe the relationship between two accounts on the balance sheet, they are also called financial ratios (as opposed to balance sheet ratios).
For example, consider the current ratio comparing current assets to current liabilities. Both are derived from the balance sheet. Other examples include quick ratios, capital gearing ratios, and debt/equity ratios.
3] Composite ratio
A composite ratio or composite ratio compares two variables from two different accounts. One is taken from the income statement and the other from the balance sheet. For example, the rate of return on capital employed. The profit figure (yield) is taken from the income statement and the capital used can be found on the balance sheet. Other examples include debtor turnover, creditor turnover and earnings per share.
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