Question

What are various types of ratios?

Answer 1

Accounting ratios are classified in two ways.

Categories as follows:
(i) Traditional Classification:
Traditional ratios are those accounting ratios which are based on the financial statement like Trading and Profit and Loss Account and Balance Sheet. On the basis of accounts of financial statements, the traditional classification is further divided into the following categories
(a) Income Statement Ratios like Gross Profit Ratio, etc.
(b) Balance Sheet Ratios like Current Ratio, Debt Equity Ratio, etc.
(c) Composite Ratios like Debtors Turnover Ratio, etc.

(ii) Functional Classification:
This classification of ratios is based on the functional need and the purpose for calculating ratio.
The functional ratios are further divided into the following categories.
(a) Liquidity Ratio: These ratios are calculated to determine short term solvency.
(b) Solvency Ratio: These ratios are calculated to determine long term solvency.
(c) Activity Ratio: These ratios are calculated for measuring the operational efficiency. These ratios relate to sales or cost of goods sold.
(d) Profitability Ratio These ratios are calculated to assess the financial performance and the financial viability of the business.