abhishreshthaa
Abhijeet S
Functional Classifications of Ratios
The ratios may be grouped in accordance with the purposes they serve of the different users of accounting information. On this basis, the ratios are classified as follows:
1. Liquidity Ratios:
These ratios analyze short-term and immediate financial position of a business organization and indicate the ability of the firm to meet its short-term commitments (current liabilities) out of its short- term resources (current assets). They are also known as Solvency Ratios’.
2. Leverage Ratios
These ratios measure the relationship between proprietor’s funds and borrowed funds. They indicate the degree of debt- financing in a firm.
3. Activity Ratios:
These ratios are designed to indicate the effectiveness of the firm in utilizing its funds, its degree of efficiency, arid its standards of performance. Hence, they are also known as ‘Efficiency and Performance Ratios.”
4. Profitability Ratios:
These ratios are intended to reflect the overall efficiency of the organization, its ability to earn a reasonable return capital employed or on shares issued arid the effectiveness of its investment policies.
The ratios may be grouped in accordance with the purposes they serve of the different users of accounting information. On this basis, the ratios are classified as follows:
1. Liquidity Ratios:
These ratios analyze short-term and immediate financial position of a business organization and indicate the ability of the firm to meet its short-term commitments (current liabilities) out of its short- term resources (current assets). They are also known as Solvency Ratios’.
2. Leverage Ratios
These ratios measure the relationship between proprietor’s funds and borrowed funds. They indicate the degree of debt- financing in a firm.
3. Activity Ratios:
These ratios are designed to indicate the effectiveness of the firm in utilizing its funds, its degree of efficiency, arid its standards of performance. Hence, they are also known as ‘Efficiency and Performance Ratios.”
4. Profitability Ratios:
These ratios are intended to reflect the overall efficiency of the organization, its ability to earn a reasonable return capital employed or on shares issued arid the effectiveness of its investment policies.