MANAGEMENT, CONTROL AND ACCOUNTABILITY FOR FINANCIAL RESOURCES
MBA (1ST YEAR)
TIMES BUSINESS SCHOOL.
Meaning and definition:
The term ‘ratio’ refers to the mathematical relationship between any two inter-related variables. In other words, it establishes relationship between two items expressed in quantitative form.
According J. Batty, ratio can be defined as “the term accounting ratio is used to describe significant relationships which exist between figures shown in a balance sheet and profit and loss account in a budgetary control system or any other part of the accounting management.
Analysis or interpretation of ratios:
The analysis or interpretation in question may be of various types. The following approaches are usually found to exist:
* Interpretation or analysis of an individual or single ratio.
* Interpretation or analysis by referring to a group of ratios.
* Interpretation or analysis of ratio by trend.
* Interpretation or analysis by inter-firm comparison.
Advantages of ratio analysis:
Ratio analysis is necessary to establish the relationship between two accounting figures to highlight the significant to the management or user who can analyze the business situation and to monitor their performance in a meaningful way. The following are the advantages of ratio analysis.
* It facilitates the accounting information to be summarized and simplified in required form.
* It highlights the inter-relationship between the facts and figures of various segments of business.
* Ratio analysis helps us to remove all type of wastages and inefficiencies.
* It provides necessary information to the management to take prompt decision relating to business.
* It helps to the management for effectively discharge its functions such as planning, organizing, controlling, directing and forecasting.
* Ratio analysis reveals profitable and unprofitable activities. Thus, the management is...