Question

Write any two objectives of accounting ratios.

Hint:

While writing objectives of accounting ratios, focus on analysis, comparison, decision-making, performance evaluation, and financial position assessment. Always explain each point briefly for better marks.

Answer 1

Accounting ratios are mathematical relationships between two accounting figures which help in analyzing and interpreting the financial statements of a business. The following are two important objectives of accounting ratios explained in detail:
1. To Analyze Financial Performance:
One of the main objectives of accounting ratios is to evaluate the financial performance of a business. Ratios such as Gross Profit Ratio, Net Profit Ratio, and Return on Capital Employed help in measuring the profitability and operational efficiency of the firm.
By comparing ratios of different years, management can identify trends in income, expenses, and profits. This helps in understanding whether the business is improving or declining over time.
2. To Assess Financial Position and Solvency:
Accounting ratios also help in determining the financial position of a business. Liquidity ratios such as Current Ratio and Quick Ratio show the ability of the firm to meet its short-term obligations.
Similarly, solvency ratios like Debt-Equity Ratio indicate the long-term financial stability of the business. These ratios are useful for creditors, investors, and management to judge the risk involved in the business.