Accounting Ratios Class 12: Formulas, Worked Examples and Board Questions

What Accounting Ratios is about

Weightage: This chapter is in Part B Option I: Financial Statement Analysis, which a student takes instead of Option II (Computerised Accounting). The syllabus unit Analysis of Financial Statements carries 12 of the 80 theory marks and covers this chapter together with the chapters Financial Statements of a Company and Analysis of Financial Statements.Source: CBSE Accountancy (055) syllabus 2026-27, Part B Option I: Financial Statement Analysis

In real board papers: asked in 2 of the 2 board papers we hold (2026 to 2026), on average 6 marks per paper. See the questions

Key concepts

Meaning, objectives, advantages and limitations of ratio analysis

NCERT section 5.1-5.4

An accounting ratio is a mathematical relationship between two accounting figures, expressed as a pure ratio (2 : 1), a number of times (6 times) or a percentage (25%).

Objectives: to know the areas needing attention, to measure liquidity, solvency, efficiency and profitability, to help in planning and forecasting, and to compare performance over time and with other firms.

Advantages: simplify and summarise accounting data; help in comparison (intra-firm and inter-firm); show trends; help locate weak spots; aid decision-making.

Limitations: they inherit the limitations of financial statements (historical cost, estimates); ignore price-level changes and qualitative factors; can be distorted by window dressing; a ratio has no meaning without a standard or comparison; and different firms may use different accounting methods.

Worked example

Suppose a firm's current ratio is 1.8 : 1. Is this good or bad? [1 mark]

Try it first, then show the solutionSolution

1. A ratio means little on its own.
2. It must be compared with the firm's past ratios, its industry average or a standard.

Answer: It cannot be judged in isolation; it needs a comparison (a limitation of ratio analysis).

Liquidity ratios: current ratio and quick ratio

NCERT section 5.6

Current ratio = current assets ÷ current liabilities. It shows how many rupees of current assets cover each rupee of current liabilities.

Quick (acid-test) ratio = quick assets ÷ current liabilities, where quick assets = current assets − inventories − prepaid expenses (and other non-liquid items such as advance tax). It is a stricter test because inventory and prepayments cannot quickly be turned into cash.

Current assets include current investments, inventories, trade receivables (net of provision), cash and cash equivalents, short-term loans and advances, and other current assets. Current liabilities include short-term borrowings (including bank overdraft), trade payables, other current liabilities and short-term provisions.

Worked example

For Akash Ltd: inventories ₹3,20,000, trade receivables ₹3,00,000, cash ₹1,60,000, prepaid expenses ₹20,000; trade payables ₹2,40,000 and other current liabilities ₹60,000. Calculate the current and quick ratios. [3 marks]

Try it first, then show the solutionSolution

1. Current assets = ₹8,00,000; current liabilities = ₹3,00,000.
2. Current ratio = 8,00,000 ÷ 3,00,000 = 2.67 : 1.
3. Quick assets = 8,00,000 − 3,20,000 − 20,000 = ₹4,60,000; quick ratio = 1.53 : 1.

Answer: Current ratio 2.67 : 1; quick ratio 1.53 : 1.

Solvency ratios

NCERT section 5.7

• Debt-equity ratio = long-term debts ÷ shareholders' funds (equity). Long-term debts = long-term borrowings (+ long-term provisions). Shareholders' funds = share capital + reserves and surplus (equivalently, non-current assets + working capital − long-term debts).
• Debt to capital employed ratio = long-term debts ÷ capital employed, where capital employed = shareholders' funds + long-term debts (net assets).
• Proprietary ratio = shareholders' funds ÷ capital employed (NCERT notes it can also be computed on total assets; use what the question specifies). On the capital-employed base, debt to capital employed + proprietary ratio = 1.
• Total assets to debt ratio = total assets ÷ long-term debts.
• Interest coverage ratio: how many times profit before interest and tax covers the interest on long-term debts (PBIT ÷ that interest).

Worked example

For Akash Ltd: share capital ₹10,00,000, reserves ₹4,00,000, 10% debentures ₹6,00,000, total assets ₹23,00,000, profit before interest and tax ₹3,00,000. Calculate debt-equity, debt to capital employed, proprietary (on capital employed), total assets to debt and interest coverage ratios. [4 marks]

Try it first, then show the solutionSolution

1. Debt-equity = 6,00,000 ÷ 14,00,000 = 0.43 : 1.
2. Capital employed = 14,00,000 + 6,00,000 = ₹20,00,000; debt to capital employed = 0.30 : 1; proprietary = 0.70 : 1 (they add to 1).
3. Total assets to debt = 23,00,000 ÷ 6,00,000 = 3.83 : 1.
4. Interest coverage = 3,00,000 ÷ 60,000 = 5 times.

Answer: 0.43 : 1; 0.30 : 1; 0.70 : 1; 3.83 : 1; 5 times.

Activity (turnover) ratios

NCERT section 5.8

• Inventory turnover = cost of revenue from operations ÷ average inventory. Cost of revenue from operations = revenue − gross profit, or opening inventory + net purchases + direct expenses − closing inventory. Average inventory = (opening + closing) ÷ 2.
• Trade receivables turnover = net credit revenue from operations ÷ average trade receivables (debtors + bills receivable, before deducting provision for doubtful debts). Average collection period = 365 (or 12 months) ÷ turnover.
• Trade payables turnover = net credit purchases ÷ average trade payables (creditors + bills payable). Average payment period = 365 ÷ turnover.
• Net asset (capital employed) turnover = revenue from operations ÷ capital employed.
• Fixed asset turnover = net revenue from operations ÷ net fixed assets.
• Working capital turnover = net revenue from operations ÷ working capital (current assets − current liabilities).

Worked example

For Akash Ltd: revenue (all credit) ₹24,00,000; cost of revenue ₹18,00,000; inventory ₹2,80,000 (opening) and ₹3,20,000 (closing); trade receivables ₹2,00,000 and ₹3,00,000. Calculate inventory turnover, trade receivables turnover and the average collection period. [3 marks]

Try it first, then show the solutionSolution

1. Average inventory = ₹3,00,000; inventory turnover = 18,00,000 ÷ 3,00,000 = 6 times.
2. Average receivables = ₹2,50,000; turnover = 24,00,000 ÷ 2,50,000 = 9.6 times.
3. Collection period = 365 ÷ 9.6 ≈ 38 days.

Answer: Inventory turnover 6 times; trade receivables turnover 9.6 times; about 38 days.

Profitability ratios

NCERT section 5.9

• Gross profit ratio = gross profit ÷ net revenue from operations × 100.
• Operating ratio = (cost of revenue + operating expenses) ÷ revenue × 100, where operating expenses cover office, administrative and selling and distribution expenses, employee benefits and depreciation (not finance costs or non-operating losses).
• Operating profit ratio = operating profit ÷ revenue × 100 = 100 − operating ratio.
• Net profit ratio = net profit ÷ revenue from operations × 100. The 2026-27 syllabus asks it on profit before tax and profit after tax.
• Return on investment (ROI / ROCE) = profit before interest and tax ÷ capital employed × 100.

Worked example

For Akash Ltd: revenue ₹24,00,000; cost of revenue ₹18,00,000; operating expenses ₹3,00,000; interest ₹60,000; tax 30%; capital employed ₹20,00,000. Calculate GP ratio, operating ratio, operating profit ratio, net profit ratio before and after tax, and ROI. [4 marks]

Try it first, then show the solutionSolution

1. GP = ₹6,00,000; GP ratio = 25%.
2. Operating ratio = (18,00,000 + 3,00,000) ÷ 24,00,000 × 100 = 87.5%; operating profit ratio = 12.5%.
3. PBT = 3,00,000 − 60,000 = ₹2,40,000; NP ratio before tax = 10.00%. PAT = ₹1,68,000; NP ratio after tax = 7.00%.
4. ROI = 3,00,000 ÷ 20,00,000 × 100 = 15%.

Answer: GP 25%; operating ratio 87.5%; operating profit 12.5%; NP 10% before tax and 7% after tax; ROI 15%.

Working back from given ratios

NCERT section 5.6 (illustrations)

Many board questions give two ratios and one figure and ask for the rest. Write each ratio as an equation and solve.

• Current and quick ratios with inventory: CA = CR × CL and QA = QR × CL, so inventory (+ prepaid) = (CR − QR) × CL.
• Working capital with current ratio: WC = CA − CL = (CR − 1) × CL.
• Gross profit on cost versus on sales: 25% on cost = 20% on sales, so cost of revenue = revenue ÷ 1.25.
• Inventory turnover with opening and closing inventory relation: express both in terms of one unknown.

Worked example

Suppose a company's current ratio is 2.5 : 1 and quick ratio 1.5 : 1, and its inventory is ₹60,000 (no prepaid expenses). Find current liabilities, current assets and quick assets. [3 marks]

Try it first, then show the solutionSolution

1. Inventory = (2.5 − 1.5) × CL, so CL = 60,000 ÷ 1 = ₹60,000.
2. CA = 2.5 × 60,000 = ₹1,50,000.
3. QA = 1.5 × 60,000 = ₹90,000 (check: 1,50,000 − 60,000).

Answer: CL ₹60,000; CA ₹1,50,000; QA ₹90,000.

Effect of transactions on ratios

NCERT section 5.6, 5.7 (illustrations)

To judge the effect of a transaction on a ratio, write how it changes the numerator and the denominator. A key rule for the current ratio: when the ratio is above 1, an equal decrease in current assets and current liabilities raises it, and an equal increase lowers it (the opposite happens when the ratio is below 1). Transactions that only swap one current asset for another (cash for receivables) leave it unchanged; buying a fixed asset for cash lowers it; raising long-term funds in cash raises it.

The table below starts from current assets ₹8,00,000 and current liabilities ₹4,00,000 (ratio 2 : 1) and applies each transaction separately.

Transaction	Current assets (₹)	Current liabilities (₹)	Current ratio	Effect
Paid trade payables ₹1,00,000 by cheque	7,00,000	3,00,000	2.33 : 1	Increase
Bought goods on credit ₹1,00,000	9,00,000	5,00,000	1.80 : 1	Decrease
Sold goods costing ₹50,000 for ₹70,000 cash	8,20,000	4,00,000	2.05 : 1	Increase
Issued shares for ₹2,00,000 cash	10,00,000	4,00,000	2.50 : 1	Increase
Bought machinery for ₹1,00,000 cash	7,00,000	4,00,000	1.75 : 1	Decrease

Worked example

Suppose the current ratio is 2 : 1. Will paying a trade payable by cheque increase, decrease or not change it? [1 mark]

Try it first, then show the solutionSolution

1. Both current assets and current liabilities fall by the same amount.
2. With a ratio above 1, an equal fall raises the ratio.

Answer: Increase.

Accounting Ratios in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Liquidity Ratios: Current Ratio and Quick Ratio
• Activity (Turnover) Ratios
• Solvency Ratios

Accounting Ratios: key facts

Current ratio

Current assets ÷ current liabilities

Quick ratio

Quick assets ÷ current liabilities; quick assets = current assets − inventories − prepaid expenses

Debt-equity ratio

Long-term debts ÷ shareholders' funds

Debt to capital employed

Long-term debts ÷ (shareholders' funds + long-term debts)

Proprietary ratio

Shareholders' funds ÷ capital employed (or total assets, if specified)

Total assets to debt

Total assets ÷ long-term debts

Interest coverage

Profit before interest and tax ÷ interest on long-term debts

Inventory turnover

Cost of revenue from operations ÷ average inventory

Trade receivables turnover

Net credit revenue ÷ average trade receivables

Trade payables turnover

Net credit purchases ÷ average trade payables

Fixed asset, net asset and working capital turnover

Revenue ÷ net fixed assets; revenue ÷ capital employed; revenue ÷ working capital

Gross profit, operating and operating profit ratios

GP ÷ revenue × 100; (cost of revenue + operating expenses) ÷ revenue × 100; 100 − operating ratio

Net profit ratio

Profit before tax (or after tax) ÷ revenue from operations × 100

Return on investment

Profit before interest and tax ÷ capital employed × 100

How the board asks Accounting Ratios

The question patterns to expect, and the method that works for each.

Tricks to remember Accounting Ratios

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Four families: L-S-A-P

  Liquidity, Solvency, Activity, Profitability.

  Use it when: Classifying ratios.

• Cost with inventory, credit with debtors

  Inventory turnover uses cost; receivables use credit revenue; payables use credit purchases.

  Use it when: Choosing numerators.

• Above 1, equal cut lifts

  When a ratio is above 1, cutting both sides equally raises it.

  Use it when: Effect of transactions.

• PBIT for safety and return

  Interest coverage and ROI both start from PBIT.

  Use it when: Profit figure to use.

Accounting Ratios: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In the board paper this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Accounting Ratios

The slips examiners see most often, and what to write instead.

• ✗Mistake: Using revenue instead of cost of revenue in inventory turnover

  Inventory is at cost; revenue is at selling price.

  Wrong working

  24,00,000 ÷ 3,00,000 = 8 times

  Right working

  18,00,000 ÷ 3,00,000 = 6 times

  ✓Do this: Numerator is cost of revenue from operations.

  Usually costs: 1 mark.

• ✗Mistake: Including current liabilities in capital employed

  Confusing capital employed with total assets.

  ✓Do this: Capital employed = shareholders' funds + long-term debts (net assets).

  Usually costs: 1-2 marks in ROI and net asset turnover.

• ✗Mistake: Leaving prepaid expenses in quick assets

  Removing only inventory.

  ✓Do this: Quick assets exclude inventories and prepaid expenses (and advance tax).

  Usually costs: 1 mark.

• ✗Mistake: Using PAT in interest coverage or ROI

  Taking the last profit figure.

  ✓Do this: Both use profit before interest and tax.

  Usually costs: 1 mark.

• ✗Mistake: Treating GP on cost as GP on sales

  Missing the base.

  ✓Do this: 25% on cost = 20% on sales; cost = revenue ÷ 1.25.

  Usually costs: 1-2 marks.

• ✗Mistake: Giving only one net profit ratio

  Older practice.

  ✓Do this: The 2026-27 syllabus asks net profit ratio on profit before and after tax; show both if not told otherwise.

  Usually costs: 1 mark.

NCERT exercise guide: Accounting Ratios

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Accounting Ratios: previous year questions

• Asked in 2 of the 2 board papers we hold (2026 to 2026), on average 6 marks per paper; 8 questions in all, counting OR alternatives. In 4 of 4 sample papers.

Counted from the real papers on our previous year papers page, not estimated. Average marks are over every board paper we hold, with an OR pair counted once. Chapter tags are ours.

Solved board questions from Accounting Ratios

Real questions from recent papers. Try each one first, then open our step-by-step solution with marks per step.

Every Accounting Ratios question, by year

Practice questions on Accounting Ratios

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Interest coverage ratio is calculated as:
   (a) PAT ÷ interest
   (b) PBT ÷ interest
   (c) PBIT ÷ interest on long-term debts
   (d) Revenue ÷ interest

   Hint

   Profit available before paying interest.

   Answer

   (c)

2. Q2 · 1 mark · MCQBoard level

   Which of the following is excluded from quick assets?
   (a) Trade receivables
   (b) Current investments
   (c) Prepaid expenses
   (d) Cash

   Hint

   Cannot be turned into cash.

   Answer

   (c) Prepaid expenses

3. Q3 · 3 marks · Short answerBoard level

   State three limitations of accounting ratios.

   Hint

   Inherited from statements; price changes; no standard.

   Answer

   They inherit the limitations of financial statements; ignore price-level changes and qualitative factors; are meaningless without a standard of comparison (also window dressing, different accounting methods).

4. Q4 · 3 marks · Short answerBoard level

   Suppose the current ratio is 3 : 1 and working capital is ₹1,20,000. Calculate current assets and current liabilities.

   Hint

   WC = (CR − 1) × CL.

   Answer

   CL ₹60,000; CA ₹1,80,000.

5. Q5 · 3 marks · Short answerHarder board level

   Suppose revenue is ₹6,00,000, gross profit is 25% on cost, opening inventory ₹70,000 and closing inventory ₹90,000. Calculate the inventory turnover ratio.

   Hint

   Cost = revenue ÷ 1.25.

   Answer

   Cost of revenue = ₹4,80,000; average inventory = ₹80,000; turnover = 6 times.

6. Q6 · 3 marks · Short answerHarder board level

   Suppose closing inventory is ₹20,000 more than opening inventory, inventory turnover is 8 times, and cost of revenue is ₹4,00,000. Find opening and closing inventory.

   Hint

   Average = 4,00,000 ÷ 8.

   Answer

   Average = ₹50,000 → opening + closing = ₹1,00,000; closing − opening = ₹20,000 → opening ₹40,000, closing ₹60,000.

7. Q7 · 4 marks · Short answerHarder board level

   Suppose profit after tax is ₹1,40,000, tax ₹60,000, interest on debentures ₹50,000; share capital ₹8,00,000, reserves ₹2,00,000 and debentures ₹2,50,000. Calculate ROI and interest coverage.

   Hint

   Add back interest and tax.

   Answer

   PBIT = ₹2,50,000; capital employed = ₹12,50,000; ROI = 20%; interest coverage = 5 times.

8. Q8 · 3 marks · Short answerHOTS / competency

   Suppose a company's quick ratio is 1.2 : 1. State with reason the effect on it of (i) selling inventory costing ₹10,000 for ₹12,000 on credit, (ii) paying an outstanding expense, (iii) buying inventory for cash.

   Hint

   Inventory is not a quick asset.

   Answer

   (i) Increase: quick assets rise by ₹12,000 (receivables), liabilities unchanged. (ii) Increase: equal fall in quick assets and current liabilities with ratio above 1. (iii) Decrease: cash (quick) falls, inventory (not quick) rises.

9. Q9 · 1 mark · Assertion-reasonHOTS / competency

   Assertion (A): A very high current ratio is always a sign of good management.
   Reason (R): Excess current assets may indicate idle funds and poor use of resources.
   (a) Both true and R explains A (b) Both true, R does not explain A (c) A true, R false (d) A false, R true

   Hint

   Too much liquidity has a cost.

   Answer

   (d) A is false; R is true.

10. Q10 · 1 mark · MCQHarder board level

    Revenue from operations ₹10,00,000; cost of revenue ₹7,00,000; operating expenses ₹1,50,000. The operating profit ratio is:
    (a) 30%
    (b) 15%
    (c) 85%
    (d) 70%

    Hint

    100 − operating ratio.

    Answer

    (b) 15%

11. Q11 · 3 marks · Short answerHarder board level

    Suppose credit revenue is ₹7,30,000, opening trade receivables ₹80,000 and closing trade receivables ₹1,20,000 (before a provision of ₹5,000). Calculate the trade receivables turnover and average collection period.

    Hint

    Use receivables before provision.

    Answer

    Average = ₹1,00,000; turnover = 7.3 times; collection period = 365 ÷ 7.3 = 50 days.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.What is the formula for capital employed?Show answer

   Shareholders' funds + long-term debts (net assets).

2. 2.Which ratio uses net credit purchases?Show answer

   Trade payables turnover.

3. 3.What is the relation between operating ratio and operating profit ratio?Show answer

   Operating profit ratio = 100 − operating ratio.

4. 4.How is the net profit ratio asked in 2026-27?Show answer

   On profit before tax and on profit after tax.

5. 5.Name the three ratios linked to capital employed turnover.Show answer

   Net asset turnover, fixed asset turnover and working capital turnover.

6. 6.What does a debt-equity ratio of 2 : 1 mean?Show answer

   Long-term debt is twice shareholders' funds; high financial risk.

7. 7.What is the effect of buying a fixed asset for cash on the current ratio?Show answer

   It decreases (current assets fall, liabilities unchanged).

8. 8.What are quick assets?Show answer

   Current assets minus inventories and prepaid expenses (and advance tax).

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you compute current and quick ratios with prepaid expenses excluded?
• ☐Can you compute debt-equity and debt to capital employed?
• ☐Can you compute proprietary and total assets to debt ratios on the right base?
• ☐Can you compute interest coverage from PAT, tax and interest?
• ☐Can you compute inventory turnover from revenue and GP on cost?
• ☐Can you compute receivables and payables turnover and periods?
• ☐Can you compute fixed asset, net asset and working capital turnover?
• ☐Can you compute operating ratio and operating profit ratio?
• ☐Can you give NP ratio before and after tax?
• ☐Can you judge the effect of a transaction on a ratio?

Accounting Ratios: frequently asked questions