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Ratio Analysis also known as Financial Statement Analysis is one important topic in Cost Accounting and an integral part of Management Advisory Services. Most students are having difficulty in dealing with this topic because of the many formulas to remember. Given below are the key points one must remember in financial ratio analysis and is the easy way to study the financial statement analysis.

What is Ratio Analysis?
Ratio Analysis is the process of identifying company’s financial strengths and weaknesses. This is done by properly establishing relationships between financial accounts in the financial statements namely the statement of financial position and statement of comprehensive income.

What are the Methods used in Financial Statement Analysis?

• • Horizontal Analysis or Trend Analysis – Comparing figures shown in the financial statements of two or more consecutive periods.
• • Vertical Analysis or Common Size Statement – Comparing figures in the financial statements of a single period using one item of the financial statement as the base.

Sets of Financial Ratio Analysis and the ratio analysis formulas

Liquidity ratio
This is the company’s ability to pay its short term current liabilities as they fall due.

Current Ratio or working Capital Ratio – measures the number of times the current liabilities can be paid using the available current assets.

Current ratio = Current Assets/Current Liabilities

Acid test ratio or quick Asset ratio – measures immediate short-term liquidity.

Quick ratio= (Cash+Marketable Securities+Receivables)/Current Liabilities

Receivable turnover – the time required to compute one collection cycle from the time receivables are collected to the time new receivables are recorded again.

Receivable turnover = Net sales/*Average Receivables

*Average receivables = (Beg. Receivables+Ending receivables)/2

Average age of receivables = number of working days in a year/receivables turnover

Inventory turnover – number of times the inventory is replaced during the period

Inventory turnover= Cost of Goods Sold/*Average merchandise Inventory

*Average Merchandise Inventory= (Beg. Inventory+Ending Inventory)/2

Average age of Inventory= number of working days/Inventory turnover

In a Manufacturing Firm:

Raw materials turnover= Cost of raw materials used/*average raw materials inventory

Goods in process turnover= Cos of Goods Manufactured/*Average Goods in process Inventory

Finished Goods turnover = Cost of Goods Sold/*Average finished goods inventory

Trade payable Turnover = Net Purchases/ *Average Trade Payable

Average Age of Trade Payable = Number of working days/Payable turnover

Current asset turnover = (Cost of sales+**Operating expenses)/*Average current asset

*All average are solved by adding the beginning and ending then divide it by two.
**Depreciation and amortization are excluded because these expenses being mentioned do not require utilization of current assets.

The second part of the topic ratio analysis talks about the two more ratio analysis technique which is the Profitability ratio and the solvency ratio. Watch out also for more tips in solving the ratio analysis.

Meet geemiz

Geezelle Maningo - A Cebu based travel blogger and the other half of GeeMiz Travel blog. She has been traveling around the Philippines and Asia since 2010 with her husband. A casual trekker/hiker since 2017 and has been blogging since 2008. A digital marketer during workdays and a bookworm on lazy days - she co-founded Cebu Book Club.

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