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Because these ratios indicate the efficiency with which the assets
of the firm are managed/utilized.
Activity / Turnover Ratios essentially evaluate the operational efficiency of any business by
measuring the rate of utilization of various assets. These ratios are directly linked with the
Life blood of a business i.e. Revenue. The efficiency measured in terms of generation of
revenue but the respective assets. These ratios are also known as performance/efficiency
Ratios.
Asset such as machinery, raw materials, debtors etc are introduced to a firm to generate
sales for the firm and there but generate profits. These turnover ratios indicate the speed
at which these assets are converted into sales. For example, inventory turnover ratio
indicates the number of times the inventory is converted into sales in a year.
The ratio gives the average credit period enjoyed from the creditors.
Total Asset Turnover Ratio is the ratio of sales total assets. The ratio
indicated the extent that the investment in total assets results in sales.
Fixed Asset turnover ratio is the ratio of sales to fixed assets. This ratio
indicates the ability of the company’s management to put the fixed assets to work to
generate sales.
Solution:
TRADING ACCOUNT
PARTICULARS AMOUNT AMOUNT PARTICULARS AMOUNT AMOUNT
3,25,000 3,25,000
Gross Profit Ratio = (Gross Profit / Sales) * 100
= (1,15,000/2,75,000) * 100
= 41.82%
OPERATING RATIO
RS
= ( (5,00,000+50,000+75,000)/75,000 ) * 100
= (6,25,000/7,50,00) * 100
= 83.33 %