Ratio Analysis – Part 4 – Activity Ratios Paper 3B: Financial Management Chapter 3 Unit I

CA B. Hari Gopal B.com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT

Learning Objectives

1. Gain Knowledge on Activity Ratios

2. Usage of various Activity Ratios

3. Preparation of various Activity Ratios

2

Introduction to Activity Ratios • Background • Types of Activity Ratios

3

Activity Ratios - Background

Activity Ratios

Meaning

Purpose

4

5

Capital Turnover ratio

6

Capital Turnover Ratio

Higher the ratio, more efficient is the utilization of owner’s and long term creditor’s funds

Formulae: Sales / Capital Employed

Indicates the firm’s ability of generating sales per Rupee of long term investment

7

Fixed Assets Turnover ratio

8

Fixed Assets Turnover Ratio

Indicate the efficient utilization of fixed assets in generating sales

Formulae: Sales / Fixed assets

9

Working Capital Turnover ratio

10

Working Capital Turnover Ratio

Formulae: Sales / Working Capital

Indicate the efficient utilization of working capital in generating sales

11

Segregation of Working Capital Turnover Ratio

Working Capital ratio is further segregated in to

Inventory Turnover ratio

Debtors Turnover ratio

Creditors Turnover ratio

12

Inventory Turnover ratio

13

Inventory Turnover Ratio

This ratio is also known as Stock Turnover ratio

Establishes the relationship between Sales during the period and average inventory held

Formulae: Sales / Average Inventory

Average Inventory = (Opening Inventory + Closing Inventory) / 2

A low ratio indicates that the inventory is not used or sold or lost or stays in warehouse for long time

14

Debtor’s Turnover ratio

15

Debtor’s Turnover Ratio

Formulae: Credit Sales / Average Receivables

Receivables pertains to credit sales. Hence, it is recommended to calculate this ratio with reference to

Credit sales alone

Formulae: Sales / Average Receivables

This ratio throws light on collection and credit policies of the firm

16

Creditor’s Turnover ratio

17

Creditor’s Turnover Ratio

A low ratio indicates liberal credit terms granted by the suppliers, whereas a high ratio shows that accounts are

settled rapidly

Formulae: Credit Purchases/ Average Accounts Payables

This ratio shows the velocity of debt payment by the firm.

18

Testing time

19

Activity Ratios - Multiple Choice Questions

20

MCQ – 1

Activity Ratios are also called as –

C. Liquidity Ratios D. Turnover Ratios

Answer: D. Turnover Ratios

A. Coverage Ratios B. Leverage Ratios

21

MCQ – 2

______ ratio indicates the firm’s ability of generating sales per rupee of long term investment

A. Capital Turnover Ratio

C. Inventory Turnover Ratio

B. Fixed Assets Turnover Ratio

D. Interest Coverage Ratios

Answer : A. Capital Turnover Ratio

22

MCQ – 3

The relationship between Sales & Capital Assets is expressed as __________ A. Working Capital Turnover Ratio

C. Fixed Assets Turnover Ratio

B. Inventory Turnover Ratio

D. Capital Turnover Ratio

Answer : C. Fixed Assets Turnover Ratio

23

MCQ – 4

_______ ratio is also known as Stock Turnover Ratio

A. Working Capital Turnover Ratio

C. Fixed Assets Turnover Ratio

B. Inventory Turnover Ratio

D. Capital Turnover Ratio

Answer : B. Inventory Turnover Ratio

24

MCQ – 5

The ratio, which indicates the speed with which the inventory is used or sold, is

A. Debtors Turnover Ratio

C. Fixed Assets Turnover Ratio

B. Inventory Turnover Ratio

D. Creditors Turnover Ratio

Answer : B. Inventory Turnover Ratio

25

MCQ – 6

______ ratio shows the velocity of debt payment by the firm

A. Debtors Turnover Ratio

C. Fixed Assets Turnover Ratio

B. Inventory Turnover Ratio

D. Creditors Turnover Ratio

Answer : D. Creditors Turnover Ratio

Lesson Summary

26

2. We had discussed various Activity ratios in detail and their usage and method of calculation.

1. We have learnt the meaning and purpose of Activity or Turnover ratios

What Next ……

27

Follow the below Presentations

Ratio Analysis Part 1 – Overview

Ratio Analysis Part 2 - Liquidity Ratios

Ratio Analysis Part 3 - Leverage Ratios

Ratio Analysis Part 5 - Profitability Ratios

28

Thank You

29