It is indeed a double-edged sword which requires a great deal of understanding and sensitivity of the management process rather than mechanical financial skill. It has rightly been observed, "The ratio analysis is an aid to management in taking correct decisions, but as a mechanical substitute for thinking and judgment, it is worse than useless. The ratios, if discriminately calculated and wisely interpreted, can be a useful tool of financial analysis.**! The computation of different accounting ratios and the analysis of the financial statements on their basis can be very well understood with the help of the illustrations given in the following pages. 5. Indicate the important accounting ratios that would be uscu wy w (1) A long-term creditor interested in determining whether his claims is adequately secured: (in) A Bank who has been approached by a company for short-term loan/overdraft; and (it) A shareholder who is examining his portfolio and who is to decide whether he should hold or sell his shares in a company 11.11 ani -AVD Illustration 11.21. Following is the Profit and Loss Account and Balance Sheet of Jai Hind Ltd. Redraft them for the purpose of analysis and calculate the following ratios: (1) Gross Profit Ratio; (ii) Overall Profitability Ratio: (iii) Current Ratio; (iv) Debt-equity Ratio: (v) Stock Turnover Ratio; (vi) Liquidity Ratio. 59 j59 PROFIT AND LOSS ACCOUNT Particulars 1,00.000 Sales 50,000 Closing Stock of Raw Materials 3,00.000 Closing Stock of Finished Goods 2.00.000 Profit on Sale of Shares 1,00,000 Particulars Opening Stock of Finished Goods Opening Stock of Raw Materials Purchase of Raw Materials Direct Wages Manufacturing Expenses Administration Expenses Selling and Distribution Expenses Loss on Sale of Plant Interest on Debentures Net Profit 10,00.000 1.50,000 1,00,000 50.000 50,000 50,000 55,000 10,000 3.85.000 13,00.000 13,00.000 BALANCE SHEET Liabilities Share Capital: Equity Share Capital Preference Share Capital Reserves Debentures Sundry Creditors Bills Payable 1.00.000 1,00.000 1,00,000 2.00.000 1.00.000 50,000 6,50.000 Assets Fixed Assets Stock of Raw Materials Stock of Finished Goods Sundry Debtors Bank balance 2.50,000 1.50,000 1,00,000 1,00,000 50.000 6,50.000