Classification
of ratios
Ratios may be classified
in the following two ways:
i.
Traditional classification
ii.
Functional classification
Traditional
classification of ratios is done on the basis of the financial statements from
which the ratios are calculated. Under the traditional classification, the
ratios are classified as: (i) Balance sheet ratios, (ii) Income statement
ratios and (iii) Inter-statement ratios.
Figure 9.1 shows some of
the examples of ratios as per traditional classification:
If both items in a ratio
are from balance sheet, it is classified as balance sheet ratio.
If the two items in a
ratio are from income statement, it is classified as income statement ratio.
If a ratio is computed
with one item from income statement and another item from balance sheet, it is
called inter-statement ratio.
Functional
classification of ratios is based on the purpose for which ratios are computed
and it is the most commonly used classification. Under the functional
classification, the ratios are classified as follows:
(i) Liquidity ratios
(ii) Long term solvency
ratios
(iii) Turnover
ratios
(iv) Profitability
ratios
Figure 9.2 shows some of
the examples of ratios as per functional classification:
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