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✦ FREE LEARNING — CLASS 11 & 12 — CBSE · PSEB — ACCOUNTS · ECONOMICS · BST ✦
Activity Ratios are used to know the performance of the resources of the business. It covers four types of ratios which are discussed in this article.
Activity ratio is used to check out the way of the usage of resources of the enterprises. It gets to know to related parties the actual performance of the business. These are also known as performance or turnover ratio.
Activity Ratios are needed to check out the actual usage of the resources of the business. These all ratios calculated in the form times. But these all are benefited differently some of them if low then these are better or some of them when these are high in time then these are better for the business. These are explained as under:
To Check out the liquidity of the business we can use the following three formulas:
The Inventory Turnover Ratio is used to know the relationship between the cost of goods sold and average inventory carries during the year of the business.
| Inventory Turnover Ratio | = | Cost of goods sold (cost of Revenue from Operation) |
| Average Inventory |
Now the question is how to calculate the cost of goods sold:
Total Revenue from an operation - Gross Profit
or
Total Revenue from an operation + Gross Loss
Or
Opening Inventory + Net Purchase + Direct Expenses - Closing Inventory
Now, the question is how to calculate the Average Inventory:
| Opening Inventory | + | Closing Inventory |
| 2 | ||
The Inventory Turnover Ratio is used to know the relationship between the Net Credit Sales and Average Trade Receivables.
| Trade Receivable Turnover Ratio | = | Net Credit Revenue from Operations |
| Average Trade Receivables |
Now the question is how to calculate the Net Credit Revenue from Operations
Credit Revenue from Operations - Credit Sale Returns
Now, the question is how to calculate the Average Inventory:
| Opening Trade Receivables | + | Closing Trade Receivables |
| 2 | ||
Trade Receivables Includes: - Sundry Debtors and Bills Receivables
| = | Numbers of Months(Days) in a year |
| Trade Receivable Turnover Ratio |
The Inventory Turnover Ratio is used to know the relationship between the Net Credit Purchases and Average Trade Payables.
| Trade Payables Turnover Ratio | = | Net Credit Purchases |
| Average Trade Payables |
Now the question is how to calculate the Net Credit Purchases
Credit Purchases - Credit Purchases Returns
Now, the question is how to calculate the Average Inventory:
| Opening Trade Payables | + | Closing Trade Payables |
| 2 | ||
| = | Numbers of Months(Days) in a year |
| Trade Payable Turnover Ratio |
The Working Capital Turnover Ratio is used to know the relationship between the working capital and total Revenue from an operation.
| Working Capital Turnover Ratio | = | Revenue from Operations |
| Working Capital |
OR
| Working Capital Turnover Ratio | = | Cost of Revenue from Operations |
| Working Capital |
We will get ratio in times.
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Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
This guide covers "What are Activity Ratios - Formulas and Examples", focusing on key definitions, step-by-step concepts, applications, and revision guidelines relevant to Advanced Financial Accounting.
It is primarily curated for Class 11 and Class 12 high school commerce, accounting, and economics students, as well as aspirants preparing for board exams or CA Foundation.
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