Q.Operating ratio of a company is 63%. Its gross profit ratio is 20%. What will be its operating profit ratio ? (A) 37% (B) 23% (C) 43% (D) 83%
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Operating Ratio — A First Look
Think of a shopkeeper who earns ₹100 from sales. She spends ₹70 on buying goods, ₹15 on salaries and rent, and ₹5 on electricity. That leaves her with ₹10 as profit. Now ask: how much of every ₹100 sale is eaten up by her normal business operations? The answer is ₹90 (₹70 + ₹15 + ₹5). That 90% is her Operating Ratio.
In everyday language, the Operating Ratio tells you: "Out of every rupee of revenue from operations, how many paise go toward running the business?" The lower this ratio, the more efficient the business — because a smaller share of revenue is consumed by operating costs.
Precise Meaning (NCERT Definition)
The Operating Ratio is a profitability ratio that measures the proportion of Operating Cost to Revenue from Operations (Net Sales).
Operating Ratio=Revenue from OperationsOperating Cost×100
Where:
- Revenue from Operations = Net Sales (Gross Sales − Sales Returns)
- Operating Cost = Cost of Revenue from Operations + Operating Expenses
Cost of Revenue from Operations = Opening Inventory + Purchases + Direct Expenses − Closing Inventory
(For a trading firm, this is simply Cost of Goods Sold.)
Operating Expenses include:
- Office and administrative expenses (rent, salaries, insurance)
- Selling and distribution expenses (advertising, commission, carriage outward)
- Depreciation on fixed assets used in operations
Non-operating items are excluded. Do NOT include:
- Interest on loans (financial cost)
- Loss on sale of fixed assets
- Donations or charity
- Dividend paid
- Income tax
Why It Matters
A high Operating Ratio (say, above 90%) means the business has very thin margins from its core operations. A low ratio (say, 70%) indicates strong operational efficiency — more revenue is left as operating profit.
Managers use it to:
- Compare efficiency over time (trend analysis)
- Benchmark against competitors
- Identify where costs are rising out of control
Investors and creditors watch it because a rising Operating Ratio often signals trouble before net profit falls.
Accounting Treatment — Which Account is Debited/Credited?
The Operating Ratio is not a journal entry. It is a ratio computed from the Profit & Loss Statement. No account is debited or credited for the ratio itself.
However, the components that go into the ratio are recorded in the usual way:
| Component | Journal Entry (Debit/Credit) |
|---|---|
| Purchases | Debit Purchases A/c, Credit Cash/Supplier A/c |
| Salaries | Debit Salaries A/c, Credit Cash/Bank A/c |
| Depreciation | Debit Depreciation A/c, Credit Accumulated Depreciation A/c |
| Revenue from Operations | Debit Cash/Bank/Debtors A/c, Credit Revenue from Operations A/c |
All these expenses and revenues are then transferred to the Profit & Loss Account at the end of the year. The Operating Ratio is simply a mathematical relationship between two figures already sitting in that account.
Proforma / Format (as per NCERT) …
Part (b)Concept understanding — Financial Statement Analysis
Financial Statement Analysis – A First Look
Think of a doctor checking your health. They don't just look at your height or weight alone — they compare your current weight with last year's, check your pulse rate against normal ranges, and see if your fever is rising or falling. That's analysis: taking raw numbers and asking "what does this mean?"
Financial Statement Analysis is exactly that — but for a business. You already know the two main financial statements from Class 11: the Balance Sheet (a snapshot of what the business owns and owes on a particular date) and the Statement of Profit and Loss (the earnings story for the year). Analysis is what you do after those statements are prepared. You don't just read the numbers; you interpret them, compare them, and draw conclusions.
The Precise Meaning
As the NCERT Class 12 Accountancy textbook puts it:
Financial Statement Analysis is the process of reviewing, evaluating, and interpreting a business's financial statements to assess its performance, financial position, and future prospects.
In simpler words: you take the raw data from the Profit & Loss Account and Balance Sheet, and you turn it into useful insights — Is the company making enough profit? Can it pay its debts? Is it growing or shrinking?
Why Does It Matter?
Three big reasons:
- For owners and investors — to decide whether to invest more money or take some out.
- For lenders (banks) — to check if the business can repay loans.
- For managers — to spot problems early (e.g., rising costs, falling sales) and fix them.
Without analysis, a Balance Sheet is just a list of numbers. With analysis, it becomes a story.
The Tools of Analysis (What You Actually Do)
NCERT focuses on three main techniques:
1. Comparative Statements
You take the same statement (say, the Profit & Loss Account) for two consecutive years and put them side by side. Then you calculate the absolute change (increase or decrease in rupees) and the percentage change.
Format for a Comparative Statement of Profit & Loss:
| Particulars | Note No. | 2022–23 (₹) | 2023–24 (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|---|
| Revenue from Operations | 5,00,000 | 6,00,000 | 1,00,000 | 20% | |
| Cost of Materials Consumed | 2,00,000 | 2,50,000 | 50,000 | 25% | |
| Gross Profit | 3,00,000 | 3,50,000 | 50,000 | 16.67% |
The percentage change is calculated as: (Absolute Change ÷ Previous Year Figure) × 100. Always use the earlier year as the base.
2. Common Size Statements
Here, you express every item as a percentage of a common base. For the Profit & Loss Account, the base is Revenue from Operations (100%). For the Balance Sheet, the base is Total Assets (or Total Liabilities).
Format for a Common Size Balance Sheet (partial):
| Particulars | Note No. | Amount (₹) | Percentage of Total |
|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||
| Shareholders' Funds | 4,00,000 | 40% | |
| Non-Current Liabilities | 3,00,000 | 30% | |
| Current Liabilities | 3,00,000 | 30% | |
| Total | 10,00,000 | 100% |
This instantly tells you: 40% of the company's funding comes from owners, 60% from outsiders.
3. Ratio Analysis
This is the most powerful tool. A ratio is simply one number divided by another. NCERT classifies ratios into three groups:
- Liquidity Ratios — Can the business pay its short-term bills? (e.g., Current Ratio = Current Assets ÷ Current Liabilities)
- Solvency Ratios — Can it pay its long-term debts? (e.g., Debt-Equity Ratio = Long-term Debt ÷ Shareholders' Funds)
- Profitability Ratios — How much profit is it earning? (e.g., Gross Profit Ratio = Gross Profit ÷ Revenue from Operations × 100)
A ratio by itself means nothing. You must compare it — with the industry average, with the company's past ratios, or with a standard norm. For example, a Current Ratio of 2:1 is generally considered healthy, but a ratio of 1:1 might signal trouble.
Accounting Treatment — What Gets Debited and Credited? …
Part (a)
Operating Profit Ratio and Operating Ratio are complementary: every rupee of revenue from operations is either absorbed by operating cost or left as operating profit, so Operating Ratio + Operating Profit Ratio = 100%.
Operating Profit Ratio = 100% − Operating Ratio = 100% − 63% = 37% …
Part (a): Operating Profit Ratio = 100% − 63% = 37% — option (A). Part (b): (C) To just study the reports of the company.
Part (a)
The Operating Ratio measures operating cost as a percentage of revenue from operations, while the Operating Profit Ratio measures operating profit as a percentage of the same revenue. Since operating cost and operating profit together make up the whole of revenue from operations:
Operating Ratio + Operating Profit Ratio = 100%
Therefore:
Operating Profit Ratio = 100% − Operating Ratio = 100% − 63% = 37% …
Showing the 12 most recent of 61 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.Which of the following analyses shows duration-based classification?(a) External analysis(b) Horizontal analysis(c) Short-term analysis(d) Vertical analysis
›Reveal solutionSolution
Duration-based classification of analysis is represented by short-term (and long-term) analysis, so the answer is (c).
Financial statement analysis is classified on different bases:
Basis of classification Types Material used Internal and external analysis Modus operandi / method Horizontal and vertical analysis Duration / time span Short-term and long-term analysis - CBSE 2026Set MARCH1 markQ.Match the following :
A B a) Valuation of goodwill i) Acknowledgement of debt b) Debentures ii) Earnings per share c) Revenue from operations iii) Inflows and Outflows of cash d) Profitability Ratio iv) Average profit method e) Cash flow statement v) Sales vi) Financial position ›Reveal solutionSolution
Correct pairings: a-iv, b-i, c-v, d-ii, e-iii (option vi is a distractor).
Each term is matched to its meaning from the Karnataka 2nd PUC Accountancy syllabus:
…
- CBSE 2026Set MARCH1 markQ.State any one user of Financial Statement Analysis.
›Reveal solutionSolution
One user of financial statement analysis is the investor/shareholder (others include management, creditors, banks, employees and government).
Financial statement analysis serves several interested parties who need information to make economic decisions.
…
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: Operating ratio + __________? = 100
›Reveal solutionSolution
Operating ratio + Operating profit ratio = 100.
The operating ratio expresses operating cost (cost of revenue from operations + operating expenses) as a percentage of net sales, while the operating profit ratio expresses operating profit as a percentage of net sales. Since operating cost + operating profit together make up the whole of net sales (100%), the two ratios are compleme …
- CBSE 2026Set ANNUAL1 markMCQQ.“Higher the ratio, the more favourable it is.” This does not apply to,(a) Operating ratio(b) Net profit ratio(c) Stock Turnover ratio(d) All of these
›Reveal solutionSolution
'Higher is more favourable' does not apply to the operating ratio - option (a).
The operating ratio = (Cost of goods sold + Operating expenses) / Net sales x 100. It shows the proportion of sales absorbed by operating costs, so a lower operating ratio is favourable (it leaves a higher operating profit). Thus, unlike the net profit or stock turnover ratios (where …
- CBSE 2026Set ANNUAL1 markQ.Profit from sale of Land is ₹ 3,00,000. Will it increase operating profit? Give reason.
›Reveal solutionSolution
No, profit from sale of land will NOT increase operating profit.
Operating Profit is the profit earned from a company's normal, regular business/trading operations alone. Profit (or loss) on sale of a fixed asset such as land is a capital transaction, unrelated to the day-to-day operating activities of the business, and is non-recurring in nature. Hence, while computing Operating Profit from Net Profit, such non-operating gains are specifically EXCLUDED (deducted back out, since they were included in net profit but do not relate to operations). Including it …
- CBSE 2025Set MARCH1 markMCQQ.Which of the following analyses shows stakeholders-based classification?(a) External analysis(b) Horizontal analysis(c) Short term analysis(d) Vertical analysis
›Reveal solutionSolution
Based on the party doing the analysis (stakeholders), analysis is internal or external; the option here is external analysis. Correct option: (a).
In GSEB Class-12 Commerce Accountancy (Analysis of Financial Statements):
- On the basis of the person/party (stakeholders) analysing: Internal analysis (by management) and External analysis (by outsiders such as investors, banks, creditors). …
- CBSE 2025Set MARCH1 markMCQQ.Which of the following is not included in operating expense?(a) Loss on sale of asset(b) Loss due to fire(c) Interest paid(d) All of the above
›Reveal solutionSolution
Loss on sale of asset, loss due to fire and interest paid are all non-operating/financial items, so none is an operating expense. Correct option: (d).
In GSEB Class-12 Commerce Accountancy (Accounting Ratios):
- Operating expenses = office/administrative, selling and distribution expenses tied to normal operations. …
- CBSE 2025Set MARCH1 markQ.Are financial expenses included to determine operating ratio?
›Reveal solutionSolution
Financial expenses are excluded from the operating ratio, because the ratio measures only operating cost (cost of goods sold + operating expenses) as a percentage of net sales.
In GSEB Class-12 Commerce Accountancy (Accounting Ratios):
- Operating ratio = (Cost of goods sold + Operating expenses) ÷ Net sales × 100. …
- CBSE 2025Set ANNUAL1 markMCQQ.Parties interested in financial statements are (A) Managers (B) Financial institutions (C) Creditors (D) All of these
›Reveal solutionSolution
Financial statements serve a wide range of users — internal (management) and external (financial institutions, creditors, investors) — each needing the information for their own decisions. Hence the answer is (D) All of these.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, the parties interested in financial statements include:
- Managers: to plan, control and take operating decisions.
- Financial institutions / banks: to assess creditworthiness before lending. …
- CBSE 2025Set ANNUAL1 markMCQQ.When financial statements of two or more organisations are analysed, it is called (A) Intra-firm analysis (B) Inter-firm analysis (C) Vertical analysis (D) None of these
›Reveal solutionSolution
Comparing the financial statements of two or more separate organisations is a comparison between firms, called inter-firm analysis. Hence the answer is (B) Inter-firm analysis.
For Bihar Class-12 (BSEB Inter) commerce candidates, financial analysis can be classified by the basis of comparison:
- Intra-firm analysis: comparing the figures of the same firm over different years (within one firm).
- Inter-firm analysis: comparing the figures of two or more different firms for the same period. …
- CBSE 2025Set ANNUAL1 markMCQQ.Financial analysis is useful for (A) Investors (B) Shareholders (C) Debenture holders (D) All of them
›Reveal solutionSolution
Financial analysis helps all stakeholders assess profitability, solvency and safety of their funds — investors, shareholders and debenture holders each use it. Hence the answer is (D) All of them.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, financial statement analysis serves many users:
- Investors: to decide whether to invest, judging earning capacity and growth.
- Shareholders: to evaluate profitability, dividend prospects and the safety of their investment. …
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