Rates and Ratios

Rates and Ratios are often interpreted as same. Differentiate between the two giving at least two examples?

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vasudeo007

  • Aug 26th, 2008
 

Rates and ratios have utterly different meanings.

Rates may mean the charges per unit. While ratios mean the ratio of one variable to other.

Rates are expenses which are debited to profit and loss account while ratios are used in interpreting business efficiency. Ratios are income or expenses.

Examples of rates: Depreciation (charged at particular rate), machine operator charges (if based on output), rent and rates (if based on usage of land/plant) etc

Examples of ratios: Ratios are classified in 5 categories.
a. Liquidity
b. Leverage
c. Profitability
d. Turnover
e. valuation

Liquidity ratios: Current Asset Ratio and Quick Ratio
current asset ratio = Current Assets/Current Liabilities

Quick Ratio= Current Assets-Bank Overdraft/Current Liabilities

Leverage ratios: Leverage means risk so the ratios which measure operational or financial risk are leverage ratios

Debt Equity ratio = Total debt / Total equity

Interest coverage ratio = Interest on loan payable / net profit

etc.

Vasudeo

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