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What are accounting ratios?

Accounting ratios (also known as financial ratios) are considered to be part of financial statement analysis. Accounting ratios usually relate one financial statement amount to another. For example, the inventory turnover ratio divides a company's cost of goods sold for a recent year by the cost of its inventory on hand during that year.

For a company with current assets of $300,000 and current liabilities of $150,000 its current ratio is $300,000 to $150,000, or 2 to 1, or 2:1. This ratio of 2:1 can then be compared to other companies in its industry regardless of size or it can be compared to the company's ratio from an earlier year.

Other examples of accounting ratios include:

To assist you in computing and understanding accounting ratios, we developed 24 forms that are available as part of AccountingCoach PRO.

You can also read our Explanation of Financial Ratios.