Corporate Accounting and Financial Management · Financial Statement Analysis

Preparing Financial Statements from Ratios

Updated 11 October 2026 · Fact-checked

Preparing financial statements from ratios means working backwards. You are given a few figures and several ratios, and you use each ratio as an equation to find one missing item. Start with the figure that is given directly, then move step by step until the balance sheet and income statement are complete and tally.

Understand Preparing Financial Statements from Ratios

Normally you take a balance sheet and compute ratios from it. In these questions you do the reverse. The ratios are clues, and each one links two or more items. If you know one side of the link, you can find the other.

Think of each ratio as a small equation. Current ratio = Current assets ÷ Current liabilities. If current liabilities are ₹4,00,000 and the current ratio is 2.5, then current assets are ₹10,00,000. One ratio, one unknown, one answer.

The skill is choosing the right order. Some items are known directly, such as share capital, sales or net worth. Start there. Each answer unlocks the next ratio. Questions are designed so that a clear chain exists from the given figure to every other item.

You must also know the base of each ratio. Stock turnover may be on cost of goods sold or on sales. Debtors turnover may use credit sales or total sales. Gross profit ratio is always on sales. If the question does not say, state your assumption in the answer. ICSI examiners give credit for clear assumptions.

Finally, check that the balance sheet tallies. Total assets must equal total capital and liabilities. If it does not, one of your steps has an error.

Key rules to remember

Current ratio: Current assets ÷ Current liabilities; Use it to find current assets once current liabilities are known, or the reverse.
Quick ratio: (Current assets − Inventory) ÷ Current liabilities; Some questions also exclude prepaid expenses. Follow the definition given in the question.
Gross profit ratio: Gross profit ÷ Sales × 100; Cost of goods sold = Sales − Gross profit.
Net profit ratio: Net profit ÷ Sales × 100; Check whether the question means profit before or after tax.
Stock turnover ratio: Cost of goods sold ÷ Average stock; If only closing stock is given, use it as the stock figure. Stock = COGS ÷ ratio.
Debtors turnover and collection period: Credit sales ÷ Debtors; Collection period = Debtors ÷ Credit sales × 365; Use 365 days unless the question says 360.
Creditors turnover and payment period: Credit purchases ÷ Creditors; Payment period = Creditors ÷ Credit purchases × 365; Credit purchases = COGS + Closing stock − Opening stock, if no other data is given.
Fixed assets turnover: Sales ÷ Net fixed assets; Gives fixed assets when sales are known.
Debt-equity ratio: Long-term debt ÷ Shareholders' funds; Check whether the question defines debt as total outside liabilities.
Proprietary ratio: Shareholders' funds ÷ Total assets; Total assets = Shareholders' funds ÷ ratio.
Return on capital employed: EBIT ÷ Capital employed × 100; Capital employed = Shareholders' funds + Long-term debt.
Balance sheet identity: Total assets = Shareholders' funds + Long-term liabilities + Current liabilities; Use this as the final check, and to find a balancing figure.

How to solve Preparing Financial Statements from Ratios questions

Use this order for any question where figures must be derived from ratios.

1Read the whole question and list every given figure and every ratio. Note the base of each ratio, such as sales, cost of sales or credit sales.
2Write the blank format of the balance sheet and the trading and profit and loss account. Fill in the items that are given directly.
3Find the first ratio that has only one unknown. Solve it. Common starting points are sales, net worth or current liabilities.
4Work down the chain. After each answer, scan the ratio list again for the next ratio with one unknown. Show each calculation in one line.
5Derive the balancing figures. Use the balance sheet identity for total assets, and subtraction for items such as cash, reserves or other current assets.
6State any assumption, such as 365 days or all sales being credit sales, before or beside the working.
7Complete the statements, tally the totals, and recheck every ratio against your final figures.
8Write the final statements neatly with working notes numbered so the examiner can follow your logic.

Quickest way: Anchor and chain method

When to use it: Use this when time is short and the question has six or more ratios. It avoids rereading the question again and again.

Underline the one figure that is given in rupees and is not a ratio. This is your anchor.
Beside each ratio, write the two items it connects. For example, write 'Debt-equity: debt, equity'.
Start at the anchor and tick off ratios in order. Each ratio should give exactly one new figure.
Keep a running list of derived figures on the side. Do not redo any calculation.
Total the assets and the liabilities side only once at the end. If they differ, recheck the last two steps first.

Common mistakes in Preparing Financial Statements from Ratios

Using sales as the base for stock turnover when the question means cost of goods sold
Many students remember every ratio as 'something ÷ sales'.
Fix: Stock turnover is on cost of goods sold unless the question says otherwise. Write the formula before you use it.
Treating the current ratio as the quick ratio, or forgetting to deduct stock
Both ratios use current liabilities, so they look alike.
Fix: If the current ratio is given, use it for current assets directly. If only the quick ratio is given, current assets = quick assets + stock (+ prepaid expenses if the definition excludes them).
Confusing gross profit with net profit when finding cost of sales
Both are called 'profit ratio' in the question.
Fix: Cost of goods sold = Sales − Gross profit. Net profit is used only after you build the profit and loss account.
Taking debt-equity as debt ÷ total capital
Students mix it with the capital employed idea.
Fix: Debt-equity = Debt ÷ Equity. If debt is half of equity, the ratio is 0.5 and debt is half of shareholders' funds.
Not checking that the balance sheet tallies
Time pressure makes students skip the last step.
Fix: Always total both sides. A mismatch tells you an earlier derived figure is wrong, so recheck before you write the final answer.
Using 360 days in one step and 365 in another
Students copy habits from textbook examples.
Fix: Use the number of days given in the question. If none is given, use 365 throughout and state it.

Worked examples

Example 1

A company has the following information. Sales are ₹20,00,000. Gross profit ratio is 25%. Stock turnover ratio is 5 times (on cost of goods sold, using closing stock). Current ratio is 2. Quick ratio is 1.2. Current liabilities are ₹4,00,000. Quick assets exclude both stock and prepaid expenses, and current assets consist only of quick assets, stock and prepaid expenses. Find: (a) cost of goods sold, (b) closing stock, (c) current assets, (d) quick assets, and (e) prepaid expenses.

Show the solution

Gross profit = 25% of ₹20,00,000 = ₹5,00,000.
Cost of goods sold = ₹20,00,000 − ₹5,00,000 = ₹15,00,000.
Closing stock = COGS ÷ Stock turnover = ₹15,00,000 ÷ 5 = ₹3,00,000.
Current assets = Current ratio × Current liabilities = 2 × ₹4,00,000 = ₹8,00,000.
Quick assets = Quick ratio × Current liabilities = 1.2 × ₹4,00,000 = ₹4,80,000.
Check: Current assets − Stock = ₹8,00,000 − ₹3,00,000 = ₹5,00,000. This differs from quick assets of ₹4,80,000 by ₹20,000. Since quick assets exclude both stock and prepaid expenses, this difference is the prepaid expenses.
So prepaid expenses = ₹5,00,000 − ₹4,80,000 = ₹20,000.

Answer: Cost of goods sold ₹15,00,000; closing stock ₹3,00,000; current assets ₹8,00,000; quick assets ₹4,80,000; prepaid expenses ₹20,000 (because quick assets exclude stock and prepaid expenses, as stated in the question).

Example 2

Prepare a balance sheet from the following. Share capital is ₹10,00,000 and there are no reserves. Debt-equity ratio is 0.6 (long-term debt to shareholders' funds). Current ratio is 1.5. Current liabilities are ₹4,00,000. Fixed assets turnover ratio is 2 times on sales of ₹28,00,000. Stock turnover on sales is 8 times. Assume all other current assets are cash.

Show the solution

Shareholders' funds = ₹10,00,000 (share capital only).
Long-term debt = 0.6 × ₹10,00,000 = ₹6,00,000.
Total liabilities side = ₹10,00,000 + ₹6,00,000 + ₹4,00,000 = ₹20,00,000. So total assets = ₹20,00,000.
Net fixed assets = Sales ÷ 2 = ₹28,00,000 ÷ 2 = ₹14,00,000.
Current assets = 1.5 × ₹4,00,000 = ₹6,00,000.
Check: ₹14,00,000 + ₹6,00,000 = ₹20,00,000, which equals total assets, so the data is consistent.
Stock = Sales ÷ 8 = ₹28,00,000 ÷ 8 = ₹3,50,000.
Cash = Current assets − Stock = ₹6,00,000 − ₹3,50,000 = ₹2,50,000.

Answer: Liabilities: Share capital ₹10,00,000; Long-term debt ₹6,00,000; Current liabilities ₹4,00,000; Total ₹20,00,000. Assets: Net fixed assets ₹14,00,000; Stock ₹3,50,000; Cash ₹2,50,000; Total ₹20,00,000.

Exam tips

Draw the blank balance sheet first and fill it as you go. Examiners award marks for correct individual figures even if one later step is wrong.
Write the formula before each calculation. A correct formula with an arithmetic slip still earns method marks.
State assumptions clearly, such as 365 days, all sales on credit, or closing stock used for turnover. Do this before the working.
When the data seems inconsistent, do not panic. Use a balancing figure, name it, and mention the assumption in one line.
Practise reading ratio wording. Phrases like 'on credit sales' or 'on cost of goods sold' decide the base and are where most marks are lost.

Practice questions from Financial Statement Analysis

Preparing Financial Statements from Ratios in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Preparing Financial Statements from Ratios: frequently asked questions

How do I prepare a balance sheet from given ratios?

List the given figures and ratios, then start with the ratio that has only one unknown. Each answer unlocks the next ratio. Finish by using the balance sheet identity for the balancing figure and check that both sides tally.

Which figure should I find first?

Find the one that connects to a rupee amount already given. This is often sales, share capital or current liabilities. Sales gives cost of sales, which gives stock and debtors.

What if the question does not state the base of a ratio?

Use the standard base. Stock turnover uses cost of goods sold, gross profit ratio uses sales, and debtors turnover uses credit sales. Write your assumption clearly in the answer.

What if my balance sheet does not tally?

Recheck each derived figure against its ratio, starting with the last one you found. If the question data truly leaves a gap, treat it as a balancing figure and state the assumption.