Determine the Traditional classification
a) Balance sheet or position statement ratios: balances sheet ratios deal with the relationship among two balance sheet item e.g., the ratio of current assets to current liabilities or the ratio of proprietors funds to fixed assets. Both the item must however pertain to the same balance sheet. The various balance sheet ratios have been named in the chart classifying statement ratios.
b) Profit and loss account or revenue/income statement ratio: these ratio deal with the relationship among two profit and loss accounts item e.g., the ratio of gross profit to sales of the ratio of net profit to sales. Both the item must however belong to the same profit and loss account. The various profit and loss account ratio commonly used is named in the chart classifying statement ratios.
c) Composite/mixed ratio or inter statement ratios: these ratios deal with the relation among a profit and loss account or income statement item and a balance sheet item e.g., stock turnover ratio or the chart exhibiting classification or statement ratios.