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CBSE Questions for Class 12 Commerce Accountancy Accounting Ratios Quiz 12 - MCQExams.com
CBSE
Class 12 Commerce Accountancy
Accounting Ratios
Quiz 12
Securitization is related to conversion of _____________.
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0%
Receivables
0%
Stock
0%
Investments
0%
Creditors
Explanation
Accounts receivables represents the amount due from the customers to whom organization has done sales. Recovery of money from receivables can take a larger time which depends on the credit policy.
Organization can convert the receivable in cash by doing the securitization. In such case, receivables are converted in to securities and sold to an investor who will provide immediate cash to the organization.
Securitization allows company to get immediate cash rather than waiting for payment from the customers. By this organization can pass the risk of non payment to investors.
For a constant EBIT, if the debt level is further increased then ____________.
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0%
EPS will always increase
0%
EPS may increase
0%
EPS will never increase
0%
None of the above
Explanation
For a constant EBIT, if the debt level is further increased then EPS may increase but only if the the rate of interest of debenture decreases simultaneously.
Formula for calculation of EPS = [(X-I) (1-T)- PD] /N
,
Where,
X= EBIT
I1= Fixed Interest
T= Tax rate
PD= Preference dividend if any
N1 = Number of shares
s.100
Alternative 1 : EBIT is $$Rs. 200000$$
, amount of debenture is $$Rs.500000$$, interest on the same is @ $$ 12$$ % and the number of equity share is $$ 10000$$ and the tax rate is $$50$$%
Alternative 2 : EBIT is $$Rs. 200000$$
, amount of debenture is $$Rs.600000$$, interest on the same is @ $$ 8$$ % and the number of equity share is $$ 10000$$ and the tax rate is $$50$$%
So now,
Alternative 1 EPS = [($$200000-60000$$) ($$1$$-$$0.5$$) -$$0$$]/ $$10000$$ = $$Rs.7$$
Rs.12
Alternative 2 EPS =
[($$200000-48000$$) ($$1$$-$$0.5$$) -$$0$$]/ $$10000$$ = $$Rs.7.6$$
Given below are two statements, identify the correctness of the following:
I. Activity ratios show where the company is going.
II. Balance sheet ratios show how the company stands.
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0%
I is correct, but II is wrong
0%
Both I and II are correct
0%
I is wrong, but II is correct
0%
Both I and II are wrong
Explanation
Activity ratios are used to assess the efficiency with which the firm manages and utilises its assets. These ratios usually compare the revenue growth with respect to the asset deployed giving an idea of where the company is headed, towards growth or decline.
Balance sheet ratios are those in which the variables used are those which are present in the balance sheet. A balance sheet is a statement which shows a picture of how the company stands as on a particular date and so the balance sheet ratios carry out the same task.
Which of the following is correct?
i.Liquidity ratios measure long term solvency of a concern.
ii.Inventory is a part of current assets.
iii.Rule of thumb for acid test ratio is 1 : 1.
iv.The amount of gross assets is equal to net capital employed.
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0%
(i), (ii) and (iv)
0%
(ii), (iii) and (iv)
0%
(i), (ii), (iii) and (iv)
0%
None of the above
Explanation
The liquidity ratios measure the ability of a concern to pay off its short term obligations.
Inventory is a part of current assets and not liquid assets.
Rule of thumb for acid test ratio is $$1:1$$
The amount of gross assets minus the current liabilities is equal to net capital employed.
If debt is
R
s
220
Rs.220
, and equity is Rs 300 , then the gearing ratio is
______.
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0%
$$20$$%
0%
$$73.33$$%
0%
$$50$$%
0%
$$30$$%
Explanation
Capital gearing ratio = Fixed Interest bearing Capital/ Equity funds or Networth
= $$220/300$$
= $$73.33$$ %
Consider the following :
i)Basic defensive and interval ratio
ii)Current ratio
iii)Superquick ratio
iv)Quick ratio
Arrange these ratios in sequence to reflect the liquidity in descending order.
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0%
(ii), (iv), (iii) and (i)
0%
(i), (ii), (iv) and (iii)
0%
(iv), (ii), (iii) and (i)
0%
(iii), (iv),(i) and (ii)
Explanation
Current ratio = Current assets/Current liabilities
Quick ratio = [Current assets minus inventory]/ Current liabilities
Super quick ratio =
[Cash + Marketable securities]/ Current liabilities
Basic defensive and interval ratio = [
Cash + Marketable securities + Trade receivables] / Average daily expenditures
As we move from ratio number $$1$$ to ratio number $$4$$ we are calculating the liquidity on more and more conservative basis as it can be seen that as we move from ratios $$1$$ to $$3$$ we are considering few and fewer assets and in the $$4$$th ratio we are considering average daily expenditures instead of the whole of current liabilities as this ratio helps us to understand that for how many days can the company survive without having to liquidate its long term assets.
The Revenue Profits of a Subsidiary company S Ltd. is $$Rs.1,20,000$$. Ratio between holding and minority is $$3 : 1$$. What is share of revenue profits of Holding Company H. Ltd.?
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0%
$$Rs. 30,000$$
0%
$$Rs. 60,000$$
0%
$$Rs. 90,000$$
0%
$$Rs. 45,000$$
Explanation
The revenue profits of the subsidiary company is $$Rs.120000$$ and the Holding : Minority ratio is $$3 : 1$$ so the share of revenue profits of the Holding Company H. Ltd. is calculated as follows: $$Rs. 120000$$ x $$3/4 = Rs. 90000$$.
To test the liquidity of a concern, which of the following ratios are useful?
I. Acid test ratio
II. Capital turnover ratio
III. Bad debts to sales ratio
IV. Inventory turnover ratio
Select the correct answer using the codes given.
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0%
I and III
0%
I and IV
0%
II and IV
0%
II and III
Explanation
The ability of the business to pay its stakeholders when it is due is known as liquidity. And the ratios used to calculate are known as liquidity ratios and are essentially short term in nature. The following are the type of liquidity ratios:
Current ratio
Quick ratio or Acid test ratio
Cash Ratio or Absolute liquidity ratio
Net working capital ratio ( This can be further segregated into Inventory turnover ratio, Debtors turnover ratio and Creditors turnover ratio. So these $$3$$ ratios can also be interpreted as liquidity ratios).
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0%
Both Assertion and Reason are correct and Reason is the correct explanation for Assertion.
0%
Both Assertion and Reason are correct but Reason is not the correct explanation for Assertion.
0%
Assertion is correct but Reason is incorrect.
0%
Both Assertion and Reason are incorrect.
Explanation
Let us understand the actual use of Current Ratio.
Current Ratio = Current Asset (C.A)/Current Liabilities (C.L)
Scenario 1: C.A = $$Rs. 100000$$ and C.L = $$Rs.50000$$
Current Ratio = $$100000/50000$$ = $$2$$
Scenario 2: C.A = $$Rs. 80000$$ and C.L = $$Rs.50000$$
Current Ratio = $$80000/50000$$ = $$1.6$$
Now, what we can interpret from above is that in Scenario $$1$$ the current assets of the same are sufficient enough to pay $$2$$ times the amount of current liabilities, whereas in Scenario $$2$$ it is only $$1.6$$ times.
So from the above examples it is clear that the Current ratio is used to monitor the ability of the firm to meet its obligations and not in inventory valuation.
Overall Profitability ratio is calculated by ___________.
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0%
$$\dfrac {\text {Capital employed}}{\text {Operating profit}}\times 100$$
0%
$$\dfrac {\text {Operating profit}}{\text {Capital employed}}\times 100$$
0%
$$\dfrac {\text {Net operating profit before interest and tax}}{\text {Total capital employed}}$$
0%
$$\dfrac {\text {Capital employed}}{\text {Operating profit after interest and tax}}$$
Explanation
Overall profitability ratio is also called as return on investment. It indicates the percentage of return on the total capital employed in the business. It is also called as return on investments, return on capital employed. It is calculated by dividing capital employed by operating profit. It is calculated as a percentage.
Which one of the following is correct?
i) A ratio is an arithmetical relationship of one number to another number.
ii) Quick ratio is also known as acid test ratio.
iii) Rule of thumb for current ratio is $$2:1$$.
iv) Debt equity ratio is the relationship between outsiders fund and shareholders fund.
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0%
All (i), (ii), (iii) and (iv) are correct.
0%
Only (i), (ii) and (iii) are correct.
0%
Only (ii), (iii) and (iv) are correct.
0%
Only (ii) and (iii) are correct.
Explanation
A ratio is an arithmetical relationship of one number to another number. in terms of accountancy, an accountancy ratio would be the relationship between two figures obtained from the account statement. For example Net profit ratio is the ratio of Net profit to the Net sales made.
Quick ratio is also known as acid test ratio because it measures the ability of the company to meet unexpected liabilities without having to depend on the sale of inventories.
The rule of thumb for current ratio is $$2:1$$, this is not a constant rule but rather relative. Whether or not the current ratio is satisfactory completely depends on the nature of business, current assets and current liabilities
Debt equity ratio is calculated as Total outside liabilities/ Shareholders equity and so it can be said that it is the relationship between outsiders fund and shareholders funds.
When opening stock is $$Rs.50,000$$, closing stock is $$Rs 60,000$$ and the cost of goods sold is $$Rs.2,20,000$$, the stock turnover ratio is
_________.
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0%
2 times
0%
3 times
0%
4 times
0%
5 times
Explanation
Stock turnover ratio = Cost of goods sold/ average inventory
Cost of goods sold = $$Rs.2,20,000$$
Average Inventory= [Opening inventory + Closing Inventory]/$$2$$
= [$$50000 + 60000$$] / $$2$$
= $$Rs. 55000$$
Now,
Stock turnover ratio = $$220000/ 55000$$
= $$4$$ times.
If stock turnover ratio = $$6$$ times; Average stock = $$Rs.8,000$$;
Selling price = $$25$$% above cost.
What is the amount of gross profit?
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0%
$$Rs.2,000$$
0%
$$Rs.4,000$$
0%
$$Rs.10,000$$
0%
$$Rs.12,000$$
Explanation
Stock turnover ratio = Cost of goods sold/Average inventory
$$6$$ = Cost of goods sold/ $$8000$$
Cost of goods sold = $$Rs. 48000$$
Selling price = $$25$$ % above cost
Therefore Gross profit = Cost of goods sold x $$25$$%
= $$ 48000$$ x $$25$$%
= $$Rs. 12000$$
'X' Ltd. has a liquid ratio of 2:If its stock is Rs. 40,000 and its current liabilities are of Rs. 1 Lakh, What will be the current ratio________.
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0%
1.4 times
0%
2.4times
0%
1.2 times
0%
3.4 times
Explanation
Liquid Ratio = [Current Assets minus Stock]/ Current Liabilities
2 = [Current Assets - $$40000$$]/ $$100000$$
$$200000$$ = Current Assets - $$40000$$
Therefore Current Assets = $$Rs.240000$$
Now,
Current Ratio = Current assets/Current liabilities
= $$240000/100000$$
= $$2.4$$ times
Calculate debt equity ratio, from the following information:
Total external liabilities = Rs. 5,00,000
Balance sheet total = Rs. 10,10,000
Current liabilities = Rs. 1,00,000
Fictitious assets = Rs. 10,000
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0%
5:4
0%
6:5
0%
5:6
0%
4:5
Explanation
Long-term debt = Total external liabilities - Current liabilities
= Rs. 5,00,000 - Rs. 1,00,000
= Rs. 4,00,000
Total non-fictitious assets = Total Assets - Fictitious assets
= Rs. 10,10,000 - Rs. 10,000
= Rs. 10,00,000
Shareholders funds = Non-fictitious total assets - Total liabilities
= Rs. 10,00,000 - Rs. 5,00,000
= Rs. 5,00,000
Debt equity ratio = Rs. 4,00,000/Rs. 5,00,000
= 4:5
Calculate debt ratio, from the following information:
Total external liabilities = Rs. 5,00,000
Balance sheet total = Rs. 10,10,000
Current liabilities = Rs. 1,00,000
Fictitious assets = Rs. 10,000
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0%
0.444
0%
0.488
0%
0.499
0%
0.469
Explanation
Long-term debt = Total external liabilities - Current liabilities
= Rs. 5,00,000 - Rs. 1,00,000
= Rs. 4,00,000
Total non-fictitious assets = Total assets - Fictitious assets
= Rs. 10,10,000 - Rs. 10,000
= Rs. 10,00,000
Net assets = Total non-fictitious assets - Current liabilities
= Rs. 10,00,000 - Rs. 1,00,000
= Rs. 9,00,000
Debt ratio = Debt/Net assets
= Rs. 4,00,000/Rs. 9,00,000
= 0.444
When P/V ratio is 50% and Margin of Safety ratio is 20%, the profit on sales is ____________.
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0%
40%
0%
30%
0%
20%
0%
10%
Explanation
Profit Volume ratio is proportion of contribution to sales which signifies the percentage of contribution before considering the fixed cost.
P/V Ratio= Contribution/sales*100
Margin of safety is define as the sales over the break even sales.
Margin of Safety Ratio= Margin of Safety/Actual Sales*100
Profit ratio =Margin of Safety Ratio*P/V Ratio
=50%*20%
=10%.
Long-term solvency is indicated by
.
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0%
Liquidity ratio
0%
Debt-equity ratio
0%
Interest coverage ratio
0%
Return on capital employed
0%
Both (B) and (D) above
Explanation
Debt-equity ratio = Long term debts / Shareholders funds
Debt-equity ratio indicates the long-term solvency of a firm by analyzing the relative proportions of capital contribution by creditors and shareholders.
Scenario $$1$$ Long term debts = $$Rs.150000$$ and Shareholders funds = $$Rs.125000$$
Scenario $$2$$ Long term debts = $$Rs.150000$$ and Shareholders funds = $$Rs.100000$$
Debt-equity ratio :
Scenario 1 = $$150000/125000$$ = $$1.2 : 1$$
Scenario 2 = $$150000/100000$$ = $$1.5 : 1$$
So, in scenario 1 the debt-equity ratio is $$1.2 : 1$$ which means that the outside liabilities are only 0.2 times more than the shareholders funds whereas in scenario 2 the debt-equity ratio is $$1.5 : 1 $$ which means that the outside liabilities are 0.5 times more than the shareholders funds.
On analyzing scenario 1 and 2 we can see that the protection to the debt holders is more in scenario 1 than in scenario 2.
Improvement of profit-volume ratio can be done by________.
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0%
Increasing selling price
0%
Altering sales mixture
0%
Reducing variable cost
0%
All of the above
Explanation
Profit-volume ratio(P/V ratio) = Contribution/Sales
Contribution is the excess of sales over the variable cost.
If the selling price is increased and the variable cost is constant then, the contribution would be increase and so would the P/V ratio.
If the sales mixture is altered and the product with high contribution is sold more then the total contribution would increase and so would the P/V ratio.
If the selling price remains constant but the variable cost is reduced then the contribution would increase and so would the P/V ratio.
Calculate the creditor's turnover ratio from the following data:
Credit purchase during the year = $$Rs. 12,00,000$$
(Creditor + bills payables) in the beginning of year = $$Rs. 4,00,000$$
(Creditor + bills parables) at the end of year = $$Rs. 2,00,000$$
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0%
6 times
0%
4 times
0%
2 times
0%
5 times
Explanation
Average accounts payable = (Rs. 4,00,000 + Rs. 2,00,000)/2
= Rs. 3,00,000
Credit turnover ratio = Net credit purchases/Average accounts payable
= Rs. 12,00,000/Rs. 3,00,000
= 4 Times
Higher the ratio, the more favorable it is. This does not apply to__________.
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0%
Operating ratio
0%
Operating profit ratio
0%
Stock turnover ratio
0%
ROI
Explanation
Operating profit ratio is the ratio between operating profit and the net sales .Higher the ratio, higher would be the operating profit and it would be more favorable.
Stock turnover ratio is the relationship between the COGS and the average inventory. It indicates how fast the inventory is sold or used. A high ratio is favorable from the point of view of liquidity and vice versa.
ROI shows the returns made from the funds invested by the owners. A higher ratio is always preferred in case of returns.
Operating ratio is the ratio of operating expenses to the net sales. Higher this ratio higher would be the operating expense and lower the operating profit. So a lower ratio is more favorable in terms of business.
Information given is as follows:
Fixed Long term Loans Rs $$3,50,000$$
Fixed Assets Rs $$12,00,000$$
Share capital Rs $$8,00,000$$
Current Liabilities Rs $$2,50,000$$
Current Assets Rs $$4,00,000$$
Solvency Ratio is
.
Report Question
0%
$$0.5 : 1$$
0%
$$5 : 12$$
0%
$$5 : 16$$
0%
$$16 : 17$$
Explanation
Solvency Ratio = Proprietary fund / Total asset
= Share capital / [Fixed asset + Current asset]
= $$800000/[1200000 + 400000]$$
= $$0.5 : 1 $$
Given information is as follows:
Total assets turnover = $$3$$ times
Net profit margin = $$10\%$$
Total assets = $$Rs.2,00,000$$
The Net profit is
.
Report Question
0%
$$Rs.20,000$$
0%
$$Rs.30,000$$
0%
$$Rs.50,000$$
0%
$$Rs.60,000$$
Explanation
Total assets turnover ratio = Sales / Total assets
$$3$$ = Sales / $$200000$$
Therefore, Sales = $$Rs. 600000$$
Net profit margin = [Net profit / Sales] x $$100$$
$$10/100$$ = [Net profit / $$600000$$] x $$100$$
Therfore Net profit = $$Rs. 60000$$
Which of the following items is not taken into account when computing quick ratio?
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0%
Cash.
0%
Bank Balance.
0%
Bank Overdraft.
0%
Sundry Creditors.
Explanation
Quick Ratio = [Current assets minus Inventory and prepaid expenses] /
[Current liabilities minus Bank overdraft/ Cash credit]
Here inventory is considered as less secure than other current assets and prepaid expenses as the name suggests are paid in advance for a reason, bank overdraft and cash credit are usually secured against inventory and so all these $$4$$ items are excluded while calculating quick ratio.
Which of the following ratios indicates a favorable position, if it is high?
Report Question
0%
Inventory Turnover ratio
0%
Capital Turnover ratio
0%
ROI
0%
All the above
Explanation
Stock turnover ratio is the relationship between the COGS and the average inventory. It indicates how fast the inventory is sold or used. A high ratio is favorable from the point of view of liquidity and vice versa.
Capital turnover ratio calculates the firms ability to generate sales with respect to the long term investments. The higher the ratio the more efficient is the utilization of the funds
ROI shows the returns made from the funds invested by the owners. A higher ratio is always preferred in case of returns.
When current ratio is $$2 : 1$$, an equal increase in current assets and current liabilities would
.
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0%
Increase the current ratio
0%
Decrease the current ratio
0%
No change in current ratio
0%
None of these
Explanation
When the current ratio is $$2 : 1$$ , an equal increase in current assets and current liabilities would decrease the current ratio. Let us understand this through an example;
Current Assets = $$Rs. 100000$$ and Current Liabilities = $$Rs. 50000$$
Current ratio = Current assets/ Current liabilities
= $$100000/50000$$
= $$2 : 1 $$
Now let us increase the current assets and current liabilities by $$Rs. 50000$$ and calculate the new current ratio ;
Current ratio = $$150000/100000$$
= $$1.5 : 1$$.
The statistical yard stick that provides a measure of the relationship between two accounting figures is a
.
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0%
Current ratio
0%
Accounting ratio
0%
Capital output ratio
0%
Debt to equity ratio
Explanation
Current ratio is the ratio to measure relationship between current assets and current liability.
Capital output ratio is the ratio which measures that, how much capital is required to produce one unit of output.
Debt to equity ratio measures the proportion of debt funds to the owners capital.
Ratios are mathematical relationship between two figures. Accounting ratios are ratios that compare relationship between between two accounting figures.
When net profit is Rs$$2,25,000$$, taxes are Rs $$25,000$$ and Net worth Rs10,00,000$$. What is the rate of return on share holder's equity?
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0%
$$22.5\%$$
0%
$$20\%$$
0%
$$25\%$$
0%
None of these
Explanation
Return on Equity (ROE) = [Net profit after tax (NPAT) - Preference dividend (if any)] / Shareholder's funds or Networth
So, ROE = $$[225000-25000 - 0]$$ x $$100$$ / $$1000000$$
= $$20\%$$
Given the assets $$Rs.10,00,000$$,
Taxes $$Rs.12,500$$,
Profit before tax $$Rs.1,12,500$$,
Net worth $$Rs.5,00,000$$,
What is Ratio of Profit or ROI?
Report Question
0%
$$10\%$$
0%
$$12.5\%$$
0%
$$20\%$$
0%
$$25\%$$
Explanation
ROI (Return On Investment) = [Net Profit After Tax / Net Worth] x $$100$$
= $$[(112500-12500)/500000]$$ x $$100$$
= $$20\%$$
Low assets turnover may indicate
.
Report Question
0%
Low assets
0%
High cost of maintenance
0%
Idle assets
0%
Higher sales
0%
Both (B) and (C) above
Explanation
Net Asset Turnover ratio = Sales/ Net Asset
Asset turnover highlights the amount of assets that the firm used to produce its total sales. Therefore a low asset turnover would indicate that the firm has idle or improperly use assets.
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