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CBSE Questions for Class 12 Commerce Accountancy Accounting Ratios Quiz 3 - MCQExams.com
CBSE
Class 12 Commerce Accountancy
Accounting Ratios
Quiz 3
Which formula is used to measure the degree of Operating leverage?
Report Question
0%
E
B
I
T
S
a
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E
B
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C
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B
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C
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B
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E
B
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B
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E
B
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E
B
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0%
E
B
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C
E
B
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C
EBIT stands for____________________.
Report Question
0%
Earnings Before Investment and Taxes
0%
Earnings Before Interest and Taxes
0%
Earnings Before Income and Taxes
0%
Earnings Before Initial Capital and Taxes
Explanation
Earnings before interest and taxes (EBIT) is an analyzing tool of a company's profitability. It can be calculated as revenue
minus expenses excluding tax and interest
. It also depicts
the company's net income before income tax expense and interest expenses.
Formula :
EBIT= Revenue-COGS-operating expense
where COGS stands for the cost of goods sold
Thus the correct answer is B.
Quick ratio is calculated by using the following formula ___________________.
Report Question
0%
C
a
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h
+
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−
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C
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C
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C
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0%
C
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e
a
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c
a
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+
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t
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C
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r
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s
C
a
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+
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d
e
b
t
o
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C
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e
n
t
a
s
s
e
t
s
Explanation
Quick ratio is calculated by dividing liquid current
assets
by total
current liabilities
. Liquid current
assets
include
cash
, marketable securities and receivables.
Cash
includes
cash
in hand and
cash
at bank.
In accounting, _____________ stands for earning before tax.
Report Question
0%
EBT
0%
PBT
0%
EBIT
0%
EBITDA
Explanation
EBT stands for Earnings before tax. It is the earnings (profits) of a business, from the sale of its goods and services for a certain period, after paying the interest for the debt or borrowings of a company but before paying the tax.
_______ implies a high level of net working capital.
Report Question
0%
Enough cash
0%
Cash shortage
0%
Excessive cash
0%
None of the above
Explanation
If a company has very
high net working capital
, it has more than enough current assets to meet all of its short-term financial obligations. In general, the
higher
a company's
working capital
,
is considered as a sign of a well-managed company with the potential for growth.
The aspect of financial decision making with reference to current assets or short-term assets is known as _______________.
Report Question
0%
Capital budgeting
0%
Working capital management
0%
Dividend policy
0%
Investment analysis
Explanation
Decisions
relating to
working capital
and
short
-
term financing
are
referred to
as
working capital management
.
The policies aim at
managing
the
current assets
(generally cash and cash equivalents, inventories and debtors ) and the
short
-
term financing
, such that cash flows and returns are acceptable.
The operating leverage decreases with an increase in sales _______________.
Report Question
0%
Above the break-even point
0%
Below the break-even point
0%
Equal the break-even point
0%
None of the above
Explanation
Essentially,
operating leverage
boils down to an analysis of fixed costs and from each additional sale if they don't have to
increase
costs to produce more
sales
made after the
break
-
even point
will generate a higher contribution to profit.
As stated
above
, in good times, high
operating leverage
can supercharge profit.
Operating leverage is equal to __________________.
Report Question
0%
R
e
v
e
n
u
e
+
v
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a
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c
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a
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c
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s
t
s
+
f
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R
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0%
R
e
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÷
v
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V
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R
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V
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d
0%
R
e
v
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n
u
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−
V
a
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c
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R
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−
v
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c
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−
f
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R
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−
V
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R
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−
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b
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c
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−
f
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d
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t
s
Explanation
Operating leverage
is a cost-accounting formula that measures the degree to which a firm or project can increase
operating
income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high
operating leverage
.
The current ratio is _________________________.
Report Question
0%
C
u
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n
t
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C
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C
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C
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0%
C
a
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C
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C
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C
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a
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s
0%
L
i
q
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i
d
a
s
s
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t
s
C
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e
n
t
l
i
a
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L
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C
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0%
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t
s
Explanation
Using the Balance Sheet, the
current ratio
is calculated by dividing
current
assets by
current
liabilities:
P/V ratio shows the ________ ratio.
Report Question
0%
Profit and volume
0%
Profit earning capability
0%
Safety margin
0%
None of the above
Explanation
P/V ratio = Contribution/ Sales. It is used to measure the profitability of the company. Contribution is the excess of sales over variable cost. So basically P/V ratio is used to measure the level of contribution made at different volumes of sales.
Old Ratio - New Ratio = _______.
Report Question
0%
Sacrificing ratio
0%
Gaining Ratio
0%
Deficiency Ratio
0%
Current Ratio
Explanation
When a new partner is admitted he is given an agreed share in profits this share is only given due to sacrifice made by the old partners from their existing profit sharing ratio hence
The ration in which the partners have agreed to sacrifice their share in profit in favour of other partner is known as sacrificing ratio.
The difference between old ratio and new ratio is the sacrifice ratio.
For example:
Old profit sharing ratio is 3:2:1 among A,B and C
New profit sharing ratio is 1:2:3 among A,B and C
Sacrificing ratio = Old ratio-New ratio
Gaining ratio= New ratio-Old ratio
A sacrifices=3/6-1/6 = 2/6
B sacrifices=2/6-2/6= No change
C gaining=1/6-3/6=2/6.
Which of the following term is used to represent the proportionate relationship between debt and equity?
Report Question
0%
Cost of Capital.
0%
Capital Budgeting.
0%
Assets Structure.
0%
Capital Structure.
Explanation
The term used to represent the proportionate relationship between debt and equity is Capital structure. Because by capital structure we mean to define the mix or proportion in which the capital of the company should be so as to maximize the benefit for the shareholders. While deciding the capital structure a lot of factors have to be taken into consideration and also the Debt-equity ratio is the indicator of the financial leverage of the company.
When the Debt Turnover Ratio is
4
4
, what is the average collection period?
Report Question
0%
5
5
months
0%
4
4
months
0%
3
3
months
0%
2
2
months
Explanation
Debt Turnover ratio = Net credit sales/ Average trade receivables =
4
4
Average collection period =
12
12
months / Debt turnover ratio
=
12
12
months /
4
4
=
3
3
months
The appropriate ratio for indicating liquidity crisis is
.
Report Question
0%
Operating ratio
0%
Sales turnover ratio
0%
Current ratio
0%
Acid test ratio
Explanation
Acid test ratio or Quick ratio = Quick Assets/ Current Liabilities
= [Current Assets minus Inventory]/Current Liabilities
The Quick ratio is a much more conservative measure of short term liquidity than the Current ratio. We reduce the amount of funds held up in inventory form the current assets ,so that we can get a clear picture of how much fund can we mobilize for payment of dues in case of a cash crunch or a liquidity crisis.
Which of the following comes under efficiency ratios?
Report Question
0%
Average collection period.
0%
Inventory turnover ratio.
0%
Fixed assets turnover ratio.
0%
All of the above.
Explanation
'Efficiency ratios' are those which help determine the business how efficiently it uses its resources in form of assets and deals with the liabilities.
To know how a business converts the inventory into sales, fosters sales and earns income, these ratios are important.
Which one of the following is not a leverage ratio?
Report Question
0%
Total debt ratio
0%
Debt-Equity ratio
0%
Interest coverage ratio
0%
Quick ratio
Explanation
Quick ratio is a liquidity ratio or short term solvency ratio. Whereas the remaining three ratios are leverage ratios.
The immediate solvency ratio is?
Report Question
0%
Current Ratio
0%
Quick Ratio
0%
Debtors Turnover Ratio
0%
Stock Turnover Ratio
Explanation
The immediate solvency ratio is the quick ratio.
Quick Ratio = [Current Assets- Inventory] / [Current liabilities - Bank Overdraft and Cash credit]
While calculating the quick ratio we reduce the amount of inventory as it is less liquid than the other current assets. The reason to reduce the amount of bank overdraft and cash credit is that mostly these are secured against inventory. So quick ratio gives us an immediate solvency ratio and is a much more conservative ratio than the current ratio.
Hence b is the correct answer.
If the current ratio is
2
:
1
2
:
1
and working capital is
R
s
.
60
,
000
R
s
.
60
,
000
, what is the value of the current assets?
Report Question
0%
R
s
.
60
,
000
R
s
.
60
,
000
0%
R
s
.
1
,
00
,
000
R
s
.
1
,
00
,
000
0%
R
s
.
1
,
20
,
000
R
s
.
1
,
20
,
000
0%
R
s
.
1
,
80
,
000
R
s
.
1
,
80
,
000
Explanation
Current Ratio = Current Assets (C.A)/ Current Liabilities (C.L) =
2
/
1
2
/
1
So, CA=
2
2
CL
Now, Working Capital = Current Assets(C.A) minus Current Liabilities (C.L) =
R
s
.60000
R
s
.60000
So, C.A - C.L =
60000
60000
2
2
C.L-CL =
60000
60000
C.L =
R
s
.
60000
R
s
.
60000
Now, C.A =
2
2
x
60000
60000
=
R
s
.
120000
R
s
.
120000
A firm wants to know the Degree of Operating Leverage (DOL) with the following information:
Current level of sales :
6000
u
n
i
t
s
6000
u
n
i
t
s
Break-even point sales :
4000
u
n
i
t
s
4000
u
n
i
t
s
What would be the DOL?
Report Question
0%
1.50
1.50
0%
0.67
0.67
0%
3.00
3.00
0%
None of the above
Which of the following is not included in current assets?
Report Question
0%
Debtors
0%
Opening Stock
0%
Cash at bank
0%
Cash in hand
Explanation
Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within one year. current assets include cash and cash equivalents, accounts receivable, marketable securities, prepaid expenses, debtors etc.
'Kamal & Associates' provides following information:
Profit margin =
10
%
10
%
Asset turnover = 3 times
What is the Return on Investment (ROI) of the Company?
Report Question
0%
10
%
10
%
0%
30
%
30
%
0%
20
%
20
%
0%
25
%
25
%
Explanation
R.O.I =
Return
x
Sales
Sales Asset
Now,
Return
= Profit margin and
Sales
= Asset turnover
Sales Asset
Therefore R.O.I = Profit margin x Asset turnover
=
10
%
10
%
x
3
3
=
30
%
30
%
The ideal level of current ratio is _________.
Report Question
0%
4:2
0%
2:1
0%
Both (a) and (b)
0%
None of the above
Explanation
Ideal level of current ratio is 2:1. High ratio indicates under trading and over capitalization. Low ratio indicates over trading and under capitalization. It is most widely used of all analytical devices based on the balance sheet.
Liquidity ratio is also known as :-
a. Quick ratio
b. Acid test ratio
c. Working capital ratio
d. Stock turnover ratio
Report Question
0%
A and B
0%
A and C
0%
B and C
0%
C and D
Explanation
A liquidity ratio is an indicator of whether a company's current assets will be sufficient to meet the company's obligations when they become due. The liquidity ratios include the current ratio and the acid test or quick ratio. The current ratio and quick ratio are also referred to as solvency ratios.
If the inventory turnover is high, the working capital requirements will be ___________.
Report Question
0%
High
0%
Low
0%
Equal
0%
None of the above
Explanation
Inventory Turnover = [Cost of goods sold/Sales] / Average inventory.
A high inventory turnover is good from the point of liquidity position and vice versa. If the inventory turnover is high it means that the inventory is being used or sold in a short time, which means that the funds of the company are not being blocked and so the working capital requirements would be low.
Debt-equity ratio is sub-part of ____________.
Report Question
0%
Short-term solvency ratio
0%
Long-term solvency ratio
0%
Debtors turnover ratio
0%
None of the above
Explanation
The debt-to-equity ratio is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as risk, gearing or leverage.
The appropriate ratio for indicating liquidity crisis is_________.
Report Question
0%
Operating ratio
0%
Sales turnover ratio
0%
Current ratio
0%
Acid test ratio
Explanation
Acid test ratio or Quick ratio = Quick Assets/ Current Liabilities
= [Current Assets minus Inventory]/Current Liabilities
The Quick ratio is a much more conservative measure of short term liquidity than the Current ratio. We reduce the amount of funds held up in inventory form the current assets ,so that we can get a clear picture of how much fund can we mobilize for payment of dues in case of a cash crunch or a liquidity crisis.
Which ratio is considered as safe margin of solvency?
Report Question
0%
Liquid ratio
0%
Quick ratio
0%
Current ratio
0%
None of the above
Explanation
The current ratio measures company's ability to pay short-term and long-term obligations. To gauge this ability. the current ratio considers the current total assets of a company relative to that company's current total liabilities.
The ideal level of liquid ratio is _______.
Report Question
0%
1:1
0%
2:1
0%
3:1
0%
All of the above
Explanation
Ideal level of quick ratio or acid test ratio is 1:1. Usually, a high acid-test ratio is an indication that the firm is liquid has ability to meet its current or liquid liabilities in time and on the other hand a low quick ratio represents that the firm's liquidity position is not good.
Which ratio is known as a complementary of Net Profit Ratio?
Report Question
0%
Gross profit ratio
0%
Operating profit ratio
0%
Operating ratio
0%
None of the above
Explanation
Operating ratio shows the efficiency of a company's management by comparing company's operating expense to net sales. The smaller the ratio the greater the organisation generate profit. Thus, we can say that it is complementary to net profit ratio as they both are similar.
Therefore, C is the correct option.
Which of the following items is not taken into account while computing quick ratio?
Report Question
0%
Cash
0%
Bank Balance
0%
Bank overdraft
0%
Sundry creditors
Explanation
The
quick ratio
is a financial
ratio
used to gauge a company's liquidity. The
quick ratio
is also known as the acid test
ratio
. The
quick ratio
compares the total amount of cash and cash equivalents + marketable securities + accounts receivable to the amount of current liabilities.
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