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CBSE Questions for Class 12 Commerce Accountancy Accounting Ratios Quiz 9 - MCQExams.com
CBSE
Class 12 Commerce Accountancy
Accounting Ratios
Quiz 9
Higher the ratio, the lower the profitability is applicable to
.
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0%
Gross profit ratio
0%
Net profit ratio
0%
Operating ratio
0%
Return on investments
Explanation
Operating Ratio = [COGS + Operating Expenses] x $$100$$/ Sales
So, if COGS = $$Rs. 50000$$, Operating Expenses = $$Rs. 20000$$ and Sales = $$Rs. 100000$$
then, Operating Ratio = [$$50000 + 20000$$] x $$100$$/ $$100000$$
= $$70\%$$
Here operating profit = $$100000$$ - [$$100000$$ x $$70\%$$]
= $$Rs. 30000$$
So, if the operating ratio increases to $$80\%$$ then
Operating profit =
$$100000$$ - [$$100000$$ x $$80\%$$]
= $$Rs. 20000$$
Hence, it can be said that higher the operating ratio , lower the profitability.
Declaration of dividend on equity share cause the EPS to
.
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0%
increase
0%
decrease
0%
remain unchanged
0%
none of these
Explanation
EPS (Earning Per Share) = Net profit available to equity shareholders / Number of equity share outstanding
If the dividend is declared, still the Net profit available to equity shareholders would remain the same. It is just that the net profit would segregated into two parts. A certain amount would be distributed as dividend and the remaining part would be retained as reserves and surplus. But, then too the retained amount would be the amount available to the equity shareholders.
When operating ratio is $$91.5\%$$, the operating profit ratio will be __________.
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0%
$$191.5\%$$
0%
$$8.5\%$$
0%
$$100\%$$
0%
None of these
Explanation
Operating ratio + Operating profit ratio = $$1$$
So,
$$91.5/100$$
+ Operating profit ratio = $$1$$
Therefore,
Operating profit ratio = $$8.5\%$$
The return on capital employed shows how well the management has used the funds supplied by
Report Question
0%
Equity shareholders
0%
Equity and preference shareholders
0%
Shareholders and creditors
0%
None of these
Explanation
Return On Capital Employed (ROCE) = Earnings before interest and tax(EBIT) x 100/ Capital employed
where, Capital employed = Total Assets - Current Liabilities
Or
Fixed Assets + Working Capital
As sundry creditors are included in current liabilities and it does supply any funds so it can be concluded that ROCE shows how well the management has used the funds supplied by the Equity and preference shareholders.
Shareholders Funds / Total Assets =
.
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0%
Liquidity ratio
0%
Solvency ratio
0%
Profitability ratio
0%
None of these
Explanation
(Shareholders Funds / Total Assets) = Solvency ratio (Proprietary ratio ). It indicates the proportion of total assets financed by shareholders whether equity or preference or both.
Shareholders funds include Equity share capital + Preference share capital + Reserves and surplus.
For such ratios, total assets exclude fictitious assets and losses.
Sale of inventory for cash will cause the current ratio to __________.
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0%
increase
0%
decrease
0%
remain unchanged
0%
none of these
Explanation
Current ratio = Current assets / Current liabilities
When inventory is sold for cash then, the amount of inventory decreases and simultaneously the cash balance increases and there would be no net effect on the current asset figure. And so the current ratio will remain unchanged.
Return on equity capital ratio is obtained by dividing net profit after tax and before dividend by
.
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0%
Shareholder's funds
0%
Current assets
0%
Total assets
0%
None of the above
Explanation
Return on Equity (ROE) = [Net profit after tax (NPAT) - Preference dividend (if any)] / Shareholder's funds
Example:
NPAT = $$Rs. 100000$$ and Shareholder's funds = $$Rs.500000$$
Then, ROE = $$[100000- 0] / 500000$$
= $$0.2$$ or $$20\%$$.
Purchase of inventory on credit will cause the quick ratio to
.
Report Question
0%
increase
0%
decrease
0%
remain unchanged
0%
none of these
Explanation
Quick Ratio = [Current assets minus Inventory] / Current liabilities
Let Current assets = $$Rs. 100000$$, Inventory = $$Rs. 20000$$ and Current liabilities = $$Rs. 40000$$
So Quick Ratio = [$$100000-20000] / 40000$$ = $$2 : 1$$
Now let inventory purchased on credit be $$Rs. 20000$$, so revised Inventory = $$Rs. 60000$$ and Current liabilities = $$Rs. 60000$$
Revised Quick Ratio =[$$100000-60000] / 60000$$ = $$2 : 3$$
So , Purchase of inventory on credit will cause the quick ratio to decrease.
Pay out ratio means
.
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0%
ratio of debtors or creditors
0%
ratio of earning that are disturbed through dividend
0%
ratio of profit distributed to profit retained
0%
none of these
Explanation
Payout ratio = Dividend/ Total earnings available for shareholders
For example let the dividend declared be $$Rs.100000$$ and the total earnings for the shareholders be $$Rs. 500000$$ therefore,
Payout ratio = $$100000 / 500000$$
= $$0.2$$ times
So dividend declared would be $$0.2$$ times the earning made and the remaining $$0.8$$ times of the earnings would be retained by the company in the form of reserves and surplus.
Current ratio may be increased by
.
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0%
Overstating the current assets
0%
Overstating the current liabilities
0%
Understating current assets
0%
None of these
Explanation
Current ratio = Current assets/ current liabilities
So when current assets = $$Rs 150000$$ and current liabilities = $$Rs. 100000$$ then,
Current ratio = $$100000 / 50000$$
= $$2 : 1$$
Now if we overstate the current assets by $$Rs. 50000$$ then ,
Revised Current ratio = $$150000/50000$$
= $$3: 1 $$
So, the current ratio may be increased if we overstate the current assets.
A high payout ratio indicates that _______________.
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0%
Management is ploughing back profits
0%
Management is not re-investing profits
0%
Company is earning high profits
0%
Earnings per share is high
Explanation
A high payout ratio indicates that the company is paying out a large share of its net income to common shareholders in the form of dividend payments. The company may not have any potential opportunities for reinvestment and thus is repatriating cash back to investors.
Therefore, B is the correct option.
The turnover ratio helps management for
.
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0%
Managing resources
0%
Managing debt
0%
Evaluating performance
0%
None of these
Explanation
Turnover ratios are used by management to evaluate the efficiency with which the firm manages and utilizes its assets. For example Fixed asset turnover ratio measures how efficiently the assets are used to generate sales.
Match the following
a. Test of Liquidity
ROI
b. Test of Solvency
Acid test ratio
c. Test of Activity
Debt to Equity
d. Test of Profitability
Debtors Turnover ratio
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0%
a-2, b-3, c-4, d-1
0%
a-2, b-3, c-1, d-4
0%
a-1, b-2, c-3, d-4
0%
a-4, b-3, c-2, d-1
Explanation
Acid test ratio or Quick ratio is a much more conservative ratio than Current ratio. It measures the ability
of the company
to pay the current debts immediately and hence is a 'Test of Liquidity'.
Debt to Equity ratio measures the mix of Debt and Equity funds in the company. This gives an idea regarding the solvency of the company. A high ratio points to less protection to the creditors and vice versa.
Activity ratios are used to measure the efficiency of the firm at managing various resources.Debtors turnover ratio measures the efficiency with which the company manages its receivables and hence is a test of activity or activity ratio.
ROI ( Return On Investment ) calculates the percentage return on the funds invested in the company and hence shows the profitability of the company.
The immediate solvency ratio is
.
Report Question
0%
quick ratio
0%
current ratio
0%
stock turnover ratio
0%
debtor turnover ratio
Explanation
Quick Ratio = [Current Assets- Inventory] / [Current liabilities - Bank Overdraft and Cash credit]
While calculating 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 current ratio.
ROI is the ratio between
.
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0%
Investment and profit
0%
Net profit and capital employed
0%
Turnover and capital employed
0%
None of these
Explanation
ROI (Return On Investment ) = Net profit / Capital employed, it shows the profit made by the funds invested by the owners.
If net profit = $$Rs. 150000$$ and Capital employed = $$Rs. 500000$$
then ROI = $$150000 / 500000 $$
= $$0.3 : 1$$
Which of the following ratios is a favorable indication, if it is low?
Report Question
0%
Operating ratio
0%
Operating profit ratio
0%
Inventory turnover ratio
0%
Fixed assets turnover ratio
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.
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.
Fixed assets turnover ratio measures the efficiency with which the firm utilizes its fixed assets for generating its sales. A high ratio means higher efficiency.
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.
Current ratio is increased by :
1) Issue of redeemable debentures.
2) Selling of old machine for cash.
3) Converting debentures into equity capital.
4) Cash received from debtors.
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0%
1, 2 and 4
0%
3 and 4
0%
1 and 2
0%
4 only
Explanation
Current ratio = Current assets/ Current liabilities
When Redeemable debentures are issued, long term liabilities and the current assets increase,while the current liabilities remain constant so the current ratio would increase.
When old machine is sold for cash, fixed assets would decrease and the current assets would increase, while the current liabilities remain constant so the current ratio would increase.
When debentures are converted into equity capital there would be no changes in the current assets and the current liabilities and ultimately no change in the current ratio.
When cash is received from debtors there would be no net changes on the current assets as the cash balance would increase and the debtors balance would decrease by the same amount and hence there would no change in the current ratio.
Gross profit may be increased by :
1) Increasing selling price
2) Reducing cost of sales
3) Increasing sales of items with higher margin
4) Increasing cost of sales
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0%
One only
0%
1,2,3 and 4
0%
1, 2 and 3
0%
2, 3 and 4
Explanation
Everything else remaining constant when the selling price is increased it would lead to a higher sales amount and in effect a higher gross profit.
Everything remaining constant when the cost of sale is reduced the gross profit would increase, because Sales minus Cost of Sales = Gross profit.
When sales of items with higher margin are increased it would ultimately lead to a higher sales figure and hence higher gross profit.
Everything remaining constant when the cost of sale is increased the gross profit would decrease, because Sales minus Cost of Sales = Gross profit.
If gross profit ratio is $$25\%$$ on cost, it is _________ $$\%$$ on sales.
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0%
$$33.33\%$$
0%
$$20\%$$
0%
$$25\%$$
0%
$$50\%$$
Explanation
Cost + Gross profit = Sales
Let cost = $$100$$ and Gross profit ratio = $$25\%$$ on cost
Therefore Gross profit = $$25\%$$ x $$100$$ = $$25$$
So, $$100 + 25$$ = Sales
Sales = $$125$$
Gross profit as percentage on sales = [Gross profit/Sales] x $$100$$
= [$$25/125$$] x $$100$$
= $$20\%$$.
Large inventory accumulation is anticipation of price rise in future.
Report Question
0%
Inventory turnover ratio
0%
Fixed charge coverage ratio
0%
Debt to Equity ratio
0%
None of these
Explanation
Inventory turnover is a financial ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand.
Large Inventory accumulation leads to an increase in the cost of storing goods, cost of interest, insurance expenses, etc.
Therefore, A is the correct answer.
Borrowing from short term and investing in long term assets indicated by _________________.
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0%
Current assets to fixed assets ratio
0%
Current ratio
0%
Fixed assets turnover ratio
0%
Inventory turnover ratio
Long term solvency is indicated by
.
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0%
Rate of return
0%
Liquid ratio
0%
Debt equity ratio
0%
Capital gearing ratio
Explanation
Debt equity ratio measures the debt funds funds with respect to the equity. A high ratio means less security to the creditors, because a high ratio would indicate that the debt funds are more than the equity funds and while paying off the liabilities less funds would be available to pay off the creditors and hence the solvency would be low and vice versa. Therefore we can say that long term solvency is indicate by Debt equity ratio.
The ability of a company to meet its short-term obligations known as
.
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0%
Liquidity
0%
Solvency
0%
Profitability
0%
Trading on equity
Explanation
Liquidity
refers to both an enterprise's
ability
to pay
short
-
term obligations
and a
company's capability
to sell assets quickly to raise cash.
Return on share holder's funds being much higher than the overall return on investment indicated by ______________.
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0%
Debt-Equity ratio
0%
Debtors turnover ratio
0%
Debt collection period
0%
None of these
Capacity ratio X Efficiency ratio =
.
Report Question
0%
Activity Ratio
0%
Capacity Ratio
0%
Efficiency Ratio
0%
None of these
Explanation
Capacity ratio X Efficiency ratio = Activity ratio
If Capacity ratio = $$90\%$$ , Efficiency ratio = $$85\%$$ , then
Activity ratio = $$90/100$$ x $$85/100$$
= $$76.5\%$$
Inability to pay dues to financial institution is measured by
.
Report Question
0%
Debt coverage ratio
0%
Fixed charge coverage ratio
0%
Debtors turnover ratio
0%
Creditors turnover ratio
Explanation
Debt coverage ratio shows the firms ability to pay off current interest and installments.
Debt coverage ratio = [Net profit (after tax ) + Non-tax expenses] / [Interest liabilities + Installments]
For example if the ratio is $$3 : 1$$ it means that the firm is making returns to the extent that they can make the payments to institutions three times, which gives a very good assurance to the lenders.
Given current ratio = $$2.5$$
Quick ratio = $$1.5$$
Net working capital = Rs $$30,000$$
What is the amount of current liabilities?
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0%
$$Rs20,000$$
0%
$$Rs30,000$$
0%
$$Rs50,000$$
0%
$$Rs60,000$$
Explanation
Net working capital = Current assets - Current liabilities
$$Rs. 30000$$ = Current assets - Current liabilities
Therefore, Current assets = Current liabilities + $$Rs. 30000$$
Current ratio = Current assets/ Current liabilities
$$2.5$$ = [Current liabilities + $$Rs. 30000$$] / Current liabilities
$$2.5$$
Current liabilities =
Current liabilities + $$Rs. 30000$$
Current liabilities = $$Rs. 30000/ 1.5$$
Therefore, Current liabilities = $$Rs. 20000$$
The ________ classification has been on the basis of financial statements to which the determinants of ratios belong.
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0%
Modern
0%
Traditional
0%
Functional
0%
None of the above
Explanation
In Traditional classification the basis is the financial statement to which the determinants belong. For example balance sheet ratios, profit and loss ratios etc.
A ratio of two variables from the income statement is known as __________ ratio.
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0%
Composite
0%
Balance sheet
0%
Income statement
0%
Liquidity
Explanation
A ratio of two variable from the income statement is known as income statement ratio. For example Gross profit ratio which is the ratio of Gross profit to Sales, here both the figures are from income statement.
Quick assets include which of the following?
Report Question
0%
Cash
0%
Accounts Receivable
0%
Inventories
0%
Only (a) and (b)
Explanation
Quick assets
are
assets
that can be converted to cash quickly. Typically, they include cash, accounts receivable, marketable securities, and sometimes (not usually) inventory.
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