Accounting Ratios - Class 12 Commerce Accountancy - Extra Questions

How current ratio is different from quick ratio?

Both are short term solvency or liquidity ratios. Current ratio is the ratio most commonly used to measure the short-term financial analysis. In this ratio, current assets are divided by current liabilities. Quick ratio or Acid test ratio shows the business ability to meet its immediate commitment. Formula of this ratio is Quick or Liquid assets divided by current liabilities. Quick asset is current asset minus closing stock and prepaid expenses.


What do you mean by composite ratios?

A composite ratio or combined ratio compares two variables from two different accounts. For example, if the variables from both profit and loss account and balance sheet are used, it forms a composite ratio, such as Trade Receivable Turnover ratio, where trade receivables from the balance sheet and revenue from operations from profit and loss account are used.



What do you mean by current ratio?

The current ratio is the ratio of current assets to current liabilities. It is a measure of liquidity of a company at a certain date. It measures a company's ability to cover its short-term obligations with its current assets.
Current Ratio = Current Assets / Current Liabilities


What are activity or turnover ratios?

Activity or turnover ratios are the ratios that calculate the efficiency of operations of a business based on its utilization of resources. They are also known as productivity ratios, efficiency ratios, or more famously as turnover ratios. These ratios show the relationship between sales and any given asset.



What is Proprietary Ratio?

The proprietary ratio expresses the relationship between proprietor's funds, i.e., shareholder's funds, and net assets or capital employed of the company. 
Proprietary Ratio = Shareholders' Funds / Capital employed (or net assets).


What are liquidity ratios?

Liquidity ratios are the ratios that evaluate the firm's ability to pay its short-term liabilities, i.e. current liabilities. It shows the liquidity levels, i.e. the ratio of their assets that can be quickly converted to cash to pay off their short-term obligations when they become due.


What do you mean by Inventory Turnover Ratio?

The Inventory Turnover Ratio is the ratio that focuses on the relationship between the cost of goods sold and average stock. It studies the frequency of conversion of inventory of finished goods into revenue from operations.
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory.



What is Interest Coverage Ratio?

The interest coverage ratio measures the security of interest payable on long-term debts.
It shows the number of times interest on long-term debts is covered by the profits available for interest.
Interest Coverage Ratio = Net Profit before Interest and Tax / Interest on long-term debts.


Differentiate Fixed Capital from Working Capital.

BASIS FOR COMPARISONFIXED CAPITALWORKING CAPITAL
MeaningFixed capital refers to the investment of the enterprise in long term assets of the company.Working capital means the capital invested in the current assets of the company.
Comprise ofDurable goods whose useful life is more than one accounting period.Short term assets and liabilities
LiquidityComparatively illiquid.Highly liquid.
UsesUsed to buy non-current assets for business.Used for short term financing.
ServesStrategic objectivesOperational objectives


The proprietary ratio of M. Ltd. is $$0.80: 1$$. 
State with reasons whether the following transactions will increase, decrease or not change the proprietary ratio:
(i) Obtained a loan from bank Rs 2,00,000 payable after five years.
(ii) Purchased machinery for cash Rs 75,
(iii) Redeemed 5% redeemable preference shares Rs 1,00,000.
(iv) Issued equity shares to the vendors of machinery purchased for Rs 4,00,000. 

Transaction Implication 
Obtained a loan from bank Rs 2,00,000 payable after five years.  Total assets are increasing by 2,00,000 (as cash is coming in) but shareholders' funds remain intact, so proprietary ratio will decrease.
Purchased machinery for cash Rs 75,000.Total assets are increasing and decreasing by 75,000 simultaneously (as cash is going out and machinery is coming in), hence both numerator and denominator remain intact, therefore proprietary ratio will not change. 
Redeemed 5% redeemable preference shares Rs 1,00,000.Both shareholders' funds and total assets decrease by 1,00,000 simultaneously and proprietary ratio decreases.
Issued equity shares to the vendors of machinery purchased for Rs 4,00,000.
Both shareholders' funds and total assets increase by 4,00,000 simultaneously and proprietary ratio improves. 


From the following information obtained from the books of Kundan Ltd., calculate the inventory turnover ratio for the years 2015-16 and 2016-17:
2015-16
     Rs.		2016-17
     Rs.
Inventory on 31st March$$7,00,000$$$$17,00,000$$
Revenue from operations$$50,00,000$$$$75,00,000$$
(Gross profit is $$25$$% on cost of revenue from operations)
In the year 2015-16, inventory increased by Rs. $$2,00,000$$

Inventory Turnover Ratio = Cost of goods sold (COGS)
                                                      Average Inventory

2015-16
Gross Profit = 25% of cost = 20% of sales = 20/100 X 75,00,000 = Rs. 15,00,000

Cost of goods sold = Revenue from operations - Gross profit 
            =  50,00,000 - 10,00,000
            = Rs. 40,00,000

Average Inventory = 5,00,000 + 7,00,000 =  12,00,000 = Rs. 6,00,000
                                                   2                             2

Inventory turnover ratio = 40,00,000 = 6.7 times
                                             6,00,000

2016-17
Gross profit = 20% of sale = 20 X 50,00,000 = Rs. 10,00,000
                                               100
Cost of goods sold = Revenue from operations - Gross profit
                                 = 75,00,000 - 15,00,000
                                 = Rs. 60,00,000

Average inventory = 7,00,000 + 17,00,000 = 24,00,000 = Rs. 12,00,000
                                                  2                             2

Inventory turnover ratio =  60,00,000 = 5 times
                                             12,00,000


Answer the following question in only 'one' sentence.
When is gain ratio required to be calculated?

 Gain ratio is a partnership term. it is a ratio that is calculated in the event of retirement or death of a partner. it is calculated as follows:
Gaining Ratio =  $$New share - Old share$$


Answer the following question in only 'one' sentence.
What is the formula for calculating gross profit ratio?

Gross Profit is the total revenue amount that a company earns before deducting the expenses connected with that revenue. To calculate Gross Profit, you should know the total amount of Net Sales and the total amount of Cost of Goods Sold. The formula of Gross Profit is Gross Profit = Net Sales – Cost of Goods Sold.


Answer the following question in only 'one' sentence.
What is 'qualified acceptance'?

Qualified acceptance is a type of acceptance where the acceptance is subject to a condition. Qualified acceptance is a sort of counteroffer. Qualified acceptance brings in variations to the sum, mode, or place of payment in a contract.


Calculate the Net Profit Ratio (up to two decimal places) from the following information:
Particulars       Rs.
Gross Profit   $$80,000$$
Salary and rent   $$30,000$$
Interest on Debentures     $$5,000$$
Gain on sale of furniture     $$2,000$$
Revenue from Operations$$4,00,000$$

  Particulars Rs.
  Gross Profit $$80000$$
Add Gain on sale of furniture  $$2000$$
 Less Salary and rent$$(30000)$$ 
 Less Interest on Debenture $$(5000)$$
  Net profit
 $$47000$$
Net profit ratio = [Net profit/ Revenue from operations] x $$100$$
                          =[$$47000/400000$$] x $$100$$
                          = $$11.75\%$$


The Quick Ratio of a company is $$0.8:1$$. State whether the Quick Ratio will improve, decline or will not change in the following cases:
(i) Cash collected from Debtors $$Rs. 50,000$$
(ii) Creditors of $$Rs. 20,000$$ paid off.

Let Quick Assets = $$Rs. 80000$$ and Current Liabilities = $$Rs. 100000$$
Quick Ratio = Quick assets/Current liabilities
                     = $$80000/100000$$
                      = $$0.8 :1$$
Now,
(i) When $$Rs. 50000$$ cash is collected from debtors there would be no net increase or decrease in the quick assets as the cash balance would increase and the debtors balance would decrease simultaneously. And so the Quick ratio would not change.
(ii) When creditors of $$Rs. 20000$$ are paid off then there would be decrease in both the creditors balance and the cash balance. The revised Quick ratio = $$[80000-20000] / [100000-20000]$$
                   = $$0.75 : 1$$
And so quick ratio would decline in this scenario.




Write a word/term/phrase as a substitute of the following statements:
The ratio measuring the relationship between gross profit and net sales.

The ratio measuring the relationship between gross profit and net sales is called as Gross Profit Ratio.


(a) From the following information, compute Debt-Equity Ratio: 
Long Term Borrowings - 2,00,000
Long Term Provisions - 1,00,000
Current Liabilities - 50,000
Non-current-Assets - 3,60,000
Current-Assets - 90,000 
(b) The current ratio of X. Ltd is 2 :State with reason which of the following transaction would (i) increase; (ii) decrease or (iii) not change the ratio. 
(1) Included in the trade payables was a bills payable of Rs 9,000 which was met on maturity.
(2) Company issued 1,00,000 equity shares of Rs 10 each to the Vendors of machinery purchased. 

Debt- Equity Ratio $$=\dfrac{Long -Term Debt}{Shareholder's Funds}$$
Total Assets = Total Liabilities + Shareholder's Funds 
Total Assets = Current Assets + Non-Current Assets 
                    = 1,80,000 + 7,20,000 = 9,00,000 
Total Liabilities = Long Term Borrowings + Long-Term Provisions + Current Liabilities 
= 4,00,000 +2,00,000+1,00,000 = 7,00,000 
Therefore, Shareholder's funds = Total Assets Total Liabilities 
= 9,00,000 7,00,000 = 2,00,000 Long-Term Debt = Long Term Borrowings + Long-term Provisions = 4,00,000+2,00,000 = Rs 6,00,000 

Therefore, Debt -equity ratio =$$\dfrac{6,00,000}{2,00,000}=3:1$$
(b) Current ratio $$= \dfrac{Current\, Assets }{Current \,Liabilities }$$
(1) A bill payable of Rs. 9,000 was met on maturity will affect:
1.Trade Payable will reduce by Rs.9,000
2.Cash will reduce by $$Rs.9,000$$
Simultaneous decreases in current assets and current liabilities will improve current ratio 
Issue of share of Rs.10,00,000 to vendor of machinery will affect the following 
1.Increases on the balance of machinery 
2.Increase in the amount of share capital 
This transaction will neither affect current liabilities nor current assets.Thus ,current ratio will remain unchanged.


The Operating ratio of a company is 60%. State whether Purchase of goods costing Rs. 20,000' will increase, decrease or not change the operating ratio. 

Operating Ratio = Operation Cost/Net Sales * 100

Also, Operating Cost = Cost of Goods Sold + Operating Expenses

Since, cost of goods sold includes purchases as well as closing stock so a purchase of Rs. 20,000 worth of goods will increase the value of both closing stock as well as purchases and hence will lead to change in the value of cost of goods sold. Thus, the operating ratio will remain unchanged.


From the following particulars, Calculate:
a) Inventory turn over ratio
b) Trade receivable turn over ratio
c) Trade payable turn over ratio
d) Gross profit ratio
e) Operating ratio
f) Net profit ratio.
ParticularsRs.
Revenue from operations
Gross profit
Average inventory
Net credit revenue from operations
Average trade receivables
Net credit purchases
Average Trade payables
Operating expenses
Net profit		$$10,00,000$$
$$2,00,000$$
$$1,00,000$$
$$6,00,000$$
$$1,50,000$$
$$5,00,000$$
$$2,50,000$$
$$1,00,000$$
$$1,00,000$$

1) NET PROFIT RATIO = NET PROFIT / NET SALES X 100
                                     = 1,00,000 /10,00,000 X 100 = 10%

2) OPERATING RATIO = OPERATING EXPENSES / NET SALES X 100
                                      = 1,00,000 / 10,00,000 X 100
                                       = 10%

3) GROSS PROFIT RATIO = GROSS PROFIT / NET SALES X 100
                                            = 2,00,000 / 10,00,000 X 100 = 20%

4) TRADE PAYABLE TURNOVER RATIO = NET CREDIT PURCHASE/AVERAGE                                                                         CREDIT
                                                                    = 5,00,000 /2,50,00 = 2  

5)TRADE RECEIVABLE TURNOVER RATIO = NET CREDIT SALES/ AVERAGE                                                                                    DEBTORS
                                                                        = 6,00,000 /1,50,000 = 4

6) INVENTORY TURNOVER RATIO = COST OF GOODS SOLD / AVERAGE                                                                       INVENTORY
                                                            = 1000000 / 100000 = 10%


Calculate the Trade Receivables Turnover Ratio, the average collection period and Gross Profit Ratio from the following information:
Particulars
Total revenue from operations$$6,00,000$$
Cash revenue from operations$$25$$% of Total revenue from operations
Trade Receivables as at 01.04.2017$$60,000$$
Trade Receivables as at 31.03.2018$$1,40,000$$
Cost of Revenue from operations$$4,20,000$$

Trade Receivables Turnover Ratio $$=$$ Net Credit Sales/Average Trade receivables
Trade Receivables Turnover Ratio $$=Rs. 4,50,000/Rs. 1,00,000=4.5$$
Average collection period
$$=\cfrac { average\quad accounts\quad receivable }{ average\quad daily\quad credit\quad sales } $$
Average daily credit sales $$=4,50,000/{360}^{\ast}=1,250$$
$$=1,00,000/1,250$$
$$=80$$ days
Therefore, on an average debtors take $$80$$ days to pay
$$^{\ast} 360$$ days considered
Gross Profit Ratio
$$=Gross Profit/Sales\times 100$$
$$=(6,00,000-4,20,000)/6,00,000\times 100=30$$%
Working Notes:
(1) Credit Sales=Total sales - Cash sales
Cash Sales $$=25$$% of $$Rs. 6,00,000=Rs.1,50,000$$
Credit Sales $$=Rs. 6,00,000-Rs. 1,50,000=Rs. 4,50,000$$
(2) Average Trade Receivables = (Opening Trade Receivables + Closing Trade Receivables )/2
$$=(Rs.60,000+Rs. 1,40,000)/2$$
$$=Rs. 1,00,000$$


Calculate current ratio and quick ratio from the following information.
Stock                                Rs.$$1,00,000$$
Debtors                            Rs.    $$80,000$$ 
Bills receivables              Rs.    $$20,000$$
Advance Tax                    Rs.      $$8,000$$
Cash                                 Rs.    $$60,000$$
Creditors                          Rs.$$1,20,000$$
Bills payable                    Rs.    $$80,000$$
Bank overdraft                Rs.      $$8,000$$

Current assets = Stock + Debtors +BR + Advance tax + Cash
                          = 100000 + 80000 + 20000 + 8000 + 60000
                          = 268000
Current Liabilities = Creditors + BP + Bank OD 
                               = 120000 + 80000 + 8000
                               = 208000
Quick assets = Current assets - stock
                       = 268000 - 100000
                       = 168000
Current ratio = Current Assets / Current Liabilities 
                       = 268000/208000 
                       = 1.28
Quick ratio = Quick assets / Current Liabilities
                   = 168000/200000 
                   = 0.84


Calculate Inventory Turnover Ratio and Gross Profits Ratio from the following informations.
Net sales                         Rs. 4,00,000
Gross profits                    Rs. 1,00,000
Opening Inventory          Rs. 60,000
Closing Inventory            Rs. 90,000

A) Inventory ratio = Cost of goods sold / Average inventory
cost of goods sold = Net sales - Gross profit
                                 = 400000 - 100000 = 300000
Average inventory = op. inventory + cl. inventory / 2
                                 = 60000 + 90000 = 15000
so, Inventory ratio = 300000/ 15000 = 20 %
 
B) Gross profit ratio = Gross profit / Net sales x 100
                                  = 100000/400000 x 100 =25%


Calculate current ratio and liquid ratio from the following information:
ParticularsRs.
Current liabilities
Trade receivables
Cash in hand
Cash at Bank
Inventories
Advance Tax		$$50,000$$
$$30,000$$
$$10,000$$
$$10,000$$
$$20,000$$
$$10,000$$

Current ratio = Current asset / Current liabilities
                      = 80000/50000 = 1.6

Quick ratio = Quick assets / Current liabilities
                    = 60000/ 50000 = 1.2
  • Current Assets = Trade receivables + Cash in hand + Cash at Bank + Inventories + Advance Tax 
= 30000 + 10000 + 10000 + 20000 + 1000 = 80000
  • Quick Assets = Current Assets - Inventories = 80000-20000 = 60000
  • Current Liabilities = 50000.


What is meant by 'Activity Ratios' ?

Activity ratios are the financial ratios that measure a firm’s ability to convert different accounts within its balance sheet into cash or sales.
Activity ratios measures the relative efficiency of a firm based on its use of its assets, leverages, or other similar balance sheet items and are important in determining whether a company's management is doing a good enough job of generating revenues and cash from its resources.



Write a word or a phrase or a term which can substitute each one of the following statement:
The difference between current assets and current liabilities.

Working Capital :- Working capital means the funds available for the day to day operations at an enterprise. It also represents the excess of current assets over current liabilities including short term loans.


Match the items of List I with the items in List II.

  1. Capital gearing ratio is used to show the proportion of fixed interest bearing capital to funds belonging to the shareholder. It is used to measure the long term solvency of the company. 
  2. Fixed asset turnover used to measure the efficiency with which the firm uses its fixed asset to generate revenue.
  3. Return on equity measures the profitability of the funds invested in the company. In other words it calculates the percentage returns generated to equity shareholders.
  4. Acid test or quick ratio is used to measure the short term solvency of the company.


Match the items of List-1 with those of List -II and indicate the correct code:

  1. Acid test ratio measure the short term liquidity of the company.
  2. Debt Service Coverage Ratio measures that to what extent are the profits made sufficient to service or pay the debt holders.
  3. Debt-Equity ratio measures the long term solvency of the company by analyzing the capital structure of the company.
  4. Stock turnover ratio measures the level of activity being undertaken and the time within which the stock is being used or sold.


Class 12 Commerce Accountancy Extra Questions