Students can Download 2nd PUC Accountancy Chapter 10 Accounting Ratios Questions and Answers, Notes Pdf, 2nd PUC Accountancy Question Bank with Answers helps you to revise the complete Karnataka State Board Syllabus and to clear all their doubts, score well in final exams.

## Karnataka 2nd PUC Accountancy Question Bank Chapter 10 Accounting Ratios

### 2nd PUC Accountancy Accounting Ratios Text Book Questions and Answers

Short Questions and Answers

Question 1.

What do you mean b Ratio Analysis?

Answer:

Ratio Analysis is a technique of financial analysis. It describes the relationship between Various items of Balance Sheet and Income Statements, it helps us in ascertaining profitability, operational efficiency, solvency, etc. of a firm. It may be expressed as a fraction, proportion, percentage and in times.

It enables budgetary controls by assessing qualitative relationship among different financial variables. Ratio Analysis provides vital information to various accounting users regarding the financial position and viability and performance of a firm. It also lays down the basic framework for decision making and policy designing by management.

Question 2.

What are the various types of ratios?

Answer:

Accounting ratios are classified in the following two ways.

I. Traditional Classification

II. Functional Classification

I. Traditional Classification: This classification is based on the financial statements, i.e. Profit and Loss Account and Balance Sheet. The Traditional Classification further bifurcates accounting ratios on the basis of the accounts to which the elements of a ratio belong. On the basis of accounts of financial statements, the Traditional Classification bifurcate accounting ratios as:

a. Income Statement Ratios: These are those ratios whose all the elements belong only to the Trading and Profit and Loss Account, like Gross Profit Ratio, etc.

b. Balance Sheet Ratios: These are those ratios whose all the elements belong only to the Balance Sheet, like Current Ratio, Debt Equity Ratio, etc.

c. Composite Ratios: These are those ratios whose elements belong both to the Trading and Profit and Loss Account as well as to the Balance Sheet, like Trade recievables Turnover Ratio, etc.

II. Functional Classification: This classification reflects the functional need and the purpose of calculating ratio. The basic rationale to compute ratio is to ascertain liquidity, solvency, financial performance and profitability of a business. Consequently, the Functional Classification classifies various accounting ratios as:

a. Liquidity Ratio: These ratios are calculated to determine short term solvency.

b. Solvency Ratio: These ratios are calculated to determine long term solvency.

c. Activity Ratio: These ratios are calculated for measuring the operational efficiency and efficacy of the operations. These ratios relate to Revenue from operations or Cost Of Revenue from Operations.

d. Profitability Ratio: These ratios are calculated to assess the financial performance and the financial viability of the business.

Question 3.

What relationships will be established to study:

a. Inventory Turnover

b. Debtor Turnover

c. Payables Turnover

d. Working Capital Turnover.

Answer:

a. Inventory Turnover Ratio: Inventory Turnover Ratio: This ratio is computed to determine the efficiency with which the Inventory is used. This ratio is based on the relationship between C6st Of Revenue from

Operations and average Inventory kept during the year.

Cost of Goods Sold = Opening Stock t Purchases 4 Direct Expenses – Closing Stock or,

Cost of Goods Sold = Net Sales – Cross Profit

b. Trade receivables Turnover Ratio: This ratio is computed to determine the rate at which the amount is collected from the Trade recievables. It establishes the relationship between net credit Revenue from operations and average accounts receivables.

Net Credit Sales = Total Sales – Cash Sales

Average Accounts Receivables =

c. Payable Turnover Ratio: This ratio is known as Trade Payables Turnover Ratio. It is computed to determine the rate at which the amount is paid to the Trade Payables. It establishes the relationship between net credit purchases and average accounts payables.

Net Credit Purchases = Total Purchases – Cash Purchases

Average Accounts Payable

d. Working Capital Turnover Ratio: This ratio is computed to determine how efficiently the working capital is utilised in making Revenue from operations. It establishes the relationship between net Revenue from operations and working capital.

Net Sales = Total Sales – Sales Return

Working Capital = Current Assets – Current Liabilities.

Question 4.

The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due? Comment.

Answer:

The liquidity of a business firm is measured by its ability to pay its long term obligations. The long term obligations include payments of principal amount on the due date and payments of interests on the regular basis. Long term solvency of any business can be calculated on the basis of the following ratios.

a. Debt-Equity Ratio: It depicts the relationship between the borrowed fund and owner’s funds. The lower the debt-equity ratio higher will be the degree of security to the lenders. A low debt- equity ratio implies that the company can easily meet its long term obligations.

b. Total Assets to Debt Ratio: It shows the relationship between the total assets and the long term loans. A high Total Assets to Debt Ratio implies that more assets are financed by the implies more security to the lenders.

c. Interest Coverage Ratio- This ratio depicts the relationship between amount of profit utilised for paying interest and amount of interest payable. A high Interest Coverage Ratio implies that the company can easily meet all its interest obligations out of its profit.

Question 5.

The average age of inventory is viewed as the average length of time inventory is held by the firm or as the average number of day’s Revenue from operations in inventory. Explain.

Answer:

Inventory Turnover Ratio: This ratio is computed to determine the efficiency with which the Inventory is used. This ratio is based on the relationship between Cost of Revenue from Operations and average Inventory kept during the year.

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses – Closing Stock or, Cost of Goods sold = Net Sales – Cross Profit.

It shows the rate with which the Inventory is turned into Revenue from operations or the number of times the Inventory in turned into Revenue from operations during the year. In other words, this ratio reveals the average length of time for which the inventory is held by the firm.

Long Questions and Answers

Question 1.

What are liquidity ratios? Discuss the importance of current and liquid ratio.

Answer:

Liquidity ratios are calculated to determine the short-term solvency of a business, i.e. the ability of the business to pay back its current dues. Liquidity means easy conversion of assets into cash without any significant loss and delay.

Short-term Trade Payables are interested in ascertaining liquidity ratios for timely payment of their debts.

Liquidity ratio includes

1. Current Ratio

2. Liquid Ratio or Quick Ratio

1. Current Ratio: It explains the relationship between current assets and current liabilities. It is calculated as:

Currents Assets are those assets that can be easily converted into cash within a short period of time like, cash in hand, cash at bank, marketable securities, Trade recivables, Inventory, bills receivables, prepaid expenses, etc.

Current Liabilities are those liabilities that are to be repaid within a year like, bank overdraft, bills payables, Short-term Trade Payables, provision for tax, outstanding expenses etc.

Importance of Current Ratio: It helps in assessing the firm’s ability to meet its current liabilities on time. The excess of current assets over current liabilities provide a sense of safety and security to the Trade Payables. The ideal ratio of current assets over current liabilities is 2:1. It means that the firm has sufficient funds to meet its current liabilities. A higher ratio indicates poor investment policies of management and low ratio indicates shortage of working capital and lack of liquidity.

2. Liquid Ratio: It explains the relationship between liquid assets and current liabilities. It indicates whether a firm has sufficient funds to pay its current liabilities immediately. It is calculated as:

Liquids Assets = Current Assets – Stock – Prepaid Expenses

Importance of Liquid Ratio: It helps in determining whether a firm has sufficient funds if it has to pay all its current liabilities immediately.

It does not include Inventory, since it takes comparatively more time to convert the Inventory into cash. Further prepaid expenses are also not included in liquid assets, since these cannot be converted into cash. The ideal Liquidity Ratio is considered to be 1:1. It means that the firm has a rupee in form of liquid assets for every rupee of current liabilities.

Question 2.

How would you study the solvency position of the firm?

Answer:

Solvency position of a firm is studied with the help of the Solvency Ratios. Solvency ratios we the measures of the long-term financial position of the firm in terms of its ability to pay its long- term liabilities. In other words, the solvency of the firm is measured by its ability to pay its long term obligation on the due date.

The long term obligations include payments of principal amount on the due date and payments of interests on the regular basis. Long term solvency of any business can be calculated on the basis of the following ratios.

a. Debt-Equity Ratio: It depicts the relationship between the borrowed fund and owner’s funds. The lower the debt-equity ratio higher will be the degree of security to the lenders. A low debt- equity ratio implies that the company can easily meet its long term obligations.

Equity or the Shareholders Fund includes Preference Share Capital, Equity Share Capital, Capital Reserve, Securities Premium, General Reserve less Accumulated Loss and Fictitious Assets

b. Total Assets to Debt Ratio: It shows the relationship between the total assets and the long term loans. A high Total Assets to Debt Ratio implies that more assets are financed by the owner’s fund and the company can easily meet its long-term obligations. Thus, a higher ratio implies more security to the lenders.

Total Assets includes all fixed and current assets except fictitious assets like, Preliminary Expenses, Underwriting Commission, etc.

Debt includes all long-term loans that are to be repaid after one year. It includes debentures, mortgage loans, bank loans, loans from other financial institutions, etc.

c. Interest Coverage Ratio- This ratio depicts the relationship between amount of profit utilise for paying interest and amount of interest payable. A high Interest Coverage Ratio implies that the company can easily meet all its interest obligations out of its profit.

d. Proprietary Ratio- It shows the relationship between the Shareholders Fund and the Total Assets. This ratio reveals the financial position of a business. The higher the ratio the higher will be the degree of safety for the Trade Payables. It is calculated as:

Total Assets includes all fixed and current assets except fictitious assets like, Preliminary Expenses, Underwriting Commission, etc.

Question 3.

What are important profitability ratios? How are they worked out?

Answer:

Profitability ratios are calculated on the basis of profit earned by a business. This ratio gives a percentage measure to assess the financial viability, profitability and operational efficiency of the business. The various important Profitability Ratios are as follows:

- Gross Profit Ratio
- Operating Ratio
- Operating Profit Ratio
- Net Profit Ratio
- Return on Investment or Capital Employed
- Earnings per Share Ratio
- Dividend Payout Ratio
- Price Earnings Ratio

1. Gross Profit Ratio: It shows the relationship between Gross Profit and Net Revenue from operations. It depicts the trading efficiency of a business. A higher Gross Profit Ratio implies a better position of a business, whereas a low Gross Profit Ratio implies an inefficient unfavourable Revenue from operations policy.

Gross Profit = Net Sales – Cost of Goods Sold

Net Sales = Total Sales – Sales Return

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses – closing Stock.

2. Operating Ratio: It shows the relationship between Cost of Operation and Net Revenue from operations. This ratio depicts the operational efficiency of a business. A low Operating Ratio implies higher operational efficiency of the business. A low Operating Ratio is considered better for the business as it enables the business to be left with a greater amount after covering its operation costs to pay for interests and dividends.

Operating cost = Cost of Goods Sold + Operating Expenses

Cost of Goods Sold = Sales – Gross Profit

3. Operating Profit Ratio: It shows the relationship between the Operating Profit and Net Revenue from operations. It helps in assessing the operational efficiency and the performance of the business.

Net Sales = Total Sales – Sales Return

4. Net Profit Ratio: It shows the relationship between net profit and Revenue from operations. Higher ratio is better for firm. ,It depicts the overall efficiency of a business and acts as an important tool to the investors for analysing and measuring the viability and performance of the business.

Net sales = Total sales – Sales Return

5. Return on Investment or Capital Employed- It shows the relationship between the profit earned and the capital employed to earn that profit. It is calculated as: This ratio depicts the efficiency with which the business has utilised the capital invested by the investors. It is an important yardstick to assess the profit earning capacity of the business.

Net Sales = Total Sales – Sales Return

6. Earning per Shares- It shows the relationship between the amount of profit available to distribute as dividend among the equity shareholders and number of equity shares.

Capital Employed = Fixed Assets + Current Assets – Current Liabilities

or, Capital Employed = Share Capital + Reserve and surplus + Long-term Funds – Fictitious Assets.

This ratio depicts the efficiency with which the business has utilised the capital invested by the investors. It is an important yardstick to assess the profit earning capacity of the business.

7. Dividend Payout Ratio: It shows the relationship between the dividend per share and earnings per share. This ratio depicts the amount of earnings that is distributed in the form of dividend among the shareholders. A high Dividend Payout Ratio implies a better position and goodwill of the business for the shareholders.

8. Price Earning Ratio: It shows the relationship between the market price of a share and the earnings per share. This ratio is the most common tool that is used in the Inventory markets. This ratio depicts the degree of reliance and trust that the shareholders have on the business. This ratio reflects the expectation of the shareholders regarding the rise in the future prices of the company’s shares. A higher Price Earning Ratio definitely enables a company to enjoy favourable position in the market.

Question 4.

The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity. Explain.

Answer:

Current Ratio: It explains the relationship between current assets and current liabilities. It is calculated as:

Currents Assets are those assets that are easily converted into cash within a short period ot time like cash in hand, cash at bank, marketable securities, Trade recievables, Inventory, bills receivables, prepaid expenses, etc.

Current Liabilities are those liabilities that are to be repaid within a year like bank overdraft, bills payables, Short-term Trade Payables, provision for tax, outstanding expenses etc.

Liquid Ratio: It explains the relationship between liquid assets and current liabilities. It indicates whether a firm has sufficient funds to pay its current liabilities immediately. It is calculated as:

Generally, Current Ratio is preferable for such type of business where the Inventory or the inventories cannot easily be converted into cash like heavy machinery manufacturing companies, locomotive companies, etc. This is because, the heavy Inventorys like machinery, heavy tools etc. cannot be easily sold off.

But on the other hand, the businesses where the Inventory can be easily realised or sold off regard Liquid Ratio to be more suitable measure to reveal their liquidity position. For example, the inventories of a service sector company is very liquid as there are no Inventory kept for sale, so they prefer Liquid Ratio as a measure of overall liquidity.

Moreover, sometimes companies prefer to resort to Liquid Ratio instead of Current Ratio, if the prices of the Inventory held are prone to fluctuate. This is because if the prices of the inventories fluctuate more, then this may affect their liquidity position of the business and may reduce (or overcast) the Current Ratio. Consequently, they prefer Liquid Ratio as it excludes inventories and Inventorys.

Thirdly, if the Inventory forms the major portion of a company’s current assets, then they would prefer Current Ratio and not Liquid Ratio. This is because their current assets mostly consist of Inventory. The Liquid Ratio of such company will be very low as liquid assets exclude Inventory. This will reduce their Liquid Ratio and may create a bad image for the Trade Payables. In such a case, Current Ratio provides better measure of overall liquidity.

### 2nd PUC Accountancy Accounting Ratios Numerical Questions and Answers

Question 1.

Following is the Balance Sheet of Raj Oil Mills Limited as at March 31, 2015. Calculate current ratio.

Answer:

Current Liabilities = Stock + Debotrs + Cash at bank

= 55,800 + 28,800 + 59,400

= 1,44,000

Current liabilities = Trade Payables

= 72,000

Current Ratio = \(\frac{1,44,000}{72,000}=\frac{2}{1}\) = 2 : 1

Question 2.

Following is the Balance Sheet of Title Machine Ltd. as at March 31, 2015.

Answer:

= \(\frac{24,00,000}{30,00,000}\) = 0.8:1

Current Assets = Inventories + Trade Receivables + Cash + Short term Loans and Advances

= 12.00,000 + 9,00,000 + 2,28,000 + 60,000 = Rs. 24,00,000

Current Liabilities = Trade Payables + Short-term Borrowing + Short-term Provisions

= 23,40,000 + 6,00,000 = 60,000

= Rs. 30,00,000

2. Quick Ratio

= \(\) = 0.4:1

Quick Assets Trade Receivables + Cash + Short term Loans and Advances

= 9,00,000 + 2,28,000 + 72,000

= Rs. 12,00,000

Question 3.

Current Ratio is 3.5 : 1. Working Capital is Rs. 90000. Calculate the amount of Current Assets and Current Liabilities.

Answer:

or, Current Assets = 3.5 Current Liabilities

(1) Working Capital = Current Assets – Current Liabilities

Working Capital = 90,000

or, Current Assets – Current Liabilities = 90,000

or, 3.5 Current Liabilities – Current Liabilities

= 90,000 (from 1)

or, 2.5 Current Liabilities = 90,000

or Current Liabilities = \(\frac{90,000}{2.5}\) = 36,000

or Current Assets = 3.5 Current Liabilities

= 3.5 × 36,000

= 1,26,000

Question 4.

Shine Limited has a current ratio 4.5 : 1 and quick ratio 3 : 1; if the inventory is 36,000, calculate Current Liabilities and Current Assets.

Answer:

or, 4.5 Current Liabilities = Current Assets

or, 3 Current Liabilities = Quick Assets

Quick Assets = Current Assets – Stock

= Current Assets – 36,000

or, 4.5 Current Liabilities – 3 Current Liabilities

= 36,000

or, 1.5 Current Liabilities = 36,000

or, Current Liabilities = 24,000

Current Assets = 4.5 current Liabilities

or, Current Assets = 4.5 × 24,000

= 1,08,000

Question 5.

Current Liabilities of a company are Rs. 75,000. If current ratio is 4:1 and Liquid Ratio is 1 : 1, calculate value of Current Assets, Liquid Assets and Inventory.

Answer:

or, 4 × 75,000 = Current Assets

or, Current Assets = 3,00,000

LiquidAssets = 75,000

Stock = Current Assets – Liquid Assets

= 3,00,000 – 75,000

= 2,25,000

Question 6.

Handa Ltd. has inventory of Rs. 20,000. Total liquid assets are Rs. 1,00,000 and quick ratio is 2 : 1. Calculate current ratio.

Answer:

Question 7.

Calculate debt – equity ratio from the following information:

Total Assets Rs. 15,00,000

Current liabilities Rs. 6,00,000

Total Dcbts Rs. 12,00,000

Answer:

Equity Total Assets – Total Debts

= 15,00,000 – 12,00,000

= 3,00000

Long Term Debts = Total Debts – Current Liabilities

Question 8.

Calculate Current Ratio if:

Inventory is Rs. 6,00,000; Liquid Assets Rs. 24,00,000; Quick Ratio 2 : 1.

Answer:

Question 9.

Compute Inventory Turnover Ratio from the following information:

Answer:

Cost of Goods sold = Net Sales – Gross Profit

= 2,00,000 – 50,000

= 1,50,000

Opening Stock = Closing Stock – 20,000

= 60,000 – 20,000

= 40,000

Question 10.

Calculate following ratios from the following information:

(i) Current ratio

(ii) Liquid ratio

(iii) Operating Ratio

(iv) Gross profit ratio

Answer:

Question 11.

From the following information calculate:

(i) Gross Profit Ratio

(ii) Inventory Turnover Ratio

(iii) Current Ratio

(iv) Liquid Ratio

(v) Net Profit Ratio

(vi) Working Capital Ratio:

Answer:

(i)

Gross Profit = Revenue from operation – Cost of Sales

= 25,20,000 – 19,20,000

= 6,00,000

Gross profit Ratio = \(\frac{6,00,000}{25,20,000}\) × 100 = 23.81

(ii)

= \(\frac{19,20,000}{8,00,000}=\frac{2.4}{1}\) = 2.4:1

(iii)

Current Asset = Liquid Assets + Inventory

= 7,60,000 + 8,00,000

= 15,60,000

Current Ratio = \(\frac{15,60,000}{6,00,000}=\frac{2.6}{1}\) = 2.6:1

(iv)

(v)

(vi)

Working Capital = Current Assets – Current Liabilities

= 15,60,000 – 6,00,000

= 9,60,000

Working Capital Ratio = \(\frac{25,20,000}{9,60,000}\) = 2.625 times

Question 12.

Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information:

Answer:

Gross Profit = Net revenue from operations – Cost of Goods Sold

= 10,00,000 – 6,00,000

= 4,00,000

Gross Profit Ratio = \(\frac{4,00,000}{10,00,000} \times 100\) = 40%

Working Capital = Current Assets – Current Liabilities

= 4,00,000 – 2,80,000

= 1,20,000

Working Capital Ratio = \(\frac{10,00,000}{1,20,000}\) = 8.33 times

Total Assets = Paid up Capital + Debentures + Current Liabilities

(∵ Total Liabilities = Total Assets)

= 5,00,000 + 2,00,000 + 2,80,000

= 9,80,000

Proprietary Ratio = \(\frac{5,00,000}{9,80,000}\) = 25 : 49 = 0.51 : 1

Question 13.

Calculate Inventory Turnover Ratio if:

Inventory in the beginning is Rs. 76,250, Inventory at the end is 98,500, Gross Revenue from Operations is Rs. 5,20,000, Sales Return is Rs. 20,000, Purchases is Rs. 3,22,250.

Answer :

Gross Profit Ratio = \(\frac{4,00,000}{10,00,000} \times 100\) = 40%

Cost of Goods Sold = Opening Inventory + Purchases – Closing Inventory

= 76,250 + 3,22,250 – 98,500

= 3,00,000

Question 14.

Calculate Inventory Turnover Ratio from the data given below:

Answer:

Cost of Goods Sold = Opening Stock + Purchases + Carriage – Closing Stock

= 10,000 + 25,000 + 2,500 – 5,000

= 32,500

Stock Turnover Ratio = \([latex]\frac { 32,500 }{ 7,500 }\)[/latex] = 4.33 times

Question 15.

A trading firm’s average inventory is Rs. 20,000 (cost). If the inventory turnover ratio is 8 times and the firm sells goods at a profit of 20% on sales, ascertain the profit of the firm.

Answer:

or, Cost of Goods Sold = 20,000 × 8

or, Cost of Goods Sold = 1,60,000

Let Sale Price be Rs 100

Then Profit is Rs 20

Hence, the Cost of Revenue from Operations = Rs .100

Rs .20 = Rs.80 If the Qost of Revenue from Operations

is Rs 80, then Revenue from operations = 100

If the Cost of Revenue from Operations is Rs 1, then Revenue from operations = \(\frac { 100 }{ 80 }\)

If the Cost of Goods Sold is 1,60,000 then Sales = \(\frac { 100 }{ 80 }\) × 1,60,000 = 2,00,000

Profit = Revenue from Operations

= 2,00,000 – 1,60,000

= Rs. 40,000

Question 16.

You are able to collect the following information about a company for two years:

Calculate Inventory Turnover Ratio and Trade Receivables Turnover Ratio

Answer:

or, Cost of Revenue from Operations = Revenue from operations – Gross Profit

or, Gross Profit = 25% of Sales

= 25% of 24,00,000

= 6,00,000

or, Cost of Goods sold = 24,00,000 – 6,00,000

= 18,00,000

Note: It has been assumed that all Revenue from operations are credit Revenue from operations

Question 17.

From the following Balance Sheet and other information, calculate following ratios:

(i) Debt-Equity Ratio

(ii) Working Capital Turnover Ratio

(iii) Trade Receivables Turnover Ratio

Additional Information: Revenue from Operations Rs. 18,00,000 (Debt-Equity Ratio 0.63 : 1; Working Capital Turnover Ratio 1.39 times; Trade Receivables Turnover Ratio 2 times)

Answer:

1. Debt – Equity Ratio

Debt = Long Term Borrowings = Rs. 12,00,0000

Equity = Share Capital + Reserve and Surplus

= 10,00,000 + 9,00,000

= Rs. 19,00,000

2. Working Capital Turnover Ratio

Revenue from Operations = Rs. 18,00,000

Working Capital = Current Assets – Current Liabilities

= 18,00,000 – 5,00,000

= Rs. 13,00,000

3. Trade Receivables Turnover Ratio

Net Credit Sales = Rs. 18,00,000

Average Trade Receivable = Rs.9,00,000

Notes:

1. Revenue from Operations are assumed to be revenue generated from credit sales.

2. The amount of trade receivables given in the Balance Sheet is assumed to be Average Trade Receivables.

Question 18.

From the following information, calculate the following ratios:

(i) Liquid Ratio

(ii) Inventory turnover ratio

(iii) Return on investment

Answer:

(i)

Quick Assets = Cash + Debtors

= 40,000 + 1,00,000

= 1,40,000

Current Liabilities = Creditors + Outstanding Expenses

= 1,90,000 + 70,000

= 2,60,000

Ouick Ratio = \(\frac{1,40,000}{2,60,000}\) = 7 : 13 = 0.54 : 1

(ii)

Cost of Revenue from Operations = Revenue from Operations – Gross Profit

= 4,00,000 – 1,94,000

= 2,06,000

Capital Employed = Equity Share Capital + Profit and Loss

= 2,00,000 + 1,40,000

= 3,40,000

Return on Investment = \(\frac{1,40,000}{3,40,000}\) × 100 = 41.17%

Question 19.

From the following, calculate

(a) Debt-Equity Ratio

(b) Total Assets to Debt Ratio

(c) Proprietary Ratio.

Answer:

(a)

Equity / Share holders Funds = Equity Share Capital + Preference Share Capital + General Reserve + Accumulated Profit – Preliminary Expenses Written off

= 75,000 + 25,000 + 50,000 + 30,000 – 5,000

= 1,75,000

Question 20.

Cost of Revenue from Operations is Rs. 1,50,000. Operating expenses are Rs. 60,000. Revenue from Operations is Rs. 2,50,000. Calculate Operating Ratio.

Answer:

Question 21.

Calculate the following ratio on the basis of following information:

(I) Gross Profit Ratio

(ii) Current Ratio

(iii) Acid Test Ratio

(iv) Inventory Turnover Ratio

(v) Fixed Assets Turnover Ratio

Answer:

Question 22.

From the following information calculate Gross Profit Ratio, Inventory Turnover Ratio and Trade Receivable Turnover Ratio.

Answer:

### 2nd PUC Accountancy Accounting Ratios Additional Questions and Answers

Question 1.

Who are the users of financial ratio analysis? Explain the significance of ratio analysis to them?

The users of financial ratio analysis are as follows:

Answer:

1. Investors

2. Management

3. Short term Creditors

4. Long term Creditors.

The following points signify the importance of ratio analysis for these users.

1. Investors: The main concern for the investors is the security of the funds invested by them in the business and returns on their investments. The security of the funds is directly related to the profitability and operational efficiency of the business. Consequently, they are interested in knowing Earnings Per Share, Return on Investment and Return on Equity.

2. Management: They uses ratio analysis to determine how effectively the assets are being used. They are interested in future growth and prospects. They design various policy measures and draft future plans. Consequently, they are interested in Activity Ratios and Profitability Ratios like. Net Profit Ratio, Debtors Turnover Ratio, Fixed Assets Turnover Ratios,etc.

3. Short-term Creditors: Short-term creditors are interested in timely payment of their debts in short run. Consequently, they are interested in Liquidity Ratios like, Current Ratio, Quick Ratios etc. These ratios reveal the current financial position of the business.

4. Long-term Creditors: Long-term creditors provide funds for more than one year, so they are interested in long term solvency of the firm and in assessing the ability of the firm to pay timely interests. Consequently, they are interested in calculating Solvency Ratios like, Debt- Equity Ratio, Proprietary Ratio, Total Assets to Debt Ratio, Interest Coverage Ratio, etc.

Question 2.

Why would the inventory turnover ratio be more important when analysing a grocery store than an insurance company?

Answer:

Grocery store is a trading concern and involved in business of buying and selling of grocery. It keeps stock of various groceries to meet the requirement of the customers and it should calculate the inventory turnover ratio. Hence, this ratio is more important for a grocery store then it is for an insurance company as the latter does not need to maintain any stock of goods sold. The insurance company is engaged in delivering service that is intangible and, thus, cannot be stored.

Question 3.

Financial ratio analysis is conducted by four groups of analysts: managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?

Answer:

Financial ratio analysis is conducted by four groups of analysts: managers, equity investors, long term creditors and short term creditors. The primary emphasis of each of these groups in evaluating ratios are:-

1. Management: They use ratio analysis to determine how effectively the assets are being used. They are interested in future growth and prospects. They design various policy measures and draft future plans. Consequently, they are interested in Activity Ratios and Profitability Ratios like Net Profit Ratio, Debtors Turnover Ratio, Fixed Assets Turnover Ratios, etc.

2. Equity Investors: The main concern for the investors is the security of the funds invested by them in the business and returns on their investments. The security of the funds is directly related to the profitability and operational efficiency of the business. Consequently, they are interested in knowing Earnings Per Share, Return on Investment and Return on Equity.

3. Long-term Creditors: Long-term creditors provide funds for more than one year, so they ’ are interested in long term solvency of the firm and in assessing the ability of the firm to

pay timely interests. Consequently, they are interested in calculating Solvency Ratios like, Debt-Equity Ratio, Proprietary Ratio, Total Assets to Debt Ratio, Interest Coverage Ratio,etc.

4. Short-term Creditors: Short-term creditors are interested in timely payment of their debts in short run. Consequently, they are interested in Liquidity Ratios like, Current Ratio, QuickRatios etc. These ratios reveal the current financial position of the business.

Question 4.

What do you mean by Ratio Analysis?

Answer:

Ratio analysis covers the technique of accounting ratio for analysing the information contained in financial statements for assessing the solvency, efficiency and profitability of the firms.

Question 5.

What are various type of ratio?

Answer:

Types of ratio analysis are:

- Liquidity ratio
- Solvency ratio
- Activity or turnover ratio
- Profitability ratio.

Question 6.

State any two objectives of ratio analysis.

Answer:

Objectives of ratio analysis are as:

- To know the areas of business which need more attention.
- To know about potential areas which can be improved with the efforts in the desired direction.
- To provide a deeper analysis of the profitability, liquidity, solvency and efficiency levels in the business.
- To provide information derived from financial statements useful for making projections and estimates for the future.

Question 7.

State any two uses of Ratio analysis.

Uses of ratio analysis are as:

Answer:

(a) Helps in Decision Making: Financial statements are prepared for decisionmaking, Ratio analysis helps in making decisions from the information provided in the financial statement.

(b) Helps in communicating: The financial strengths and weakness of a firm are communicated in a more easy and understandable manner by the use of ratio.

(c) Utility to control: The employees of the firm are interested in knowing the financial position of the firm especially in terms of its profitability.

(d) Helps in control: Ratio analysis help in marketing effective control of the business. The calculated ratio can be compared with the standard ratios and deviations could be located and corrective measures can be taken.

Question 8.

What is current ratio?

Answer:

Current ratio may be defined as the relationship between current assets and current liabilities. This is a measure of general liquidity.

Question 9.

What is stock turnover ratio?

Answer:

Stock turnover ratio is the ratio which indicate the number of times the stock is timed over during a year. It expresses the relationship between the cost of goods sold and stock of goods.

Question 10.

What is debt equity ratio?

Answer:

Debt equity ratio measures the relationship between long term debt and equity. This ratio indicates the relationship between the external equities and the shareholders fund.

Question 11.

What is operating Ratio?

Answer:

Operating ratio is computed to analyse cost of operation in relation to sales.

Operating ratio = operating cost/ net sales × 100.