CBSE Class 12 Accountancy Accounting Ratios Important Questions Set 01

Very Short Answer Questions (1 Mark)

Question 1. State whether the following statement is True or False: Accounting Ratios are those that are based on financial statements and express an arithmetical relation between various accounting variables.
Answer:
True

Teacher's Note:
1. Ratios are always calculated from figures in the Statement of Profit and Loss and the Balance Sheet.

Question 2. State whether the following statement is True or False: Quick Ratio establishes the relationship between Non-current assets and Non-current liabilities.
Answer:
False

Teacher's Note:
1. Quick Ratio = Quick Assets ÷ Current Liabilities; non-current items are never used in it.

Question 3. State whether the following statement is True or False: Solvency Ratio is calculated to measure the enterprise’s ability to pay interest on long-term liabilities at maturity.
Answer:
True

Teacher's Note:
1. Solvency ratios look at long-term debts, while liquidity ratios look at short-term dues.

Question 4. State whether the following statement is True or False: Loose tools and stores and spares are excluded to calculate working capital while calculating Working Capital Turnover Ratio.
Answer:
True

Teacher's Note:
1. Under CBSE guidelines loose tools and stores and spares are excluded from current assets when working capital is calculated for this ratio.

Question 5. State whether the following statement is True or False: When long-term debts are increased and shareholders’ funds remain unchanged, Debt to Equity Ratio will increase.
Answer:
True

Teacher's Note:
1. Only the numerator (debt) rises, so the ratio rises.

Question 6. Fill in the blank: __________ establishes the relationship between proprietors’ funds and the total assets.
Answer:
Proprietary Ratio

Teacher's Note:
1. Proprietary Ratio = Shareholders’ Funds ÷ Total Assets.

Question 7. Fill in the blank: The formula to calculate return on investment __________ .
Answer:
\( \frac{\text{Net Profit before Interest, Tax and Dividend}}{\text{Capital Employed}} \times 100 \)

Teacher's Note:
1. Profit is taken before interest and tax because capital employed includes long-term debt as well as equity.

Question 8. Fill in the blank: Operating ratio and __________ are complementary to each other.
Answer:
Operating profit ratio

Teacher's Note:
1. Operating Ratio + Operating Profit Ratio = 100%.

Question 9. Fill in the blank: Trade receivables are sum total of debtors and __________ .
Answer:
Bills receivable

Teacher's Note:
1. Bills payable belong to trade payables, not trade receivables.

Question 10. Fill in the blank: Revenue from operations is ₹18,00,000, Gross Profit 25% on cost, Operating expenses ₹1,80,000. Operating Ratio is __________ .
Answer:
90%
Gross Profit = 18,00,000 × \( \frac{25}{125} \) = ₹3,60,000; Cost of Revenue from Operations = 18,00,000 − 3,60,000 = ₹14,40,000
Operating Ratio = \( \frac{14,40,000 + 1,80,000}{18,00,000} \times 100 \) = 90%

Teacher's Note:
1. Profit 25% on cost means 25/125 of revenue, not 25% of revenue.

Question 11. What is meant by ratio analysis? [CBSE Delhi 2001]
Answer:
Ratio analysis is a process of computing, determining and presenting the relationship of items or group of items in the financial statements. It is an important technique of financial analysis.

Teacher's Note:
1. A ratio on its own says little; it becomes useful when compared with past years, other firms or an ideal standard.

Question 12. State any two limitations of ratio analysis. [CBSE (AI) 2010(C)]
Answer:
(i) Qualitative factors are ignored, (ii) Lack of standard ratios.

Teacher's Note:
1. Other limitations you can write: effect of price-level changes is ignored, and ratios are only as reliable as the accounts they come from.

Question 13. What will be the operating profit ratio, if operating ratio is 85.07%?
Answer:
Operating profit ratio = 100 − 85.07% = 14.93%.

Teacher's Note:
1. Operating Ratio + Operating Profit Ratio always equals 100%.

Question 14. State the limitations of ratio analysis regarding qualitative aspect? [CBSE (AI) 2010(C)]
Answer:
Ratio analysis is a technique of quantitative analysis and therefore it ignores qualitative aspects which may be important for an enterprise.

Teacher's Note:
1. Examples of qualitative factors ignored: quality of management, employee relations, customer goodwill.

Teacher's Note:
1. When the ratio is more than 1, an equal decrease in both current assets and current liabilities increases it.

Teacher's Note:
1. Prepaid rent is not a quick asset, so paying cash for it reduces quick assets.

Short Answer Questions (2 Marks)

Teacher's Note:
1. When the ratio is below 1, an equal decrease in both quick assets and current liabilities lowers it further (check: 0.8 − 0.05 over 1 − 0.05 < 0.8).

Teacher's Note:
1. Long-term provisions are part of debt in this ratio; current liabilities are not.

Teacher's Note:
1. When capital is not given, find shareholders’ funds as total assets minus all outside liabilities.

Question 20. From the following details obtained from the financial statements of Jeev Ltd., Calculate interest coverage ratio:
Net Profit after tax ₹1,20,000
12% Long-term Debt ₹20,00,000
Tax Rate 40%. [CBSE Delhi 2016]
Answer:
Interest Coverage Ratio = \( \frac{\text{Net Profit before Interest and Tax}}{\text{Fixed Interest Charges}} \)
Net Profit after tax = ₹1,20,000; Tax rate = 40%
Net Profit before tax = ₹1,20,000 × 100/60 = ₹2,00,000
Add: Interest on 12% long-term Debt, i.e., 12/100 × ₹20,00,000 = ₹2,40,000
Profit before Interest and Tax = ₹4,40,000
Interest Coverage Ratio = \( \frac{4{,}40{,}000}{2{,}40{,}000} \) = 1.83 times

Teacher's Note:
1. Profit after tax at 40% tax is 60% of profit before tax, so divide by 60 and multiply by 100.

Question 21. From the following information, calculate inventory turnover ratio; Revenue from operations ₹16,00,000; Average Inventory ₹2,20,000; Gross Loss Ratio 5%. [CBSE (AI) 2016]
Answer:
Inventory Turnover Ratio = \( \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}} \)
Cost of Revenue from Operations = Revenue from Operations + Gross Loss = ₹16,00,000 + ₹80,000 = ₹16,80,000
Average Inventory = ₹2,20,000
Inventory Turnover Ratio = \( \frac{16{,}80{,}000}{2{,}20{,}000} \) = 7.64 times

Teacher's Note:
1. With a gross loss, cost of revenue from operations is more than revenue, so the loss is added, not deducted.

Question 22. From the following information related to Naveen Ltd., calculate
(a) Return on Investment and,
(b) Total Assets to Debt Ratio.
Information:
Fixed Assets ₹75,00,000; Current Assets ₹40,00,000; Current Liabilities ₹27,00,000; 12% Debentures ₹80,00,000 and Net Profit before Interest, Tax and Dividend ₹14,50,000. [CBSE Delhi 2015]
Answer:
(a) Return on Investment = \( \frac{\text{Net Profit before Interest, Tax and Dividend}}{\text{Capital Employed}} \times 100 \)
Net Profit before Interest, Tax and Dividend = ₹14,50,000
Capital Employed = Fixed Assets + Current Assets – Current Liabilities = ₹75,00,000 + ₹40,00,000 – ₹27,00,000 = ₹88,00,000
Return on Investment = \( \frac{14{,}50{,}000}{88{,}00{,}000} \times 100 \) = 16.48%
(b) Total Assets to Debt Ratio = \( \frac{\text{Total Assets}}{\text{Long-term Debt}} \)
Total Assets = Fixed Assets + Current Assets = 75,00,000 + 40,00,000 = ₹1,15,00,000
Long-term Debt = 12% Debentures = ₹80,00,000
Total Assets to Debt Ratio = \( \frac{1{,}15{,}00{,}000}{80{,}00{,}000} \) = 1.44 : 1.

Teacher's Note:
1. Capital employed on the assets side is total assets less current liabilities.

Question 23. From the following, calculate ‘Trade Receivables Turnover Ratio’:
Total Revenue from Operations for the year—₹8,40,000
Cash Revenue from Operations—40% of Credit Revenue from Operations
Closing Trade Receivables—₹2,00,000
Excess of Closing Trade Receivables over Opening Trade Receivables—₹80,000. [CBSE (AI) 2016(C)]
Answer:
Trade Receivables Turnover Ratio = \( \frac{\text{Credit Revenue from Operations}}{\text{Average Trade Receivables}} \) = \( \frac{6{,}00{,}000}{1{,}60{,}000} \) = 3.75 Times
Working Notes:
1. Calculation of Credit Revenue from Operations:
Let Credit Revenue from Operations = x; Cash Revenue from Operations = 40% of x = 4x/10
x + 4x/10 = ₹8,40,000; 10x + 4x = ₹84,00,000; 14x = ₹84,00,000
x = ₹6,00,000 (Credit Revenue from Operations)
2. Average Trade Receivables = \( \frac{\text{Opening Trade Receivables + Closing Trade Receivables}}{\text{2}} \) = \( \frac{1{,}20{,}000 + 2{,}00{,}000}{2} \) = ₹1,60,000

Teacher's Note:
1. Opening receivables = closing receivables − excess = 2,00,000 − 80,000 = ₹1,20,000.

Question 24. Opening Inventory : ₹60,000; Closing Inventory : ₹1,00,000; Inventory turnover ratio 8 times; Selling price 25% above cost; Calculate the Gross Profit Ratio. [CBSE Delhi 2009; (AI) 2009]
Answer:
Average Inventory = \( \frac{\text{Opening Inventory + Closing Inventory}}{\text{2}} \) = \( \frac{1{,}60{,}000}{2} \) = ₹80,000
Inventory Turnover Ratio = \( \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}} \)
8 = \( \frac{\text{Cost of Revenue from Operations}}{80{,}000} \)
Cost of Revenue from Operations = ₹6,40,000
Gross Profit = 25% of ₹6,40,000 = ₹1,60,000
Revenue from Operations = Cost of Revenue from Operations + Profit = ₹6,40,000 + ₹1,60,000 = ₹8,00,000
Gross Profit Ratio = \( \frac{\text{Gross Profit}}{\text{Revenue from Operations}} \times 100 \) = \( \frac{1{,}60{,}000}{8{,}00{,}000} \times 100 \) = 20%.

Teacher's Note:
1. 25% on cost is the same as 20% on sales; you can check the answer this way.

Question 25. Opening Inventory ₹29,000; Closing Inventory ₹31,000; Revenue from operations ₹3,20,000; Gross Profit Ratio 25% on Sales. Calculate Inventory Turnover Ratio.
Answer:
Calculation of Inventory Turnover Ratio:
Cost of Revenue from Operations = Revenue from Operations – Gross Profit = ₹3,20,000 – 25% of ₹3,20,000 = ₹3,20,000 – ₹80,000 = ₹2,40,000
Average Inventory = \( \frac{29{,}000 + 31{,}000}{2} \) = ₹30,000
Inventory Turnover Ratio = \( \frac{\text{Cost of Revenue from operations}}{\text{Average Inventory}} \) = \( \frac{2{,}40{,}000}{30{,}000} \) = 8 times.

Teacher's Note:
1. Here the profit is on sales, so take 25% of revenue directly.

Teacher's Note:
1. When only ‘Net Profit Ratio’ is asked, show both before-tax and after-tax figures to be safe.

Question 27. Z Ltd. has a Current Ratio of 3.5 and Quick Ratio of 1.5 : 1. If the excess of current assets over Quick assets as represented by inventory is ₹60,000, calculate current assets and current liabilities. [CBSE (F) 2012]
Answer:
Inventory = Current Assets − Quick Assets = 3.5 CL − 1.5 CL = 2 CL = ₹60,000, so Current Liabilities = ₹30,000
Current Assets ₹1,05,000; Current Liabilities ₹30,000

Teacher's Note:
1. Write both ratios with the same current liabilities; the difference in the ratios represents inventory.

Question 28. A business has a Current Ratio of 3 : 1 and Quick Ratio of 1.2 : 1. If the working capital is ₹1,80,000, calculate Total Current Assets and Inventory. [CBSE Delhi 2010]
Answer:
Working Capital = 3 CL − 1 CL = 2 CL = ₹1,80,000, so CL = ₹90,000; Quick Assets = 1.2 × 90,000 = ₹1,08,000
Current Assets ₹2,70,000, Inventory ₹1,62,000

Teacher's Note:
1. Working capital equals (current ratio − 1) times current liabilities.

Short Answer Questions (3 Marks)

Question 29. (a) The ratio of Current Assets (₹3,00,000) to Current Liabilities (₹2,00,000) is 1.5 : 1.
The accountant of the firm is interested in maintaining a Current Ratio of 2:1, by paying off a part of the current liabilities. Compute the amount of current liabilities that should be paid, so that the Current Ratio at the level of 2:1 may be maintained.
(b) Total Debts of Rimzim Ltd. are ₹3,90,000, Long-term Debts are ₹3,00,000 and working capital is ₹1,80,000. Calculate current ratio. [CBSE (AI) 2004]
Answer:
(a) Let current liabilities to be paid out of current assets = x
As Current Ratio = \( \frac{\text{Current Assets}}{\text{Current Liabilities}} \)
\( \frac{2}{1} \) = \( \frac{3{,}00{,}000 - x}{2{,}00{,}000 - x} \); 3,00,000 − x = 4,00,000 − 2x
2x − x = 4,00,000 − 3,00,000; x = 1,00,000
So, in order to maintain the current ratio of 2 : 1, current liabilities to be paid are ₹1,00,000.
(b) Current Ratio = \( \frac{\text{Current Assets}}{\text{Current Liabilities}} \)
(i) Calculation of Current Liabilities:
Current Liabilities = Total Debts or Liabilities – Long-term Debts or Liabilities = ₹3,90,000 – ₹3,00,000 = ₹90,000
(ii) Calculation of Current Assets:
Working Capital = Current Assets – Current Liabilities
1,80,000 = Current Assets – ₹90,000; Current Assets = ₹2,70,000
∴ Current Ratio = \( \frac{2{,}70{,}000}{90{,}000} \) = 3 : 1

Teacher's Note:
1. Paying a liability uses cash, so the same x is deducted from both current assets and current liabilities.

Question 30. Calculate Current Ratio of a company from the following information:
Inventory Turnover Ratio: 4 times
Inventory in the end was ₹20,000 more than inventory in the beginning.
Revenue from operations ₹3,00,000
Gross Profit Ratio 25%
Current Liabilities ₹40,000
Quick Ratio 0.75 : 1 [CBSE (AI) 2011]
Answer:
Inventory Turnover Ratio = \( \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}} \)
4 (Given) = \( \frac{\text{(Revenue from Operations - Gross Profit)}}{\text{Average Inventory}} \)
Average Inventory = \( \frac{(3{,}00{,}000 - 25\%\text{ of }3{,}00{,}000)}{4} \)
Average Inventory = \( \frac{2{,}25{,}000}{4} \) = ₹56,250
Closing Inventory = 56,250 + \( \frac{1}{2} \) of ₹20,000 = ₹56,250 + ₹10,000 = ₹66,250
Current Assets = Liquid Assets + Closing Inventory
With the help of Quick Ratio, we can find out Liquid Assets:
Quick Ratio = \( \frac{\text{Liquid Assets}}{\text{Current Liabilities}} \)
0.75 (Given) = \( \frac{\text{Liquid Assets}}{40{,}000} \)
or Liquid Assets = ₹40,000 × 0.75 = ₹30,000
Current Assets = Liquid Assets + Inventory = ₹30,000 + ₹66,250 = ₹96,250
Current Ratio = \( \frac{\text{Current Assets}}{\text{Current Liabilities}} \) = \( \frac{96{,}250}{40{,}000} \) = 2.41 : 1

Teacher's Note:
1. Closing inventory is the average plus half the difference between opening and closing inventory.

Question 31. Assuming that the Debt to Equity ratio of a company is 0.50, state whether this ratio would increase, decrease or remain unchanged in the following cases :
(i) Purchase of fixed assets on a credit of 3 months
(ii) Issue of new shares for cash
(iii) Purchased machinery and paid to the vendors by issue of equity shares
(iv) Obtained 8% long-term loan [CBSE 2019 (67/5/2)]
Answer:
(i) No change    (ii) Decrease
(iii) Decrease    (iv) Increase

Teacher's Note:
1. Credit of 3 months is a current liability, so long-term debt and equity are both unchanged in case (i).

Question 32. From the following information, calculate any two of the following ratios:
(a) Debt to Equity Ratio
(b) Working Capital Turnover Ratio and
(c) Return on Investment
Information:
Equity Share Capital ₹50,000; General Reserve ₹5,000; Statement of Profit and Loss after tax and interest ₹15,000; 9% Debentures ₹20,000; Trade payables (Creditors) ₹15,000; Land and Building ₹65,000, Equipments ₹15,000; Trade Receivables (Debtors) ₹14,500 and Cash ₹5,500.
Sales (Revenue from Operations) for the year ended 31-03-2017 was ₹1,50,000, Tax rate 50%. [CBSE Delhi 2012]
Answer:
(a) Debt to Equity Ratio = \( \frac{\text{Debt}}{\text{Equity}} \) = \( \frac{20{,}000}{70{,}000} \) = 0.29 : 1
Equity = Equity Share Capital + General Reserve + Statement of Profit and Loss = ₹50,000 + ₹5,000 + ₹15,000 = ₹70,000
(b) Working Capital Turnover Ratio = \( \frac{\text{Net Revenue from Operations}}{\text{Working Capital}} \) = \( \frac{1{,}50{,}000}{5{,}000} \) = 30 times
Working Capital = Current Assets – Current Liabilities
Current Assets = ₹14,500 + ₹5,500 = ₹20,000
Working Capital = ₹20,000 – ₹15,000 = ₹5,000
(c) Return on Investment = \( \frac{\text{Net Profit before Interest and Tax}}{\text{Capital Employed}} \times 100 \) = \( \frac{31{,}800}{90{,}000} \times 100 \) = 35.33%
Profit before tax = 15,000 × \( \frac{100}{50} \) = ₹30,000
Profit before interest and tax = ₹30,000 + ₹1,800 = ₹31,800
Capital Employed = Share Capital + General Reserve + Statement of Profit and Loss + 9% Debentures = ₹50,000 + ₹5,000 + ₹15,000 + ₹20,000 = ₹90,000.

Teacher's Note:
1. Profit after tax must be grossed up for tax first and then interest on debentures (9% of ₹20,000 = ₹1,800) added back.

Teacher's Note:
1. The closing inventory of 2015-16 (₹7,00,000) is the opening inventory of 2016-17.

Teacher's Note:
1. Add the interest on every long-term loan (debentures and mortgage loan) to profit before tax.

Question 35. From the following information, calculate Operating Profit Ratio:
Opening Stock ₹10,000; Purchases ₹1,20,000; Revenue from operations ₹4,00,000; Purchase Returns ₹5,000; Returns from Revenue from operations ₹15,000; Selling Expenses ₹70,000; Administrative Expenses ₹40,000; Closing Stock ₹60,000. [CBSE Delhi 2016]
Answer:
Operating Profit Ratio = \( \frac{\text{Operating Profit}}{\text{Net Revenue from Operations}} \times 100 \)
Net Revenue from Operations = ₹4,00,000 – ₹15,000 = ₹3,85,000
Cost of Revenue from Operations = Opening Stock + Purchases – Purchase return – Closing Stock = ₹(10,000 + 1,20,000 – 5,000 – 60,000) = ₹65,000
Gross Profit = Net Revenue from Operations – Cost of Revenue from Operations = ₹3,85,000 – ₹65,000 = ₹3,20,000
Operating Expenses = Selling Expenses + Administrative Expenses = ₹70,000 + ₹40,000 = ₹1,10,000
Operating Profit = Gross Profit – Operating Expenses = ₹3,20,000 – ₹1,10,000 = ₹2,10,000
Operating Profit Ratio = \( \frac{2{,}10{,}000}{3{,}85{,}000} \times 100 \) = 54.55%

Teacher's Note:
1. Always deduct sales returns first; the ratio is on net revenue from operations.

Question 36. (a) From the following information, compute ‘Total Assets to Debt Ratio’:
Shareholders’ Funds ₹1,60,000; Total Debt ₹3,60,000, Current Liabilities ₹40,000.
(b) The ratio of Current Assets (₹6,00,000) to Current Liabilities (₹4,00,000) is 1.5 : 1. The accountant of this firm is interested in maintaining a current ratio of 2:1 by paying some part of Current Liabilities. Suggest the amount of Current Liabilities which he must pay for this purpose. [CBSE (F) 2013]
Answer:
(a) Total Assets = Total Debts + Shareholders’ Funds = ₹3,60,000 + ₹1,60,000 = ₹5,20,000
Long-term Debts = Total Debts – Current Liabilities = ₹3,60,000 – ₹40,000 = ₹3,20,000
Total Assets to Debt Ratio = \( \frac{\text{Total Assets}}{\text{Long-term Debts}} \) = \( \frac{5{,}20{,}000}{3{,}20{,}000} \) = 1.625 : 1
(b) Let the amount of Current Liabilities to be paid = x
\( \frac{2}{1} \) = \( \frac{6{,}00{,}000 - x}{4{,}00{,}000 - x} \)
₹8,00,000 – 2x = ₹6,00,000 – x; 2x – x = ₹8,00,000 – ₹6,00,000; x = ₹2,00,000
Current Liabilities of ₹2,00,000 should be paid off to obtain current ratio of 2:1.

Teacher's Note:
1. Check: (6,00,000 − 2,00,000) ÷ (4,00,000 − 2,00,000) = 2 : 1.

Question 37. Inventory turnover ratio is 3 times, Revenue from operations are ₹1,80,000 and Opening Inventory is ₹2,000 more than the Closing Inventory. Calculate opening and closing Inventory when goods are sold at 20% profit on cost.
Answer:
Suppose cost of Revenue from operations = 100
Revenue from Operations = Cost of Revenue from operations + Profit = 100 + 20 = ₹120
Cost of Revenue from Operations = 1,80,000 × \( \frac{100}{120} \) = ₹1,50,000
Inventory Turnover Ratio = \( \frac{\text{Cost of Revenue from operations}}{\text{Average Inventory}} \) = 3 times
\( \frac{1{,}50{,}000}{\text{Average Inventory}} \) = 3 times
Average Inventory = \( \frac{1{,}50{,}000}{3} \) = ₹50,000
Total Inventory = 50,000 × 2 = ₹1,00,000
Suppose Opening Inventory = x; Closing Inventory = x – 2,000
x + (x – 2,000) = 1,00,000; 2x = 1,00,000 + 2,000 = ₹1,02,000
x = \( \frac{1{,}02{,}000}{2} \) = ₹51,000 (Opening Inventory)
Closing Inventory = x – 2,000 = 51,000 – 2,000 = ₹49,000.

Teacher's Note:
1. Opening + Closing Inventory = 2 × Average Inventory; then use the given difference.

Teacher's Note:
1. In (a) all revenue is taken as credit revenue because no cash revenue is given; returns are deducted first.

Question 39. Net Credit Revenue from Operations of MS Ltd. during the year were ₹1,80,000. Trade Receivables Turnover is 4 times. Calculate Trade Receivables in the beginning and at the end of the year if closing Trade Receivables are two times in comparison to opening Trade Receivables.
Answer:
Let Opening Trade Receivables = x; Closing Trade Receivables = 2 × x = 2x
Trade Receivables Turnover Ratio = \( \frac{\text{Net Credit Revenue from Operations, i.e., Credit Sales}}{\text{Average Trade Receivables}} \)
4 = \( \frac{1{,}80{,}000}{\frac{x + 2x}{2}} \)
4 × 3x = 3,60,000; 12x = 3,60,000
x = \( \frac{3{,}60{,}000}{12} \) = 30,000 (Opening Trade Receivables)
Closing Trade Receivables = 30,000 × 2 = ₹60,000
Alternative Method:
Trade Receivables Turnover Ratio = \( \frac{\text{Net Credit Revenue from Operations}}{\text{Average Trade Receivables}} \) = 4 times
Average Trade Receivables will amount of \( \frac{1}{4} \) of credit revenue from operations = \( \frac{1{,}80{,}000}{4} \) = ₹45,000
Total Trade Receivables = 45,000 × 2 = ₹90,000
Let Opening Trade Receivables be = x; Closing Trade Receivables will be = x × 2 = 2x
Equation: x + 2x = 90,000; 3x = 90,000; x = \( \frac{90{,}000}{3} \) = 30,000 (Opening Trade Receivables)
Closing Trade Receivables = 30,000 × 2 = ₹60,000.

Teacher's Note:
1. Check: average (30,000 + 60,000)/2 = 45,000 and 1,80,000 ÷ 45,000 = 4 times.

Teacher's Note:
1. Trade payables = creditors for goods + bills payable; creditors for fixed assets are not trade payables.

Long Answer Questions (5 Marks)

Question 41. Calculate the following ratios with the help of the information given below:
(i) Operating Ratio (ii) Gross Profit Ratio (iii) Quick Ratio (iv) Working Capital Turnover Ratio (v) Proprietary Ratio.
Information:
Equity Share Capital ₹1,00,000; 8% Preference Share Capital ₹80,000; 9% Debentures ₹60,000; General Reserve ₹10,000; Revenue from Operations ₹2,00,000; Opening Inventory ₹12,000; Purchases ₹1,20,000; Wages ₹8,000; Closing Inventory ₹18,000; Selling and Distribution Expenses ₹2,000; Other Current Assets ₹50,000; Fixed Assets ₹2,12,000 and Current Liabilities ₹30,000. [CBSE (AI) 2000]
Answer:
(i) Operating Ratio = \( \frac{\text{Cost of Revenue from Operations + Operating Expenses}}{\text{Net Revenue from Operations}} \times 100 \)
Cost of Revenue from Operations = Opening Inventory + Purchases + Wages – Closing Inventory = ₹12,000 + ₹1,20,000 + ₹8,000 – ₹18,000 = ₹1,22,000
Operating Ratio = \( \frac{1{,}22{,}000 + 2{,}000 \text{ (selling and distribution expenses)}}{2{,}00{,}000} \times 100 \) = 62%
(ii) Gross Profit Ratio = \( \frac{\text{Gross Profit}}{\text{Net Revenue from Operations}} \times 100 \)
Gross Profit = Net Revenue from Operations – Cost of Revenue from Operations = ₹2,00,000 – ₹1,22,000 = ₹78,000
Gross Profit Ratio = \( \frac{78{,}000}{2{,}00{,}000} \times 100 \) = 39%
(iii) Quick Ratio = \( \frac{\text{Liquid Assets}}{\text{Current Liabilities}} \) = \( \frac{50{,}000}{30{,}000} \) = 1.67 : 1
(iv) Working Capital Turnover Ratio = \( \frac{\text{Revenue from Operations}}{\text{Working Capital}} \)
Working Capital = Closing Inventory + Other Current Assets – Current Liabilities = ₹18,000 + ₹50,000 – ₹30,000 = ₹38,000
Working Capital Turnover Ratio = \( \frac{2{,}00{,}000}{38{,}000} \) = 5.26 times
(v) Proprietary Ratio = \( \frac{\text{Shareholders' Funds}}{\text{Total Assets}} \)
Shareholders’ Funds = Equity Share Capital + Preference Share Capital + General Reserve = ₹1,00,000 + ₹80,000 + ₹10,000 = ₹1,90,000
Total Assets = Closing Inventory + Other Current Assets + Fixed Assets = ₹18,000 + ₹50,000 + ₹2,12,000 = ₹2,80,000
Proprietary Ratio = \( \frac{1{,}90{,}000}{2{,}80{,}000} \times 100 \) = 67.86%.

Teacher's Note:
1. Preference share capital is part of shareholders’ funds; debentures are not.
2. Working Capital Turnover Ratio is calculated on Revenue from Operations, the same formula used in other questions of this chapter.

Teacher's Note:
1. Check: Operating Ratio 77.5% + Operating Profit Ratio 22.5% = 100%.
2. Net profit equals operating profit here only because there are no non-operating items.