CBSE Class 12 Accountancy Accounting Ratios Important Questions Set 02

Very Short Answer Questions (1 Mark)

Teacher's Note:
1. A short-term loan is a current liability, so it is not part of ‘debt’ in this ratio.

Question 2. What will be the impact of ‘Cash Paid to Trade Payables’ on a Current Ratio of 2:1? State the reason. [CBSE Delhi 2012(C)]
Answer:
Current Ratio will increase because both Current assets and Current liabilities are decreased by the same amount.

Teacher's Note:
1. Quick check with figures: (2,00,000 − 50,000) ÷ (1,00,000 − 50,000) = 3 : 1, higher than 2 : 1.

Question 3. State with reason whether repayment of long-term loan will result in increase, decrease or no change of Debt to Equity ratio. [CBSE Delhi 2010(C)]
Answer:
Debt to equity ratio will decrease because long-term loan will decrease but total equity (Shareholders’ funds) will remain unchanged.

Teacher's Note:
1. Only the numerator falls, so the ratio falls.

Question 4. The inventory turnover ratio of a Company is 3 times. State, giving reason, whether the ratio improves, declines or does not change because of increase in the value of closing inventory by ₹5,000. [CBSE (AI) 2008]
Answer:
Inventory turnover ratio will decline because increase in the value of closing inventory by ₹5,000 will decrease the cost of Revenue from Operations (Opening Inventory + Purchases – Closing Inventory) and will increase the value of average inventory \( \left( \frac{\text{Opening Inventory} + \text{Closing Inventory}}{2} \right) \).

Teacher's Note:
1. Closing inventory affects both the numerator and the denominator here, and both changes push the ratio down.

Question 5. The gross profit ratio of a company is 50%. State with reason whether the decrease in rent received by ₹15,000 will increase, decrease or not change the ratio. [CBSE Delhi 2009(C)]
Answer:
Decrease in rent received by ₹15,000 will not change the gross profit ratio because rent received being an indirect income, does not affect gross profit.

Teacher's Note:
1. Gross profit is affected only by revenue from operations and direct costs; rent received is an other income, shown below gross profit.

Question 6. Debt to Equity Ratio of X Ltd. is 1 : 2. What is the effect of conversion of debentures into preference shares on this ratio? [CBSE (F) 2006]
Answer:
Debt to Equity Ratio will decrease as conversion of debentures into preference shares will reduce the long-term debts but increase the equity.

Teacher's Note:
1. Preference share capital is part of shareholders’ funds (equity) in this ratio.

Question 7. What are liquidity ratios?
Answer:
Liquidity ratios are the ratios meant for testing short-term solvency position of the firm, i.e., whether a company is able to repay the short-term loans on their due dates. They include (i) Current Ratio, and (ii) Liquid Ratio.

Teacher's Note:
1. Liquid Ratio is the same as Quick Ratio or Acid Test Ratio.

Question 8. What are solvency ratios?
Answer:
Solvency ratios show the long-term financial solvency and measure the enterprise ability to pay interest and long-term liabilities at maturity. They include: (i) Debt to Equity Ratio, (ii) Proprietary Ratio, (iii) Total Assets to Debt Ratio.

Teacher's Note:
1. Interest Coverage Ratio is the fourth solvency ratio in the CBSE syllabus.

Question 9. What do you understand by working capital?
Answer:
Excess of current assets over current liabilities is called working capital.

Teacher's Note:
1. Working Capital = Current Assets − Current Liabilities; it is used as the denominator of the Working Capital Turnover Ratio.

Question 10. How can the cost of revenue from operations be calculated?
Answer:
Cost of revenue from operations can be calculated by the following ways:
Cost of revenue from operations = Net Revenue from Operations – Gross Profit.
Or
Cost of revenue from operations = Opening Inventory + Net Purchases + Direct Expenses – Closing Inventory.

Teacher's Note:
1. Net purchases means purchases less purchases returns.

Question 11. Give the assets side approach to calculate capital employed.
Answer:
Capital Employed = Net Fixed Assets + Net Working Capital.

Teacher's Note:
1. Non-current investments and long-term loans and advances are also added on the assets side approach.

Question 12. Give any two reasons of increase in gross profit.
Answer:
(i) Selling price may have increased without the same increase in the price of materials and wages.
(ii) Gross profit may be higher due to over-valuation of closing inventory.

Teacher's Note:
1. Over-valued closing inventory reduces cost of revenue from operations, which inflates gross profit.

Question 13. You are a creditor of a company. Mention any two ratios that you would like to calculate to analyse the financial position of the company.
Answer:
(i) Current Ratio, (ii) Quick Ratio.

Teacher's Note:
1. Short-term creditors care about liquidity ratios.

Question 14. In case a bill receivable is dishonoured, elucidate whether this will improve, decline or will have no change on current ratio, if the existing current ratio is 2:1.
Answer:
No change. In case a bills receivable is dishonoured, current ratio will not change because bills receivable decreases and debtors increases by the same amount.

Teacher's Note:
1. Both bills receivable and debtors are current assets, so total current assets stay the same.

Question 15. Rubies Ltd. has a profit of ₹4,00,000 before interest and tax. Its ROI is 25%. Calculate the capital employed in the company.
Answer:
Capital employed = \( \frac{4,00,000}{25} \times 100 \) = ₹16,00,000.

Teacher's Note:
1. ROI = Profit before Interest and Tax ÷ Capital Employed × 100; rearrange to find capital employed.

Question 16. Assuming that the current ratio is 2 : 1, state giving reasons, whether this ratio will improve, decline or will have no change, in case a final dividend already declared is paid?
Answer:
Improve. In case a final dividend already declared is paid, current ratio will improve, because both the current assets and current liabilities are decreased by the same amount.

Teacher's Note:
1. Dividend once declared is a current liability until it is paid.

Short Answer Questions (2 Marks)

Teacher's Note:
1. Total assets equal total of the equity-and-liabilities side, so current liabilities can be found as a balancing figure.

Teacher's Note:
1. Long-term debt is not given directly; it is the balancing figure of the equity-and-liabilities side.

Teacher's Note:
1. Long-term provisions are included in debt along with long-term borrowings.

Teacher's Note:
1. At 30% tax, profit after tax is 70% of profit before tax.

Question 21. From the given information, calculate the inventory turnover ratio. Revenue from Operations: ₹2,00,000; GP: 25% on cost; Inventory in the beginning is 1/3 of the inventory at the end which was 30% of revenue from operations. [CBSE Delhi 2010]
Answer:
Cost of Revenue from Operations = 2,00,000 × \( \frac{100}{125} \) = ₹1,60,000; Closing Inventory = 30% of 2,00,000 = ₹60,000; Opening Inventory = ₹20,000; Average Inventory = ₹40,000
Inventory Turnover Ratio = 4 times

Teacher's Note:
1. Closing inventory is 30% of revenue; opening inventory is one-third of that.

Question 22. A trader carries an average inventory of ₹80,000. His inventory turnover ratio is 12 times. Find out his profit if he sells at a profit of 20% on revenue from operations. [CBSE (F) 2004]
Answer:
Cost of Revenue from Operations = 80,000 × 12 = ₹9,60,000; 20% on revenue = 25% on cost
Gross Profit ₹2,40,000

Teacher's Note:
1. Convert profit on sales to profit on cost: 20/80 = 25%.

Teacher's Note:
1. Find current liabilities as total assets less non-current liabilities and shareholders’ funds.

Teacher's Note:
1. Operating cost = cost of revenue from operations + operating expenses.

Teacher's Note:
1. Add back 12% interest on borrowings (₹24,000) to profit before tax.

Question 26. ₹2,00,000 is Cost of Revenue from operations, Inventory Turnover Ratio 8 times, Inventory in the beginning is 1.5 times more than the Inventory at the end. Calculate values of opening and closing inventory. [CBSE Delhi 2004]
Answer:
Average Inventory = 2,00,000 ÷ 8 = ₹25,000; Opening + Closing = ₹50,000; Opening = 2.5 × Closing
Opening Inventory ₹35,714, Closing Inventory ₹14,286

Teacher's Note:
1. ‘1.5 times more than’ means closing inventory plus 1.5 times of it, i.e., 2.5 times.

Teacher's Note:
1. ‘25% above cost’ means profit is calculated on cost of revenue from operations.

Question 28. O.M. Ltd. has a Current Ratio of 3.5:1 and Quick Ratio of 2 : 1. If the excess of Current Assets over Quick Assets as represented by Inventory is ₹1,50,000, calculate Current Assets and Current Liabilities. [CBSE Delhi 2012]
Answer:
Inventory = 3.5 CL − 2 CL = 1.5 CL = ₹1,50,000, so CL = ₹1,00,000
Current Assets ₹3,50,000, Current Liabilities ₹1,00,000

Teacher's Note:
1. Check: quick assets 2,00,000 + inventory 1,50,000 = 3,50,000.

Short Answer Questions (3 Marks)

Teacher's Note:
1. A constant GP ratio with higher absolute gross profit means the growth came from higher volume (6,000 units against 5,000), not from better margins.

Teacher's Note:
1. Wages and carriage inwards are direct expenses, so they go into cost of revenue from operations.

Teacher's Note:
1. Interest, accidental losses and rent income are non-operating items: they affect net profit but not operating profit.

Question 32. The following information is provided to you:
Share Capital ₹80,000, General Reserve ₹40,000, 15% Loan from Bank ₹50,000, Revenue from Operations for the year ₹1,00,000, Tax paid during the year ₹20,000, Profit after interest and tax ₹40,000.
From the above information, calculate the following ratios:
(a) Debt to Equity Ratio
(b) Interest Coverage Ratio
(c) Return on Investment.
Answer:
(a) Debt to Equity Ratio = \( \frac{\text{Long-term Debts}}{\text{Shareholders' Funds}} \)
Shareholders’ Funds = Share Capital + General Reserve + Profit after Interest and Tax = ₹80,000 + ₹40,000 + ₹40,000 = ₹1,60,000
Debt to Equity Ratio = \( \frac{50{,}000}{1{,}60{,}000} \) = 0.31 : 1
(b) Interest Coverage Ratio = \( \frac{\text{Net Profit before Interest, Tax and Dividend}}{\text{Interest Charges}} \)
= \( \frac{\text{Net Profit after Interest and Tax + Tax + Interest}}{\text{Interest Charges}} \) = \( \frac{40{,}000 + 20{,}000 + 7{,}500}{7{,}500} \) = \( \frac{67{,}500}{7{,}500} \) = 9 times
(c) Return on Investment = \( \frac{\text{Net Profit before Interest and Tax}}{\text{Capital Employed}} \times 100 \)
Capital Employed = Share Capital + Reserves and Surplus (General Reserve + Profit) + Long-term Loans = ₹80,000 + ₹40,000 + ₹40,000 + ₹50,000 = ₹2,10,000
Return on Investment = \( \frac{67{,}500}{2{,}10{,}000} \times 100 \) = 32.14%.

Teacher's Note:
1. Interest on the 15% bank loan is 15% of ₹50,000 = ₹7,500; add it back with tax to get profit before interest and tax.

Teacher's Note:
1. Total assets here are the Balance Sheet total; current liabilities are not deducted for the Total Assets to Debt Ratio.

Teacher's Note:
1. A transaction between two current assets, or between two current liabilities, never changes the current ratio.

Teacher's Note:
1. Bonus shares only move an amount from reserves to share capital, so total shareholders’ funds do not change.

Teacher's Note:
1. Shareholders’ funds = total assets − long-term debt − current liabilities.

Question 37. From the given information, calculate the following:
(i) Cost of Revenue from operations (ii) Opening and closing inventory
(iii) Quick Assets (iv) Current Assets
Information:
Inventory Turnover Ratio 6 times,
Inventory at the end is ₹6,000 more than the inventory in the beginning,
Revenue from operations (all credit) ₹2,40,000.
Gross Profit 25% on cost,
Current Liabilities ₹80,000,
Quick Ratio 0.80: 1. [CBSE Delhi 2016 (C)]
Answer:
Average Inventory = 1,92,000 ÷ 6 = ₹32,000; Opening + Closing = ₹64,000 with Closing = Opening + 6,000
(i) Cost of Revenue from operations ₹1,92,000 (ii) Opening Inventory ₹29,000, Closing Inventory ₹35,000 (iii) Quick Assets ₹64,000, (iv) Current Assets ₹99,000

Teacher's Note:
1. Current assets = quick assets + closing inventory (not average inventory).

Question 38. (a) Compute ‘Working Capital Turnover Ratio’ from the following information:
Cash Sales ₹1,30,000; Credit Sales ₹3,80,000; Sales Returns ₹10,000; Liquid Assets ₹1,40,000; Current Liabilities ₹1,05,000 and Inventory ₹90,000.
(b) Calculate ‘Debt to Equity Ratio’ from the following information:
Total Assets ₹3,50,000; Total Debt ₹2,50,000 and Current Liabilities ₹80,000. [CBSE Delhi 2013]
Answer:
(a) Net Revenue = 1,30,000 + 3,80,000 − 10,000 = ₹5,00,000; Working Capital = 1,40,000 + 90,000 − 1,05,000 = ₹1,25,000
(b) Long-term Debt = 2,50,000 − 80,000 = ₹1,70,000; Equity = 3,50,000 − 2,50,000 = ₹1,00,000
Working Capital Turnover Ratio = 4 times; Debt to Equity Ratio = 1.7 : 1

Teacher's Note:
1. ‘Total debt’ includes current liabilities, so deduct them to get long-term debt.

Question 39. Calculate opening and closing trade receivables from the following information :
Trade Receivable Turnover Ratio 4 times; Cost of Revenue from Operations ₹3,20,000; Gross Profit Ratio 20%; Closing Trade Receivables were ₹15,000 more than Opening Trade Receivables; Cash Revenue from Operations being 33\( \frac{1}{3} \)% of Credit Revenue from Operations. [CBSE 2019 (67/3/1)]
Answer:
Revenue from Operations = 3,20,000 × \( \frac{100}{80} \) = ₹4,00,000; Credit Revenue = 4,00,000 × \( \frac{3}{4} \) = ₹3,00,000; Average Trade Receivables = ₹75,000
Opening Receivables = ₹67,500, Closing Receivables = ₹82,500

Teacher's Note:
1. Cash revenue = 1/3 of credit revenue, so credit revenue is 3/4 of total revenue.

Question 40. From the following information, calculate any two of the following ratios:
(a) Debt to Equity Ratio;
(b) Working Capital Turnover Ratio;
(c) Return on Investment.
Information:
Equity Share Capital ₹10,00,000; General Reserve ₹1,00,000; Statement of Profit and Loss Balance after Tax and Interest ₹3,00,000; 12% Debentures ₹4,00,000; Trade Payables ₹3,00,000; Land and Building ₹13,00,000; Furniture ₹3,00,000; Trade Receivables ₹2,90,000; Cash ₹1,10,000.
Revenue from Operations for the year ended 31.3.2011 was ₹30,00,000 and Tax paid 50%. [CBSE (AI) 2012]
Answer:
(a) Equity = 10,00,000 + 1,00,000 + 3,00,000 = ₹14,00,000; Debt = ₹4,00,000
(b) Working Capital = 2,90,000 + 1,10,000 − 3,00,000 = ₹1,00,000
(c) Profit before Tax = 3,00,000 × 100/50 = ₹6,00,000; Interest = 12% of 4,00,000 = ₹48,000; Profit before Interest and Tax = ₹6,48,000; Capital Employed = 14,00,000 + 4,00,000 = ₹18,00,000
(a) Debt to Equity Ratio = 0.29 : 1, (b) Working Capital Turnover Ratio = 30 times, (c) Return on Investment = \( \frac{6{,}48{,}000}{18{,}00{,}000} \times 100 \) = 36%

Teacher's Note:
1. Gross up profit after tax for 50% tax, then add debenture interest, before dividing by capital employed.

Long Answer Questions (5 Marks)

Teacher's Note:
1. Debenture Redemption Reserve is a reserve, so it is part of shareholders’ funds.
2. Working Capital Turnover Ratio uses total revenue from operations (cash + credit).

Teacher's Note:
1. Loss on sale of building is a non-operating loss and employee benefit expenses are indirect, so neither goes into cost of revenue from operations.