CBSE Class 12 Accountancy Accounting Ratios MCQs Set 07

Answer: (b) Liquidity Ratios

Explanation:
1. Liquidity ratios (Current Ratio, Quick Ratio) compare current assets with current liabilities, i.e., short-term obligations.

Teacher's Note:
1. Short-term = liquidity; long-term = solvency. Keep this pairing clear in one-mark questions.

Answer: (d) Inventory and Prepaid Expenses

Explanation:
1. Quick Assets = Current Assets − Inventory − Prepaid Expenses, because these two cannot be quickly converted into cash.

Teacher's Note:
1. Bills payable is a liability, so it can never be excluded from current assets.

Answer: (c) 2:1

Explanation:
1. A current ratio of 2 : 1 is considered ideal: current assets twice the current liabilities.

Teacher's Note:
1. Do not confuse it with the ideal Quick Ratio, which is 1 : 1.

Answer: (d) Solvency Ratios

Explanation:
1. Solvency ratios (Debt to Equity, Total Assets to Debt, Proprietary, Interest Coverage) assess long-term obligations.

Teacher's Note:
1. Solvency ratios are the ones a debentureholder or long-term lender looks at.

Answer: (b) Inventory Turnover Ratio

Explanation:
1. Inventory Turnover Ratio = Cost of Revenue from Operations ÷ Average Inventory shows how fast inventory is sold.

Teacher's Note:
1. Inventory Turnover Ratio is always worked on cost, so use cost of revenue from operations, not sales at selling price.

Answer: (a) suppliers and lenders

Explanation:
1. Average Payment Period shows how quickly the firm pays its creditors, which matters most to suppliers and lenders.

Teacher's Note:
1. Average Payment Period = 12 months (or 365 days) ÷ Trade Payables Turnover Ratio.

Answer: (b) Return on Investment

Explanation:
1. Return on Investment relates profit to capital employed, so it is a profitability ratio; the others are solvency or liquidity ratios.

Teacher's Note:
1. Debt to Equity and Proprietary Ratio are solvency ratios; Quick Ratio is a liquidity ratio.

Answer: (d) Long-term financial position

Explanation:
1. Debt to Equity Ratio = Long-term Debts ÷ Shareholders’ Funds; it shows the long-term financial position (solvency).

Teacher's Note:
1. Debt here means long-term debt only; current liabilities are not included.

Answer: (c) Current Assets – (Inventory + Prepaid expenses)

Explanation:
1. Liquid (quick) assets exclude both inventory and prepaid expenses from current assets.

Teacher's Note:
1. Option (b) is a common trap: prepaid expenses must also be deducted.

Answer: (c) Both the above

Explanation:
1. Liquid Ratio, Quick Ratio and Acid Test Ratio are names for the same ratio.

Teacher's Note:
1. All three names refer to Liquid Assets ÷ Current Liabilities.

Answer: (a) Revenue from operations – Gross profit

Explanation:
1. Revenue from Operations = Cost of Revenue from Operations + Gross Profit, so Cost of goods sold = Revenue from operations − Gross profit.

Teacher's Note:
1. Net profit is after indirect expenses, so subtracting it does not give cost of goods sold.

Answer: (a) Operating Ratio

Explanation:
1. Operating Ratio + Operating Profit Ratio = 100%, so 100 − Operating Profit Ratio = Operating Ratio.

Teacher's Note:
1. This pair is complementary; use it to find one when the other is given.

Answer: (d) Profitability

Explanation:
1. Profitability ratios (GP, NP, Operating Profit, ROI) measure return earned by the business.

Teacher's Note:
1. Return on Investment is the main profitability ratio for overall performance.

Answer: (a) Activity

Explanation:
1. Activity (turnover) ratios show how quickly inventory, receivables etc. are converted into sales or cash.

Teacher's Note:
1. Turnover ratios are expressed in ‘times’, not as percentages.

Answer: (b) Liquidity

Explanation:
1. Liquidity is the ability of the firm to meet its short-term obligations as they become due.

Teacher's Note:
1. Liquidity is about short-term dues; solvency is about long-term debts.

Answer: (c) Average Collection Period

Explanation:
1. Average Collection Period shows how long customers take to pay, so it helps evaluate credit and collection policies.

Teacher's Note:
1. Average Collection Period = 12 months (or 365 days) ÷ Trade Receivables Turnover Ratio.

Answer: (b) 50%

Explanation:
1. A proprietary ratio of about 50% (0.5 : 1) or more is generally treated as satisfactory, showing that at least half of the assets are financed by owners.

Teacher's Note:
1. A higher proprietary ratio means a lower risk for creditors.

Answer: (d) 6 or 7

Explanation:
1. An Interest Coverage Ratio of 6 to 7 times is considered ideal for an industrial company.

Teacher's Note:
1. Interest Coverage Ratio uses profit before interest and tax, not net profit after tax.

Answer: (b) Operating Ratio

Explanation:
1. Operating Ratio shows operating cost as a percentage of revenue; a higher operating ratio means a lower operating profit.

Teacher's Note:
1. For all profit ratios a higher value is better; Operating Ratio is the exception because it measures cost.

Answer: (c) 2:1

Explanation:
1. Total long-term funds should be twice the long-term loans, i.e., 2 : 1, so that long-term lenders are adequately covered.

Teacher's Note:
1. This is the same idea as the Total Assets to Debt Ratio, where a higher ratio means more security for lenders.