CBSE Class 12 Accountancy HOTs Accounting Ratios

Question. Ratio of Current Assets (Rs.6,00,000) to Current Liabilities (Rs.4,00,000) is 1.5:1. The ac-countant of the firm is interested in maintaining a Current Ratio of 2:1, by paying a part of the current liabilities. How much amount of current liabilities should be paid so that current ratio at the level of 2:1 may be maintained?
(a) Rs.4,00,000
(b) Rs.3,00,000
(c) Rs.2,00,000
(d) Rs.1,00,000
Answer. C

Question. 'Return on Investment' (ROI) is calculated under:
(a) Liquidity Ratio
(b) Solvency Ratio
(c) Profitability Ratio
(d) Activity Ratio
Answer. C

Question. Which of the following item is not included to the current assets while calculating cur-rent ratio?
(a) Cash and Cash Equivalents
(b) Only Loose Tools
(c) Only Stores and Spares
(d) Both Loose Tools and Stores & Spares
Answer. D

Question. Deep Ltd. has a Current Ratio of 3.5:1 and Quick Ratio of 1.5:1. If the excess of current assets over quick assets as represented by stock is Rs.60,000, what will be the value of current as-sets and current liabilities?
(a) Current Assets Rs. 1,20,000 and Current Liabilities Rs.30,000
(b) Current Assets Rs. 1,05,000 and Current Liabilities Rs.30,000
(c) Current Assets Rs. 1,05,000 and Current Liabilities Rs.40,000
(d) Current Assets Rs. 1,20,000 and Current Liabilities Rs.40,000
Answer. B

Question. Cash Balance 15,000; Trade Receivables 35,000; Inventory 40,000;
Trade Payables 24,000 and Bank Overdraft is 6,000. Current Ratio will be:
(a) 3.75: 1
(b) 3:1
(c) 1:3
(d) 1:3.75
Answer. B

Question. A company's Current Ratio is 2: 1. After cash payment to some of its creditors, Current Ratio will:
(a) Decrease
(b) As before
(c) Increase
(d) None of these
Answer. C

Question. A Company's Current Assets are 8,00,000 and its current liabilities are 4,00,000.
Subsequently, it purchased goods for 1,00,000 on credit. Current
ratio will be.............
(a) 2:1
(b) 2.25:1
(c) 1.8:1
(d) 1.6:1
Answer. C

Question. A company's Current assets are ₹3,00,000 and its current liabilities are 2,00,000. Subse-quently, it paid 50,000 to its trade payables. Current ratiowill be...........
(a) 2:1
(b) 1.67: 1
(c) 1.25:1
(d) 15:1
Answer. C

Question. The Current Ratio of a company is 1.8:1 and its Quick Ratio is 1.6: 1.
From the following transactions, pick out the transaction which involves an increase in both the Current Ratio and Quick Ratio:
(a) Goods worth 10,000 sold at a loss of ₹2,000.
(b) Insurance premium of 3,000 paid in advance.
(c) Plant and Machinery purchased for ₹9,000.
(d) Bills Payable of ₹2,000 honoured on the due date.
Answer. B

Question. Inventory Turnover Ratio is:
(a) Average Inventory/Revenue from Operations
(b) Average Inventory/Cost of Revenue from Operations
(c) Cost of Revenue from Operations/Average Inventory
(d) G.P/Average Inventory
Answer. C

Question. Which of the following is not operating expenses?
(a)office expenses
(b) selling expenses
(c) bad debts
(d) loss by fire
Answer. D

Question. Revenue from Operations 8,00,000; Gross Profit Ratio 25%; Opening Inventory 1,00,000; Closing Inventory 60,000. Inventory Turnover Ratiowill be:
(a) 10 Times
(b) 7.5 Times
(c) 8 Times
(d) 12.5 Times
Answer. B

Question. On the basis of following data, the cost of revenue from operations by acompany will be: Opening Inventory 70,000; Closing Inventory 80,000; Inventory Turnover Ratio 6 Times.
(a) 1,50,000
(b) 90,000
(c) 4,50,000
(d) 4,80,000
Answer. C

Question. Assertion (A): Liquidity Ratios are used to assess the short-term financial obligations of the firm.
Reason (R): Current Ratio and Acid-test Ratio are two liquidity ratios which measure the firm's ability to meet its current obligations in time.
In the context of the above two statements, which of the following is correct
Codes:
(a) Both (A) and (R) are correct and (R) is the correct reason of (A).
(b) Both (A) and (R) are correct but (R) is not the correct reason of (A)
(c) Only (R) is correct.
(d) Both (A) and (R) are wrong.
Answer. A

Question. Assertion (A): A high Operating Ratio indicates a favourable position.
Reason (R): A high Operating Expenses leaves a high margin to meet Non-operating expenses.
In the context of the above two statements, which of the following is correct?
Codes:
(a) (A) and (R) both are correct and (R) correctly explains (A).
(b) Both (A) and (R) are correct but (R) does not explain (A).
(c) Both (A) and (R) are incorrect.
(d) (A) is correct but (R) is incorrect.
Answer. C

Question. Assertion (A): If Gross Profit Ratio is 20%, goods for 50,000 sold to employees at cost will decrease the ratio.
Reason (R): There will be no change in Gross Profit Ratio, because both Cost of Revenue from Operations and Revenue from Operations will increase by the sameamount
In the context of the above two statements, which of the following is correct?
(a) (A) and (R) both are correct and (R) correctly explains (A).
(b) Both (A) and (R) are correct but (R) does not explain (A).
(c) Both (A) and (R) are incorrect.
(d) (A) is correct but (R) is incorrect.
Answer. D

Read the following case study and answer questions.
FORTUNE Ltd. is a com-pany engaged in textilebusiness having a share capital of Rs. 2,00,000.
Rema, the accountant of the firm is analysingits financial figures and intends to prepare its statement of profit and loss for 2021. The sales of the company during this period were 7,00,000 and sales return were 40,000. Its purchases were 4,95,000, wages amounted to 1,00,000, salaries amounted to 15,000, rent amounted to 9,900, sundry expenses were worth 14,100 and also there was a discount (Cr.) worth 10,000.

Question. What is the amount that will be shown in revenue from operations in the statement of profit and loss?
(a) 7,00,000
(b) 7,40,000
(c) 6,60,000
(d) 28.10,000
Answer. C

Question. What is the amount that will be shownin other income in the statement ofprofit and loss?
(a)5,000
(b) 10,000
(c) 20,000
(d) None of these
Answer. B

Question. What is the amount that will be shown in employee benefit expenses in the statement of profit and loss?
(a) 71,00,000
(b) 15.000
(c) 1,07,500
(d)1,15,000
Answer. D

Question. What is the amount that will be shownin other expenses in the statement ofprofit and loss?
(a) 24,000
(b) 14,100
(c) 9,900
(d) None of these
Answer. A

Question. Calculate ‘Liquidity Ratio’ from the following information:
Current liabilities = Rs. 50,000
Current assets = Rs. 80,000
Inventories = Rs. 20,000
Advance tax = Rs. 5,000
Prepaid expenses = Rs. 5,000
Answer. 
Liquidity Ratio = Liquid Assets/Current Liabilities
Liquidity Assets = Current assets − (Inventories + Prepaid expenses + Advance tax)
= Rs. 80,000 − (Rs. 20,000 + Rs. 5,000 + Rs. 5,000) = Rs. 50,000
Liquidity Ratio = Rs. 50,000 / 50,000 = 1 : 1.

Question. X Ltd., has a current ratio of 3.5 : 1 and quick ratio of 2 : 1. If excess of current assets over quick assets represented by inventories is Rs. 24,000, calculate current assets and current liabilities.
Answer. Current Ratio = 3.5 : 1 Quick Ratio = 2 : 1
Let Current liabilities = x
Current assets = 3.5x and
Quick assets = 2x
Inventories = Current assets − Quick assets
24,000 = 3.5x − 2x
24,000 = 1.5x
Current Liabilities = Rs. 16,000
Current Assets = 3.5x = 3.5 × Rs. 16,000 = Rs. 56,000.
Verification:
Current Ratio = Current assets : Current liabilities
= Rs. 56,000 : Rs. 16,000
= 3.5: 1
Quick Ratio = Quick assets : Current liabilities
= Rs. 32,000 : Rs. 16,000 = 2 : 1

Question. From the following information calculate Debt equity Ratio:-
Share capital: 10,000 shares of 10 eachRs. 1,00,000,
debentures Rs.75,000
General Reserve45000, Long term provision Rs.25,000
Surplus Rs.30,000 Outstanding Expenses Rs.10,000
Answer. Debt to equity ratio = Debt / Equity (shareholder funds) = 1,00,000 / 1,75,000 = 0.57 : 1
Debt = Debentures + Long term provisions = 75,000 + 25,000 = 1,00,000
Equity = Share Capital + General Reserve + Surplus = 1,00,000 + 45,000 + 30,000 = 1,75,000

Question. Shareholders’ funds Rs. 14,00,000
Total Debts (Liabilities) Rs. 18,00,000
Current Liabilities = Rs. 2,00,000.
Calculate total assets to debt ratio.
Answer. Total Assets to debt ratio = Total Assets / Long term Debts
= 32,00,000 / 16,00,000 = 2 : 1
Long term debts = total debts (Liabilities) − Current Liabilities
= 18,00,000 − 2,00,000 = 16,00,000
Total assets = shareholder funds + total debts (liabilities)

Question. From the following details, calculate interest coverage ratio:
Net Profit after tax Rs. 60,000; 15% Long-term debt 10,00,000; and Tax rate 40%.
Answer. Net Profit after Tax = Rs. 60,000
Tax Rate = 40%
Net Profit before tax = Net profit after tax × 100/ (100 − Tax rate)
= Rs. 60,000 × 100/(100 − 40)
= Rs. 1,00,000
Interest on Long-term Debt = 15% of Rs. 10,00,000 = Rs. 1,50,000
Net profit before interest and tax = Net profit before tax + Interest
= Rs. 1,00,000 + Rs. 1,50,000 = Rs. 2,50,000
Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on long-term debt
= Rs. 2,50,000/Rs. 1,50,000
= 1.67 times

Question. From the following information, calculate inventory turnover ratio:
Inventory in the beginning = 18,000
Inventory at the end = 22,000
Net purchases = 46,000
Wages = 14,000
Revenue from operations = 80,000
Carriage inwards = 4,000
Answer. 
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Cost of Revenue from Operations = Inventory in the beginning + Net Purchases + Wages + Carriage inwards − Inventory at the end
= Rs. 18,000 + Rs. 46,000 + Rs. 14,000 + Rs. 4,000 − Rs. 22,000 = Rs. 60,000
Average Inventory = Inventory in the beginning + Inventory at the end / 2
= Rs. 18,000 + Rs. 22,000/ 2 = Rs. 20,000
∴ Inventory Turnover Ratio = Rs. 60,000/ Rs. 20,000 = 3 Times

Question. Calculate the Trade receivables turnover ratio from the following information:
Total Revenue from operations 4,00,000
Cash Revenue from operations 20% of Total Revenue from operations
Trade receivables as at 1.4.2020Rs.40,000
Trade receivables as at 31.3.2021Rs.1,20,000
Answer. Trade Receivables Turnover Ratio = Net Credit Revenue from Operations / Average Trade Receivables
Credit Revenue from operations = Total revenue from operations − Cash revenue from operations
Cash Revenue from operations = 20% of Rs. 4,00,000
= Rs. 4,00,000 × 20 / 100 = Rs. 80,000
Credit Revenue from operations = Rs. 4,00,000 − Rs. 80,000 = Rs. 3,20,000
Average Trade Receivables = Opening Trade Receivables + Closing Trade Receivables / 2
= Rs. 40,000 + Rs. 1,20,000 / 2 = Rs. 80,000
= Net Credit Revenue Form Operations / Average Inventory
= Rs. 3,20,000 / Rs. 80,000 = 4 times.

Question. Calculate the Trade payables turnover ratio from the following figures:
Credit purchases during 2020-21 = 12,00,000
Creditors on 1.4.2020 = 3,00,000
Bills Payables on 1.4.2020 = 1,00,000
Creditors on 31.3.2021 = 1,30,000
Bills Payables on 31.3.2021 = 70,000
Answer. Trade Payables Turnover Ratio = Net Credit Purchases / Average Trade Payables
Average Trade Payables = Creditors in the beginning + Bills payables in the beginning + Creditors at the end + Bills payables at the end / 2
= Rs. 3,00,000 + Rs. 1,00,000 + Rs. 1,30,000 + Rs. 70,000 2 = Rs. 3,00,000
∴ Trade Payables Turnover Ratio = Rs. 12,00,000 / Rs. 3,00,000 = 4 times

Question. From the following information, calculate –
Trade receivables turnover ratio
Average collection period
Trade payable turnover ratio
Given:
Revenue from Operations Rs.8,75,000
Creditors Rs.90,000
Bills receivable Rs.48,000
Bills payable Rs.52,000
Purchases Rs.4,20,000
Trade debtors Rs.59,000
Answer. Trade Receivables Turnover Ratio = Net Credit Revenue from operation / Average Trade Receivable
= Rs. 8, 75,000 / (Rs. 59,000 + Rs. 48,000) = 8.18 times
Average Collection Period = 365 / Trade Receivables Turnover Ratio = 365 / 8.18 = 45 days
Trade Payable Turnover Ratio = Purchases / Average Trade Payables
= Purchases / Creditors + Bills payable
= 4,20,000 / 90,000 + 52,000
= 4,20,000 / 1,42,000 = 2.96 times

Question. Following information is available for the year 2020-21, calculate gross profit ratio:
Revenue from Operations: Cash Rs.25,000
Credit Rs.75,000
Purchases: Cash Rs15,000
Credit Rs60,000
Carriage Inwards Rs2,000
Salaries Rs25,000
Decrease in Inventory Rs10,000
Return Outwards Rs2,000
Wages Rs5,000
Answer. Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Op-eration
= Rs.25, 000 + Rs.75, 000 = Rs. 1,00,000
Net Purchases = Cash Purchases + Credit Purchases − Return Outwards
= Rs. 15,000 + Rs. 60,000 − Rs. 2,000 = Rs. 73,000
Cost of Revenue from operations = Purchases + (Opening Inventory − Closing Inven-tory) + Direct Expenses
= Purchases + Decrease in inventory + Direct Expenses
= Rs. 73,000 + Rs. 10,000 + (Rs. 2,000 + Rs. 5,000)
= Rs. 90,000
Gross Profit = Revenue from Operations − Cost of Revenue from Operation
= Rs. 1,00,000 − Rs. 90,000 = Rs. 10,000
Gross Profit Ratio = Gross Profit/Net Revenue from Operations × 100
= Rs.10,000/Rs.1,00,000 × 100 = 10%.

Question. Given the following information:
Revenue from Operations 3,40,000
Cost of Revenue from Operations 1,20,000
Selling expenses 80,000
Administrative Expenses 40,000
Calculate Gross profit ratio and Operating ratio.
Answer. Gross Profit = Revenue from Operations − Cost of Revenue from Operations
= Rs. 3,40,000 − Rs. 1,20,000
= Rs. 2,20,000
Gross Profit Ratio = Gross Profit / Revenue from operation × 100
= Rs. 2,20,000 / Rs. 3,40,000 × 100 = 64.71%
Operating Cost = Cost of Revenue from Operations + Selling Expenses + Administrative Expenses
= Rs. 1,20,000 + 80,000 + 40,000 = Rs. 2,40,000
Operating Ratio = Operating Cost / Net Revenue from Operations × 100
= Rs. 2,40,000 / Rs. 3,40,000 x 100 = 70.59%

Question. Net profit after interest but before tax1,40,000; 15% Long-term debts Rs.4,00,000, Share holder's funds 2,40,000; Tax rate 50%. Calculate Return on Capital employed.
Answer. Return on Capital Employed/capital employed x100
Calculation of Profit before Interest and Tax
Net Profit after Interest but before Tax Interest =1,40,000
(15% on 4,00,000) =60,000
Net Profit before Interest andTax =2,00,000
Capital Employed
Shareholder's Funds + Long-term Debts= 2,40,000 +4,00,000 =6,40,000
Return on Capital Employed =2,00,000/6,40,000x 100 =31.25%

Question. Fixed Assets or Non-current Assets (at cost) 7,00,000, Accumulated Depreciation
1,00,000,Revenue from Operations 18,00,000. Calculate Fixed Assets/Non-current Assets turnover Ratio.
Answer. Fixed Assets/Non-current Assets Turnover Ratio=
Revenue from Operations/ Net Fixed Assets
18,00,000/6,00,000=3 Times
"Net Fixed Assets = Fixed Assets (at Cost) - Accumulated Depreciation
=7,00,000-1,00,000=6,00,000.

Question. Based on the following information :
Calculate Net Assets or Capital Employed Turnover Ratio:
Shareholders' Funds 40,00,000, Equity Share Capital 15,00,000, 7% Preference Share Capital 10,00,000, Reserves and Surplus 15,00,000, 8% Debentures 10,00,000 and Revenue om Oper-ations75,00,000.
Answer. 
Net Assets or Capital Employed Turnover Ratio =
Revenue from Operations /Net Assets or Capital Employed
= 75,00,000/5000000=1.5 Times
Revenue from Operations= 75,00,000 (Given)
Capital Employed (Note) - Shareholders' Funds + Long-term Borrowings