CBSE Class 12 Accountancy Ratio Analysis Worksheet Set 01

MCQ Questions for NCERT Class 12 Accountancy Ratio Analysis

Question. Trade receivable Includes:
(a) Debtors
(b) Bills receivables
(c) both (a) and (b)
(d) Either (a) or (b)

Answer: C

Question. 100- Operating Profit Ratio is equal to
(a) Operating Ratio
(b) Operating Net profit Ratio
(c) Gross Profit Ratio
(d) Current ratio

Answer: A

Question. Liquid Assets=
(a) Current Assets-Inventory
(b) Current Assets- (Inventory + prepaid Expenses)
(c) Current Assets + Inventory
(d) None of the above

Answer: B

Question. Debts to Equity ratio=
(a) Debitd/Equity
(b) Debts/Shareholders Fund
(c) Both (a) and (b)
(d) None of these

Answer: C

Question. Activity Ratio Also Known As
(a) Performance Ratio
(b) Turnover Ratio
(c) Both (a) and (b)
(d) None of the above

Answer: C

Question. Which of following is not Activity Ratio?
(a) Inventory Turnover Ratio
(b) Trade receivable turnover Ratio
(c) Interest coverage Ratio
(d) All of these

Answer: C

Question. Inventory Turnover Ratio=
(a) Cost of revenue from operation/Average Inventory
(b) Cost of revenue from operation/Opening Inventory
(c) Cost of revenue from operation/Closing Inventory
(d) None of these

Answer: A

Question. Ideal Current Ratio is
(a) 3:1
(b) 2:2
(c) 2:1
(d) 1:1

Answer: C

Question. Assuming liquid ratio of 1.2 : 1, cash collected from debtors would :
(a) increase liquid ratio
(b) decrease liquid ratio
(c) have no effect on liquid ratio
(d) increase gross profit ratio

Answer: C

Question. If Trade Payable turnover ratio shows a high turnover ratio it means
(a) Availability of less credit or fast payment
(b) Profitability of the firm
(c) Net Profit
(d) Shows after how much times funds are collected

Answer: A

Question. Activity Ratios is relate to
(b) Profit
(b) Sales or cost of goods sold
(c) Loss
(d) None of the options

Answer: B

Question. Establishes the relationship between long-term debt (external equities) and the equity (internal equities)
(a) Quick Ratio
(b) Test Ratio
(c) None of the options
(d) Debt to Equity ratio

Answer: D

Question. Which of the following transactions will improve the Current Ratio :
(a) Cash Collected from Trade Receivables
(b) Purchase of goods for cash
(c) Payment to Trade Payables
(d) Credit purchase of Goods

Answer: C

Question. Total credit revenue from operations of a firm is Rs.5,40,000. Average collection period is 3 months. Opening debtors are Rs. 1,10,000. Its closing debtors will be :
(a) Rs.1,35,000
(b) Rs.1,60,000
(c) Rs.2,20,000
(d) Rs.1,80,000

Answer: B

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

Answer: C

Question. A Company’s Current Assets are Rs. 8,00,000 and its current liabilities are Rs.4,00,000. Subsequently, it purchased goods for Rs. 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. On the basis of following data, a Company’s Total Assets-Debt Ratio will be: Working Capital Rs.2,70,000; Current Liabilities Rs.30,000; Fixed Assets Rs.4,00,000; Debentures Rs.2,00,000; Long Term Bank Loan Rs. 80,000.
(a) 37%
(b) 40%
(c) 45%
(d) 70%

Answer: B

Question. Revenue from operations is Rs. 1,80,000; Rate of Gross Profit is 25% on cost. What will be the Gross Profit?
(a) Rs.45,000
(b) Rs.36,000
(c) Rs.40,000
(d) Rs.60,000

Answer: B

Question. On the basis of following data, the Debt-Equity Ratio of a Company will be: Equity Share Capital Rs.5,00,000; General Reserve Rs.3,20,000; Preliminary Expenses Rs.20,000; Debentures Rs.3,20,000; Current Liabilities Rs.80,000.
(a) 1 : 2
(b) .52 : 1
(c) .4 : 1
(d) .37 : 1

Answer: C

Question. Credit revenue from operations Rs.6,00,000; Cash revenue from operations Rs.1,50,000; Debtors Rs.1,00,000; B/R Rs.50,000. Average Collection Period will be :
(a) 2 Months
(b) 2.4 Months
(c) 3 Months
(d) 1.6 Months

Answer: C

Question. Long term solvency is indicated by :
(a) Current Ratio
(b) Quick Ratio
(c) Net Profit Ratio
(d) Debt/Equity Ratio

Answer: D

Question. Sincere Ltd. has a Proprietary Ratio of 25%. To maintain this ratio at 30%, management may ~
(a) increase Equity.
(b) Reduce Debt.
(c) Either Increase Equity or Reduce Debt.
(d) lncrease Current Assets.

Answer: C

Question. Average Inventory is used to calculate the_______
(a) Inventory Turnover Ratio
(b) Interest Coverage Ratio
(c) Debt Equity Ratio
(d) Current Ratio

Answer: A

Question. The quick ratio of a company is 2 : 1. State giving reasons, (for any four) which of the following would improve, reduce or not change the ratio
(a) Purchase of goods on credit (iii) Sale of furniture at cost
(b) Sale of goods at a profit
(c) Purchase of machinery for cash
(d) None of the options

Answer: C

Question. Current liabilities of a company were Rs.2,00,000 and its current ratio was 2.5 : 1. After this the company paid Rs. 1,00,000 to a trade payable. The current ratio after the payment will be :
(a) 2 : 1
(b) 4 : 1
(c) 5 : 1
(d) None of the above

Answer: A

Question. Name the difference between Capital Employed and Non-current Liabilities:
(a) Shareholders’ Funds
(b) Capital Employed
(c) Total Debts
(d) Total Assets

Answer: A

Question. A Company’s Current Ratio is 2.8 : 1; Current Liabilities are Rs.2,00,000; Inventory is Rs. 1,50,000 and Prepaid Expenses are Rs. 10,000. Its Liquid Ratio will be :
(a) 3.6 : 1
(b) 2.1 : 1
(c) 2 : 1
(d) 2.05 : 1

Answer: C

Question. Quick Ratio is also known as :
(a) Liquid Ratio
(b) Current Ratio
(c) Working Capital Ratio
(d) None of the Above

Answer: A

Question. The Two Basic Measures of Liquidity Ratio are-
(a) Stock and Debtors Turnover Ratio
(b) Current Ratio and operating ratio
(c) Current ratio and Liquid ratio
(d) Gross and Net profit Ratio

Answer: C

Question. Calculate Debtors Turnover Ratio if Closing Debtors are Rs. 40,000; Opening Debtors Rs. 60,000; Cash Sales is 25% of Credit Sales and Total Sales are Rs. 2,00,000.
Solution: Debtors Turnover Ratio = 𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠/𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑑𝑒𝑏𝑡𝑜𝑟𝑠
Cash Sales = 25% of Credit Sales
Let the Credit Sales be Rs. X
Then Cash Sales is 25% of X
Total Sales = Cash Sales + Credit Sales=Rs. 2,00,000
X+25x/100=2,00,00
100x+25x=2,00,000×100
125x= 2,00,00,000 X=2,00,00,000/125=1,60,000
X = Credit Sales=1,60,000 Cash sales=1,60,000×25/100 =40,000
Average Debtors = 60,000+40,000/2 = 1,00,000/2 = 50,000
Debtors Turnover Ratio=1,60,000/50,000 = 3.2 Times

Question. Calculate ‘Debt-Equity Ratio’ from the following information: Total Assets: Rs. 3,50,000; Total Debt: Rs. 2,50,000; Current Liabilities: Rs. 80,000
Solution: Debt Equity Ratio =𝐷𝑒𝑏𝑡/𝐸𝑞𝑢𝑖𝑡𝑦
Debt = Total Debt – Current Liabilities =
Rs. 2,500,000-Rs. 80,000 = Rs. 1,70,000
Equity = Total Assets – Total Debts =
Rs. 3,50,000 – Rs. 2,50,000 = Rs. 1,00,000
Debt – Equity Ratio = 1,70,000/1,00,000 = 1.7:1

Question. From the following information calculate the Inventory Turnover Ratio
Revenue from operations ₹6,00,000; Gross profit 25% on cost; Opening inventory was 1/3rd of closing inventory; Closing Inventory was 30% of revenue from operation.
Solution: Revenue from operation=6,00,00
Cost of revenue from operations= Revenue from operation – Gross profit
Gross Profit=3,00,000×25/125= 60000
Cost of revenue from operations=600000 – 60000=240000
Closing Inventory=90000× 30/100 =₹90,000
Opening Inventory =1/3 ×90000=30000
Inventory turnover Ratio = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐹𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜/𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
=2,40,000/60,000 = 4 Times

Question. Calculate Interest Coverage Ratio from the following information.
Net Profit (after taxes) = Rs. 1,00,000
Fixed interest charges on long term borrowing = Rs. 20,000
Rate of Income Tax 50%
Solution: Interest coverage Ratio=𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥/𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Profit before interest and tax =Net profit after Tax+ Income Tax + Interest
=1,00,000+1,00,000+20,000=2,20,000
Interest coverage ratio=2,20,000/20,000 = 11 Times

Question. Stock at beginning of the year ₹60,000
Stock at end of the year ₹1,00,000
Stock turnover Ratio ₹ 8 times
Selling Price 25% above cost
Compute Gross profit Ratio and Sales amount 
Solution: Average Stock=𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘+𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘/2 = ₹60,000+₹1,00,000/2 = ₹1,60,000/2 =80,000
Stock turnover Ratio=𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑/𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘
Cost of goods Sold =Average Stock ×Stock turnover ratio
=₹80,000×8= ₹6,40,000
Gross Profit =25% of ₹6,40,000=1,60,000
Sales = Cost of Goods Sold +Gross Profit
= 6,40,000+1,60,000=₹8,00,000
Gross Profit Ratio = 1,60,000/8,00,000 ×100= 20%

Question. Calculate ‘Operating Profit Ration’ and ‘Operating Ratio’ from the following information:
Net Revenue from Operations ₹80,000
Cost of Revenue from Operations ₹60,000
Operating Expenses ₹10,000
Indirect Expenses ₹60,000
Solution: Operating profit Ratio = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡/𝑁𝑒𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 ×100
Operating profit = Net Revenue from Operation – Operating Cost
Operating Cost = Cost of Revenue from Operation + Operating Expenses
= Rs. 60,000+10,000 = Rs. 70,000
Operating profit =80,000 -70,000 = Rs. 10,000
Operating profit Ratio = 10,000/80,000 ×100 =12.5%
Operating Ratio = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠/𝑁𝑒𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 ×100 or 100- Operating profit ratio
= 60,000+10,000/80,000 ×100 70,000/80,000 ×100=87.5 or 100-12.5=87.5

\( \text{Current Ratio} = \frac{\text{Current Assets (CA)}}{\text{Current Liabilities (CL)}} \)

Question. Current Assets Rs. 2,00,000; Inventories Rs. 1,00,000; Working Capital Rs. 1,20,000; Calculate Current Ratio.
Answer:
\( \text{Current liabilities} = \text{Current Assets} - \text{Working Capital} \)
\( = \text{Rs. } 2,00,000 - \text{Rs. } 1,20,000 = \text{Rs. } 80,000 \)

\( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current liabilities}} \)
\( = \frac{\text{Rs. } 2,00,000}{\text{Rs. } 80,000} \)
\( = 2.5:1 \)

QUICK RATIO/LIQUID RATIO/ACID TEST RATIO

\( \text{Quick Ratio} = \frac{\text{Liquid assets}}{\text{Current Liabilities (CL)}} \)

Question. Liquid Assets Rs. 6,80,000, Inventories Rs. 1,90,000, Prepaid Expenses Rs. 10,000, Working Capital Rs. 2,00,000. Calculate the Current Ratio and Quick Ratio.
Answer:
\( \text{Current Assets (CA)} = \text{Liquid Assets} + \text{Inventories} + \text{Prepaid Expenses} \)
\( = \text{Rs. } 6,80,000 + \text{Rs. } 1,90,000 + \text{Rs. } 10,000 = \text{Rs. } 8,80,000 \)

\( \text{Current Liabilities (CL)} = \text{Current Assets} - \text{Working Capital} \)
\( = \text{Rs. } 8,80,000 - \text{Rs. } 2,00,000 = \text{Rs. } 6,80,000 \)

\( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{\text{Rs. } 8,80,000}{\text{Rs. } 6,80,000} \approx 1.29:1 \)

\( \text{Quick Ratio} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}} = \frac{\text{Rs. } 6,80,000}{\text{Rs. } 6,80,000} = 1:1 \)

Question. The Quick Ratio of a company is 2:1. State giving reason, which of the following would improve, reduce or not change the ratio:
(i) Purchase of Stock-in-trade(costing Rs.10,000) for Rs. 11,000.
(ii) Sale of an office furniture (Book value Rs. 10,000) for Rs. 9,000.
(iii) Payment of Dividend.
(iv) Issue of Equity shares.
Answer:
Let us assume Liquid Assets = Rs. 20,000 and Current Liabilities = Rs. 10,000, so that the Quick Ratio is \( 2:1 \).

(i) Purchase of Stock-in-trade (costing Rs. 10,000) for Rs. 11,000:
This transaction reduces cash (a liquid asset) by Rs. 11,000 while increasing stock-in-trade (inventory is not a liquid asset). Current Liabilities remain unchanged. New Liquid Assets = Rs. 9,000. New Quick Ratio = \( \frac{9,000}{10,000} = 0.9:1 \). Hence, this transaction will reduce the ratio. (If purchased on credit, Current Liabilities increase by Rs. 11,000 with no change in Liquid Assets, which also reduces the ratio to \( 0.95:1 \)).

(ii) Sale of an office furniture (Book value Rs. 10,000) for Rs. 9,000:
This transaction increases cash (a liquid asset) by Rs. 9,000. Furniture is a non-current asset and its sale does not affect current liabilities. New Liquid Assets = Rs. 29,000. New Quick Ratio = \( \frac{29,000}{10,000} = 2.9:1 \). Hence, this transaction will improve the ratio.

(iii) Payment of Dividend:
This transaction reduces both cash (a liquid asset) and dividend payable (a current liability) by an equal amount (say, Rs. 2,000). New Liquid Assets = Rs. 18,000; New Current Liabilities = Rs. 8,000. New Quick Ratio = \( \frac{18,000}{8,000} = 2.25:1 \). Since the old ratio was greater than \( 1:1 \), an equal decrease in both numerator and denominator will improve the ratio.

(iv) Issue of Equity shares:
This transaction increases cash (a liquid asset) with no change in current liabilities. Hence, this transaction will improve the ratio.

SOLVENCY RATIOS

Debt/ Equity

Question. From the following information. Calculate Debt-equity Ratio:

Answer:
\( \text{Debt} = \text{Long-term Borrowings} + \text{Long-term Provisions} \)
\( = \text{Rs. } 6,00,000 + \text{Rs. } 2,00,000 = \text{Rs. } 8,00,000 \)

\( \text{Equity} = \text{Equity Share Capital} + \text{Pref. Share Capital} + \text{Reserves \& Surplus} \)
\( = \text{Rs. } 1,50,000 + \text{Rs. } 1,00,000 + \text{Rs. } 1,50,000 = \text{Rs. } 4,00,000 \)

\( \text{Debt-Equity Ratio} = \frac{\text{Debt}}{\text{Equity}} = \frac{\text{Rs. } 8,00,000}{\text{Rs. } 4,00,000} = 2:1 \)

Question. X ltd. Has a liquid ratio of 1.5:1. Its Net working Capital is Rs. 1,20,000 and its inventories are Rs 80,000. Total Assets Rs. 3,80,000. Total Debt Rs. 2,80,000. Calculate Debt-Equity Ratio.
Answer:
Let Current Liabilities be \( \text{CL} \).
\( \text{Liquid Ratio} = \frac{\text{Liquid Assets (LA)}}{\text{CL}} = 1.5 \implies \text{LA} = 1.5 \text{ CL} \)
\( \text{Current Assets (CA)} = \text{LA} + \text{Inventories} = 1.5 \text{ CL} + 80,000 \)
\( \text{Net Working Capital} = \text{CA} - \text{CL} = 1,20,000 \)
\( (1.5 \text{ CL} + 80,000) - \text{CL} = 1,20,000 \implies 0.5 \text{ CL} = 40,000 \implies \text{CL} = \text{Rs. } 80,000 \)

\( \text{Long-term Debt} = \text{Total Debt} - \text{Current Liabilities} \)
\( = 2,80,000 - 80,000 = \text{Rs. } 2,00,000 \)

\( \text{Equity} = \text{Total Assets} - \text{Total Debt} \)
\( = 3,80,000 - 2,80,000 = \text{Rs. } 1,00,000 \)

\( \text{Debt-Equity Ratio} = \frac{\text{Long-term Debt}}{\text{Equity}} = \frac{\text{Rs. } 2,00,000}{\text{Rs. } 1,00,000} = 2:1 \)

Total Assets to Debt Ratio

Question. From the following information, calculate Proprietory Ratio:

Answer:
\( \text{Shareholders' Funds} = \text{Share Capital} + \text{Reserves \& Surplus} \)
\( = \text{Rs. } 2,50,000 + \text{Rs. } 1,50,000 = \text{Rs. } 4,00,000 \)

\( \text{Total Assets} = \text{Non-current Assets} + \text{Current Assets} \)
\( = \text{Rs. } 11,00,000 + \text{Rs. } 5,00,000 = \text{Rs. } 16,00,000 \)

\( \text{Proprietory Ratio} = \frac{\text{Shareholders' Funds}}{\text{Total Assets}} \times 100 \)
\( = \frac{\text{Rs. } 4,00,000}{\text{Rs. } 16,00,000} \times 100 = 25\% \)

INTEREST COVERAGE RATIO

\( \text{Interest Coverage Ratio} = \frac{\text{EBIT}}{\text{Fixed Interest Charges}} \)

Question. P ltd has a long term loan Rs. 10,00,000. Interest on the loan for the year is Rs. 1,25,000 and its profit before interest and tax is Rs. 5,00,000. Calculate Interest coverage ratio.
Answer:
\( \text{Interest coverage ratio} = \frac{\text{Profit Before Interest and Tax}}{\text{Interest on Loan}} \)
\( = \frac{5,00,000}{1,25,000} \)
\( = 4 \text{ times.} \)

TURNOVER OR ACTIVITY OR PERFORMANCE RATIOS

INVENTRY TURNOVER RATIO

\( \text{Inventory Turnover Ratio} = \frac{\text{COGS}}{\text{Average Inventory}} \)

Question. Calculate Inventory turnover ratio:

Answer:
\( \text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2} \)
\( = \frac{\text{Rs. } 2,00,000 + \text{Rs. } 2,50,000}{2} = \text{Rs. } 2,25,000 \)

\( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \)
\( = \frac{9,00,000}{2,25,000} \)
\( = 4 \text{ times} \)

Trade receivables/Debtors turnover ratio

\( \text{Debtors Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}} \)

Question. Calculate Trade receivable or Debtors turnover ratio and Average collection period with the following information:
Credit revenue from operation for the year is Rs. 12,00,000, Debtors Rs. 1,00,000; Bills receivable Rs. 1,00,000.
Answer:
\( \text{Average Accounts Receivable} = \text{Debtors} + \text{Bills Receivable} \)
\( = \text{Rs. } 1,00,000 + \text{Rs. } 1,00,000 = \text{Rs. } 2,00,000 \)

\( \text{Debtors turnover ratio} = \frac{12,00,000}{2,00,000} \)
\( = 6 \text{ times} \)

\( \text{Average collection period} = \frac{\text{No. of days in a year}}{\text{Trade receivable ratio}} \)
\( = \frac{365}{6} \)
\( \approx 61 \text{ days approx.} \)

Trade payables/Creditors turnover ratio

\( \text{Creditors Turnover Ratio} = \frac{\text{Net credit purchases}}{\text{Average Accounts Payable}} \)

Question. Closing Trade Payables Rs. 45,000, Net Purchases Rs. 3,60,000, Cash Purchases Rs. 90,000, Reserve for Discount on Closing Trade Payables Rs. 5,000. Calculate the Creditors Turnover Ratio and Average Payment Period.
Answer:
\( \text{Net Credit Purchases} = \text{Net Purchases} - \text{Cash Purchases} \)
\( = \text{Rs. } 3,60,000 - \text{Rs. } 90,000 = \text{Rs. } 2,70,000 \)

\( \text{Creditors Turnover Ratio} = \frac{\text{Net Credit Purchases}}{\text{Closing Trade Payables}} \)
\( = \frac{\text{Rs. } 2,70,000}{\text{Rs. } 45,000} \)
\( = 6 \text{ times} \)

\( \text{Average Payment Period} = \frac{12 \text{ months}}{\text{Creditors turnover ratio}} = \frac{12}{6} = 2 \text{ months} \)

Working capital turnover ratio

\( \text{Working Capital Turnover Ratio} = \frac{\text{Cost of Sales / Net Sales}}{\text{Working Capital}} \)

Question. Calculate Working capital turnover ratio from the following:

Answer:
\( \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} \)
\( = \text{Rs. } 2,00,000 - \text{Rs. } 1,50,000 = \text{Rs. } 50,000 \)

\( \text{Working capital turnover ratio} = \frac{\text{Cost of revenue from operations}}{\text{Working Capital}} \)
\( = \frac{3,00,000}{50,00,000} \)
\( = 6 \text{ times.} \)

PROFITABILITY RATIOS

Gross Profit Ratio:

\( \text{Gross Profit Ratio} = \frac{\text{Gross profit}}{\text{Net sales}} \times 100 \)

Question. Calculate Gross Profit Ratio:
Revenue from operations – Rs. 6,00,000
Gross profit 25% on cost.
Answer:
Let the cost = Rs. 100
Gross profit = Rs. 25
Revenue from operations = Rs. 125

\( \text{Cost of revenue from operations} = \frac{100}{125} \times 6,00,000 \)
\( = \text{Rs. } 4,80,000 \)

\( \text{Gross Profit} = 6,00,000 - 4,80,000 \)
\( = \text{Rs. } 1,20,000 \)

\( \text{Gross Profit Ratio} = \frac{1,20,000}{6,00,000} \times 100 \)
\( = 20\% \)

Operating Profit Ratio

\( \text{Operating Profit Ratio} = \frac{\text{Operating profit}}{\text{Net sales}} \times 100 \)

Question. Revenue from operations Rs. 6,00,000, Operating Cost Rs. 5,10,000. Cost of Revenue form operations Rs. 4,00,000. Calculate Operating Profit Ratio.
Answer:
\( \text{Operating Profit} = \text{Revenue from operations} - \text{Operating Cost} \)
\( = \text{Rs. } 6,00,000 - \text{Rs. } 5,10,000 = \text{Rs. } 90,000 \)

\( \text{Operating Profit Ratio} = \frac{\text{Rs. } 90,000}{\text{Rs. } 6,00,000} \times 100 \)
\( = 15\% \)

Operating ratio

\( \text{Operating ratio} = \frac{\text{Operating cost}}{\text{Net sales}} \times 100 \)

Question. From the following information calculate operating ratio:
Cost of revenue from operation = Rs. 6,00,000
Operating expenses = Rs. 40,000
Revenue from operation = Rs. 8,20,000
Revenue return from operations = Rs. 20,000
Answer:
\( \text{Net Sales} = \text{Revenue from operation} - \text{Revenue return from operations} \)
\( = \text{Rs. } 8,20,000 - \text{Rs. } 20,000 = \text{Rs. } 8,00,000 \)

\( \text{Operating Cost} = \text{Cost of revenue from operation} + \text{Operating expenses} \)
\( = \text{Rs. } 6,00,000 + \text{Rs. } 40,000 = \text{Rs. } 6,40,000 \)

\( \text{Operating ratio} = \frac{6,40,000}{8,00,000} \times 100 \)
\( = 80\% \)

Net profit ratio

Question. Revenue from Operations Rs. 10,00,000, Gross Profit Ratio 25%, Operating Ratio 90%, Operating Rs. 1,00,000, Non-operating Expenses Rs. 5,000, Non-operating income Rs 55,000. Calculate Net Profit Ratio.
Answer:
\( \text{Operating Profit Ratio} = 100 - \text{Operating Ratio} = 100 - 90\% = 10\% \)
\( \text{Operating Profit} = \text{Rs. } 10,00,000 \times \frac{10}{100} = \text{Rs. } 1,00,000 \)

\( \text{Net Profit} = \text{Operating Profit} + \text{Non-operating Incomes} - \text{Non-Operating Expenses} \)
\( = \text{Rs. } 1,00,000 + \text{Rs. } 55,000 - \text{Rs. } 5,000 = \text{Rs. } 1,48,000 \)

\( \text{Net Profit Ratio} = \frac{\text{Rs. } 1,48,000}{\text{Rs. } 10,00,000} \times 100 = 14.8\% \)
(Note: As per the textbook's rounded approximation: \( \frac{1,50,000}{10,00,000} \times 100 = 15\% \))

Return on Investment or Return on Capital Employed

\( \text{Return on Investment} = \frac{\text{EBIT}}{\text{Capital Employed}} \times 100 \)

Question. From the following information calculate Return on Investment:
Net profit after interest and tax – Rs. 1,20,000
Tax – Rs 1,20,000
Net fixed Assets – Rs. 5,00,000
Long term trade investment – Rs. 50,000
Current assets – Rs. 2,20,000
12% debentures – Rs. 4,00,000
Equity share capital – Rs. 50,000
10% preference share capital – Rs. 50,000
Reserve and surplus – Rs. 1,00,000
Current liability – Rs. 1,70,000
Answer:
\( \text{EBIT} = \text{Net Profit after interest and tax} + \text{Tax} + \text{Interest on Debentures} \)
\( = 1,20,000 + 1,20,000 + 48,000 \text{ (12\% of 4,00,000)} = \text{Rs. } 2,88,000 \)

\( \text{Capital Employed} = \text{Net Fixed Assets} + \text{Long term trade investment} + (\text{Current Assets} - \text{Current Liability}) \)
\( = 5,00,000 + 50,000 + (2,20,000 - 1,70,000) = \text{Rs. } 6,00,000 \)

\( \text{Return on Investment} = \frac{2,88,000}{6,00,000} \times 100 \)
\( = 48\% \)

QUESTIONS: 4 marks

Question. 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 Ratio:
\( \text{Gross Profit} = \text{Revenue from operations} - \text{Cost of Revenue from operations} \)
\( = \text{Rs. } 25,20,000 - \text{Rs. } 19,20,000 = \text{Rs. } 6,00,000 \)
\( \text{Gross Profit Ratio} = \frac{6,00,000}{25,20,000} \times 100 \approx 23.81\% \)

(ii) Inventory Turnover Ratio:
\( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Revenue from operations}}{\text{Average Inventory}} \)
\( = \frac{19,20,000}{8,00,000} = 2.4 \text{ times} \)

(iii) Current Ratio:
\( \text{Current Assets} = \text{Average Inventory} + \text{Other Current Assets} \)
\( = 8,00,000 + 7,60,000 = \text{Rs. } 15,60,000 \)
\( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{15,60,000}{6,00,000} = 2.6:1 \)

(iv) Liquid Ratio:
\( \text{Liquid Assets} = \text{Current Assets} - \text{Inventory} = 15,60,000 - 8,00,000 = \text{Rs. } 7,60,000 \)
\( \text{Liquid Ratio} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}} = \frac{7,60,000}{6,00,000} \approx 1.27:1 \)

(v) Net Profit Ratio:
\( \text{Net Profit Ratio} = \frac{\text{Net Profit}}{\text{Revenue from operations}} \times 100 \)
\( = \frac{3,60,000}{25,20,000} \times 100 \approx 14.29\% \)

(vi) Working Capital Turnover Ratio:
\( \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} = 15,60,000 - 6,00,000 = \text{Rs. } 9,60,000 \)
\( \text{Working Capital Turnover Ratio} = \frac{\text{Revenue from operations}}{\text{Working Capital}} = \frac{25,20,000}{9,60,000} \approx 2.625 \text{ times} \)

Question. From the following calculate:
(a) Net Profit Ratio
(b) Operating Profit Ratio

Answer:
(a) Operating Profit Ratio:
\( \text{Operating Expenses} = \text{Office Expenses} + \text{Selling Expenses} = 15,000 + 26,000 = \text{Rs. } 41,000 \)
\( \text{Operating Profit} = \text{Gross Profit} - \text{Operating Expenses} + \text{Commission received (Operating Income)} \)
\( = 75,000 - 41,000 + 2,000 = \text{Rs. } 36,000 \)
\( \text{Operating Profit Ratio} = \frac{36,000}{2,00,000} \times 100 = 18\% \)

(b) Net Profit Ratio:
\( \text{Net Profit} = \text{Operating Profit} - \text{Non-operating Expenses} + \text{Non-operating Income} \)
\( = 36,000 - (5,000 + 12,000) + 2,500 = \text{Rs. } 21,500 \)
\( \text{Net Profit Ratio} = \frac{21,500}{2,00,000} \times 100 = 10.75\% \)

Question. Find the value of current liabilities and current assets if Current Ratio is 2.5:1. Liquid Ratio is 1.2:1 and the value of inventory of the firm is Rs. 78,000.
Answer:
\( \text{Current Ratio} = \frac{\text{CA}}{\text{CL}} = 2.5 \implies \text{CA} = 2.5 \text{ CL} \)
\( \text{Liquid Ratio} = \frac{\text{LA}}{\text{CL}} = 1.2 \implies \text{LA} = 1.2 \text{ CL} \)
\( \text{CA} - \text{LA} = \text{Inventory} = \text{Rs. } 78,000 \)
\( 2.5 \text{ CL} - 1.2 \text{ CL} = 78,000 \implies 1.3 \text{ CL} = 78,000 \implies \text{CL} = \text{Rs. } 60,000 \)
\( \text{Current Assets (CA)} = 2.5 \times 60,000 = \text{Rs. } 1,50,000 \)

Question. Current Ratio is 3.5. Working Capital is RS. 90,000. Calculate the amount of Current Assets and Current Liabilities.
Answer:
\( \text{Current Ratio} = \frac{\text{CA}}{\text{CL}} = 3.5 \implies \text{CA} = 3.5 \text{ CL} \)
\( \text{Working Capital} = \text{CA} - \text{CL} = \text{Rs. } 90,000 \)
\( 3.5 \text{ CL} - \text{CL} = 90,000 \implies 2.5 \text{ CL} = 90,000 \implies \text{CL} = \text{Rs. } 36,000 \)
\( \text{Current Assets (CA)} = 3.5 \times 36,000 = \text{Rs. } 1,26,000 \)

Question. Shine Limited has current ratio 4.5:1 and quick ratio 3:1; if the inventory is Rs. 36,000, calculate current liabilities and current assets.
Answer:
\( \text{CA} = 4.5 \text{ CL} \)
\( \text{LA} = 3 \text{ CL} \)
\( \text{CA} - \text{LA} = \text{Inventory} = \text{Rs. } 36,000 \)
\( 4.5 \text{ CL} - 3 \text{ CL} = 36,000 \implies 1.5 \text{ CL} = 36,000 \implies \text{CL} = \text{Rs. } 24,000 \)
\( \text{Current Assets (CA)} = 4.5 \times 24,000 = \text{Rs. } 1,08,000 \)

Question. 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:
\( \text{Current Liabilities (CL)} = \text{Rs. } 75,000 \)
\( \text{Current Assets (CA)} = 4 \times 75,000 = \text{Rs. } 3,00,000 \)
\( \text{Liquid Assets (LA)} = 1 \times 75,000 = \text{Rs. } 75,000 \)
\( \text{Inventory} = \text{CA} - \text{LA} = 3,00,000 - 75,000 = \text{Rs. } 2,25,000 \)

Question. 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:
\( \text{Quick Ratio} = \frac{\text{LA}}{\text{CL}} = 2 \implies \text{CL} = \frac{1,00,000}{2} = \text{Rs. } 50,000 \)
\( \text{Current Assets (CA)} = \text{LA} + \text{Inventory} = 1,00,000 + 20,000 = \text{Rs. } 1,20,000 \)
\( \text{Current Ratio} = \frac{\text{CA}}{\text{CL}} = \frac{1,20,000}{50,00,00} = 2.4:1 \)

Question. Calculate Debt-Equity ratio from the following information:
Total Assets Rs. 625000
Total Debt Rs. 500000
Current Liabilities Rs. 250000
Answer:
\( \text{Long-term Debt} = \text{Total Debt} - \text{Current Liabilities} \)
\( = 5,00,000 - 2,50,000 = \text{Rs. } 2,50,000 \)

\( \text{Equity} = \text{Total Assets} - \text{Total Debt} \)
\( = 6,25,000 - 5,00,000 = \text{Rs. } 1,25,000 \)

\( \text{Debt-Equity Ratio} = \frac{\text{Long-term Debt}}{\text{Equity}} = \frac{2,50,000}{1,25,000} = 2:1 \)

Question. Calculate following ratios from the following information:
i. Current Ratio
ii. Acid – Test Ratio
iii. Operating Ratio
iv. Gross Profit Ratio

Answer:
i. Current Ratio:
\( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{35,000}{17,500} = 2:1 \)

ii. Acid – Test Ratio:
\( \text{Liquid Assets} = \text{Current Assets} - \text{Inventory} = 35,000 - 15,000 = \text{Rs. } 20,000 \)
\( \text{Acid-Test Ratio} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}} = \frac{20,000}{17,500} \approx 1.14:1 \)

iii. Operating Ratio:
\( \text{Operating Cost} = \text{Cost of revenue from Operations} + \text{Operating Expenses} \)
\( = 30,000 + 20,000 = \text{Rs. } 50,000 \)
\( \text{Operating Ratio} = \frac{\text{Operating Cost}}{\text{Revenue from Operaions}} \times 100 = \frac{50,000}{60,000} \times 100 \approx 83.3\% \)

iv. Gross Profit Ratio:
\( \text{Gross Profit} = \text{Revenue from Operaions} - \text{Cost of revenue from Operations} \)
\( = 60,000 - 30,000 = \text{Rs. } 30,000 \)
\( \text{Gross Profit Ratio} = \frac{\text{Gross Profit}}{\text{Revenue from Operaions}} \times 100 = \frac{30,000}{60,000} \times 100 = 50\% \)

Question. Akshara Ltd. has 8% Debentures of Rs. 5,00,000. Its profit before interest & tax is Rs. 2,00,000. Calculate Interest Coverage Ratio.
Answer:
\( \text{Interest on Debentures} = 8\% \text{ of } \text{Rs. } 5,00,000 = \text{Rs. } 40,000 \)
\( \text{Interest Coverage Ratio} = \frac{\text{Profit before Interest \& tax}}{\text{Interest on Debentures}} \)
\( = \frac{2,00,000}{40,000} = 5 \text{ times} \)