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Statement Analysis Tools and Accounting Ratios Test - 18

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Statement Analysis Tools and Accounting Ratios Test - 18
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  • Question 1
    1 / -0
    Old Ratio - New Ratio = _______.
    Solution
    When a new partner is admitted he is given an agreed share in profits this share is only given due to sacrifice made by the old partners from their existing profit sharing ratio hence 
    The ration in which the partners have agreed to sacrifice their share in profit in favour of other partner is known as sacrificing ratio.
    The difference between old ratio and new ratio is the sacrifice ratio.
    For example:
    Old profit sharing ratio is 3:2:1 among A,B and C
    New profit sharing ratio is 1:2:3 among A,B and C
    Sacrificing ratio = Old ratio-New ratio
    Gaining ratio= New ratio-Old ratio
    A sacrifices=3/6-1/6 = 2/6
    B sacrifices=2/6-2/6= No change
    C gaining=1/6-3/6=2/6.
  • Question 2
    1 / -0
    Which of the following term is used to represent the proportionate relationship between debt and equity?
    Solution
    The term used to represent the proportionate relationship between debt and equity is Capital structure. Because by capital structure we mean to define the mix or proportion in which the capital of the company should be so as to maximize the benefit for the shareholders. While deciding the capital structure a lot of factors have to be taken into consideration and also the Debt-equity ratio is the indicator of the financial leverage of the company.
  • Question 3
    1 / -0
    When the Debt Turnover Ratio is $$4$$, what is the average collection period?
    Solution
    Debt Turnover ratio = Net credit sales/ Average trade receivables = $$4$$
    Average collection period = $$12$$ months / Debt turnover ratio
                                                 = $$12$$ months / $$4$$
                                                  = $$3$$ months
  • Question 4
    1 / -0
    The immediate solvency ratio is?
  • Question 5
    1 / -0
    The appropriate ratio for indicating liquidity crisis is                        .
    Solution
    Acid test ratio or Quick ratio = Quick Assets/ Current Liabilities
                                                    = [Current Assets minus Inventory]/Current Liabilities
    The Quick ratio is a much more conservative measure of short term liquidity than the Current ratio. We reduce the amount of funds held up in inventory  form the current assets ,so that we can get a clear picture of how much fund can we mobilize for payment of dues in case of a cash crunch or a liquidity crisis. 
  • Question 6
    1 / -0
    Which of the following comes under efficiency ratios?
    Solution
    'Efficiency ratios' are those which help determine the business how efficiently it uses its resources in form of assets and deals with the liabilities.
    To know how a business converts the inventory into sales, fosters sales and earns income, these ratios are important.
  • Question 7
    1 / -0
    Which one of the following is not a leverage ratio?
    Solution
    Quick ratio is a liquidity ratio or short term solvency ratio. Whereas the remaining three ratios are leverage ratios.
  • Question 8
    1 / -0
    A firm wants to know the Degree of Operating Leverage (DOL) with the following information:
    Current level of sales : $$6000\ units$$
    Break-even point sales : $$4000\ units$$
    What would be the DOL?
  • Question 9
    1 / -0
    If the current ratio is $$2 : 1$$ and working capital is $$Rs. 60,000$$, what is the value of the current assets?
    Solution
    Current Ratio = Current Assets (C.A)/ Current Liabilities (C.L)  = $$2/1$$
    So, CA= $$2$$ CL

    Now, Working Capital = Current Assets(C.A) minus Current Liabilities (C.L) = $$Rs.60000$$
    So, C.A - C.L = $$60000$$
           $$2$$ C.L-CL = $$60000$$
            C.L = $$Rs. 60000$$

    Now, C.A = $$2$$ x $$60000$$ = $$Rs. 120000$$
  • Question 10
    1 / -0
    Which of the following is not included in current assets?
    Solution
    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within one year. current assets include cash and cash equivalents, accounts receivable, marketable securities, prepaid expenses, debtors etc.
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