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Statement Analysis Tools and Accounting Ratios Test - 34

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Statement Analysis Tools and Accounting Ratios Test - 34
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  • Question 1
    1 / -0
    Which of the following is normally treated as a satisfactory ratio of current assets to current liabilities?
    Solution
    The rule of thumb for a satisfactory current ratio is $$2 : 1$$. Let Current assets be $$Rs. 100000$$ and the Current liabilities be $$Rs. 40000$$
    Now, Current ratio = Current assets/ Current liabilities
                                    = $$100000/40000$$
                                    = $$2.5 : 1$$ . 
    This current ratio is satisfactory as it shows that the current assets available are $$2.5$$ times the amount of current liabilities.
  • Question 2
    1 / -0
    The application of sacrificing ratio is used when...
  • Question 3
    1 / -0
    Method of inventory valuation will not affect
  • Question 4
    1 / -0
    Which of the following is the long term liquidity ratio?
    Solution
    • Current ratio is a short term liquidity ratio.
    • Stock turnover ratio is an activity ratio
    • Operating ratio is a profitability ratio
    • Interest coverage ratio is a long term liquidity ratio which calculates the ability of the firm to meet the interest obligations.
  • Question 5
    1 / -0
    Right of stoppage of goods in transit can be effected for
  • Question 6
    1 / -0
    ____________ assets are those which are meant to be converted cash at the earliest opportunity.
  • Question 7
    1 / -0
    Higher the ratio, the lower the profitability is applicable to                .
    Solution
    Operating Ratio = [COGS + Operating Expenses] x $$100$$/ Sales
    So, if COGS = $$Rs. 50000$$, Operating Expenses = $$Rs. 20000$$ and Sales = $$Rs. 100000$$
    then, Operating Ratio = [$$50000 + 20000$$] x $$100$$/ $$100000$$
                                         = $$70\%$$
    Here operating profit = $$100000$$ - [$$100000$$ x $$70\%$$] = $$Rs. 30000$$
    So, if the operating ratio increases to $$80\%$$ then 
    Operating profit = $$100000$$ - [$$100000$$ x $$80\%$$] = $$Rs. 20000$$
    Hence, it can be said that higher the operating ratio , lower the profitability.
  • Question 8
    1 / -0
    Declaration of dividend on equity share cause the EPS to                    .
    Solution
    EPS (Earning Per Share) = Net profit available to equity shareholders / Number of equity share outstanding
    If the dividend is declared, still the Net profit available to equity shareholders would remain the same. It is just that the net profit would segregated into two parts. A certain amount would be distributed as dividend and the remaining part would be retained as reserves and surplus. But, then too the retained amount would be the amount available to the equity shareholders.
  • Question 9
    1 / -0
    Sale of inventory on account will cause the inventory turnover ratio to                    .
    Solution
    Inventory turnover ratio = Cost of goods sold(COGS) / Average inventory
    Let Cost of goods sold be $$Rs. 80000$$ , Opening inventory = $$Rs. 20000$$ and Closing Inventory = $$Rs.30000$$
    Average Inventory = [Opening Inventory + Closing Inventory] / 2
                                    = $$[20000 + 30000] / 2 $$
                                     $$Rs. 25000$$
    Inventory turnover ratio = $$80000/ 25000$$
                                             = $$3.2 $$ times
    If inventory of $$Rs. 10000$$ is sold on credit then COGS = $$Rs. 90000$$ and the Closing Inventory = $$Rs. 20000$$
    Revised Average Inventory = $$[20000 +20000] /2$$
                                                   = $$Rs. 20000$$
    Revised Inventory turnover ratio = 90000/2000080000/25000
                                             = 4.53.2 times
    So sale of Inventory on account will cause the inventory turnover ratio to Increase.
  • Question 10
    1 / -0
    Which of the following transactions will change the current ratio?
    Solution
    1. When goods are purchased for cash the stock would increase and the cash balance would decrease and so there would be no effect on the current ratio.
    2. When plant is acquired on account the fixed asset would increase and there would be increase in the creditors amount, hence the current ratio would decrease.
    3. When goods are sold on credit the stock would decrease and the debtors would increase and hence there would be no effect on current ratio.
    4. When debentures are converted into equity capital there would be no changes in current assets and current liabilities  and so no change in current ratio.
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