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Statement Analysis Tools and Accounting Ratios Test - 35

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Statement Analysis Tools and Accounting Ratios Test - 35
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  • Question 1
    1 / -0
    When operating ratio is $$91.5\%$$, the operating profit ratio will be __________.
    Solution
    Operating ratio + Operating profit ratio = $$1$$
    So, $$91.5/100$$  + Operating profit ratio = $$1$$
    Therefore, 
                  Operating profit ratio = $$8.5\%$$ 
  • Question 2
    1 / -0
    The return on capital employed shows how well the management has used the funds supplied by                   
    Solution
    Return On Capital Employed (ROCE) = Earnings before interest and tax(EBIT) x 100/ Capital employed
    where, Capital employed = Total Assets - Current Liabilities
                                                    Or
                                                   Fixed Assets + Working Capital
    As sundry creditors are included in current liabilities and it does supply any funds so it can be concluded that ROCE shows how well the management has used the funds supplied by the Equity and preference shareholders.
  • Question 3
    1 / -0
    Shareholders Funds / Total Assets =                              .
    Solution
    (Shareholders Funds / Total Assets) = Solvency ratio (Proprietary ratio ). It indicates the proportion of total assets financed by shareholders whether equity or preference or both.
    Shareholders funds include Equity share capital + Preference share capital + Reserves and surplus.
    For such ratios, total assets exclude fictitious assets and losses.
  • Question 4
    1 / -0
    Sale of inventory for cash will cause the current ratio to __________.
    Solution
    Current ratio = Current assets / Current liabilities
    When inventory is sold for cash then, the amount of inventory decreases and simultaneously the cash balance increases and there would be no net effect on the current asset figure. And so the current ratio will remain unchanged.
  • Question 5
    1 / -0
    Purchase of inventory on credit will cause the quick ratio to               .
    Solution
    Quick Ratio = [Current assets minus Inventory] / Current liabilities
    Let Current assets = $$Rs. 100000$$, Inventory = $$Rs. 20000$$ and Current liabilities = $$Rs. 40000$$
     So Quick Ratio = [$$100000-20000] / 40000$$ = $$2 : 1$$
    Now let inventory purchased on credit be $$Rs. 20000$$, so revised Inventory = $$Rs. 60000$$ and Current liabilities = $$Rs. 60000$$
    Revised Quick Ratio =[$$100000-60000] / 60000$$ = $$2 : 3$$
    So , Purchase of inventory on credit will cause the quick ratio to decrease.
  • Question 6
    1 / -0
    Return on equity capital ratio is obtained by dividing net profit after tax and before dividend by                        .
    Solution
    Return on Equity (ROE) = [Net profit after tax (NPAT) - Preference dividend (if any)]  / Shareholder's funds
    Example: 
    NPAT = $$Rs. 100000$$ and Shareholder's funds = $$Rs.500000$$
    Then, ROE = $$[100000- 0] / 500000$$
                       = $$0.2$$ or $$20\%$$.                  
  • Question 7
    1 / -0
    Pay out ratio means                              .
    Solution
    Payout ratio = Dividend/ Total earnings available for shareholders
    For example let the dividend declared be $$Rs.100000$$ and the total earnings for the shareholders be $$Rs. 500000$$ therefore,
    Payout ratio = $$100000 / 500000$$
                         = $$0.2$$ times
    So dividend declared would be $$0.2$$ times the earning made and the remaining $$0.8$$ times of the earnings would be retained by the company in the form of reserves and surplus.
  • Question 8
    1 / -0
    Current ratio may be increased by                    .
    Solution
    Current ratio = Current assets/ current liabilities
    So when current assets = $$Rs 150000$$ and current liabilities = $$Rs. 100000$$ then,
    Current ratio = $$100000 / 50000$$
                           = $$2 : 1$$
    Now if we overstate the current assets by $$Rs. 50000$$ then ,
    Revised Current ratio = $$150000/50000$$
                                         = $$3: 1 $$
    So, the current ratio may be increased if we overstate the current assets. 
  • Question 9
    1 / -0
    The turnover ratio helps management for                        .
    Solution
    Turnover ratios are used by management to evaluate the efficiency with which the firm manages and utilizes its assets. For example Fixed asset turnover ratio measures how efficiently the assets are used to generate sales.
  • Question 10
    1 / -0
    A high payout ratio indicates that _______________.
    Solution
    A high payout ratio indicates that the company is paying out a large share of its net income to common shareholders in the form of dividend payments. The company may not have any potential opportunities for reinvestment and thus is repatriating cash back to investors.
    Therefore, B is the correct option.
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