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Statement Analysis Tools and Accounting Ratios Test - 41

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Statement Analysis Tools and Accounting Ratios Test - 41
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  • Question 1
    1 / -0
    Calculate following Operating Profit ratio from the following information: 
    Current Assets                                                  Rs.35,000
    Stock                                                                  Rs.15,000
    Operating Expenses                                         Rs.20,000
    Sales                                                                   Rs.60,000
    Cost of Goods Sold                                           Rs.30,000
    Solution
    Operating profit ratio of a company can be determined by comparing operating profit with the net sales. It shows the end of the management in running the business. It is calculated as:
    Operating Profit ratio = (Operating Profit/ Net Sales)x 100
                                        = (Sales - operating expenses - cost of goods sold/ Net 
                                             Sales) x 100
                                        = (60,000-20,000-30,000/60,000)x100
                                        = (10,000/60,000)x100 = 16.67%
  • Question 2
    1 / -0
    Given the following information:

    Sales                                       3,40,000

    Cost of Goods Sold                1,20,000 

    Selling expenses                       80,000

    Administrative Expenses           40,000 

    Calculate Operating Ratio from the above:

    Solution
    The operating ratio of a company can be determined by comparing the operating expenses with the net sales. Smaller the ratio, higher is the efficiency of the business.
    It is calculated as:
    Operating Ratio = (Operating expenses/ Net Sales) x 100
                               = (Cost of Goods sold + Selling expenses + Administration
                                   expenses/ Net Sales) x 100
                               = (1,20,000+80,000+40,000/3,40,000)x100
                               = (2,40,000/3,40,000)x100 =  70.58%

  • Question 3
    1 / -0
    A higher accounts receivable turnover ratio means _______________.
    Solution
    Accounts receivable turnover is the number of times per year that a business collects its average accounts receivables.
    A high turnover ratio indicates a combination of a conservative credit policy and an aggressive collections department, as well as a number of high-quality customers.
  • Question 4
    1 / -0
    Ability to trade at net price very quickly is classified as _____________.
  • Question 5
    1 / -0
    Given that,
    Current Ratio = 2.5
    Acid-test ratio = 1.5
    Net working capital = Rs. 60,000
    The value of current liabilities will be ___________ .
    Solution
    Given,
    Current ratio = 2.5 : 1
    Quick Ratio = 1.5 : 1
    Net working capital  = 60,000

    Net working capital = Current assets - Current liabilities
    Current Assets        = Net working capital + Current liabilities
                                     = 60,000 +  Current liabilities (1) 
    Current ratio           = Current assets
                                     -------------------------
                                     Current liabilities
    Current Assets      = Current liabilities x 2.5 (2) 
    Merging equation (1) and (2)
    60,000 + Current liabilities = 2.5Current liabilities 
    60,000                                 = 2.5 current liabilities - Current liabilities
    60,000                                 = 1.5 Current liabilities
    Current liabilities                 = 60,000
                                                  --------------
                                                    1.5 
                                                  = 40,000 
    Therefore, current liabilities = 40,000. 
  • Question 6
    1 / -0
    Which one of the following statements is correct? When creditors' velocity or creditors' turnover is higher as compared to debtors' velocity, it would ______________.
  • Question 7
    1 / -0
    The current ratio of a company is 2: 1. Which of the following suggestions would improve the ratio?
  • Question 8
    1 / -0
    Which of the following is not correct about the concept 'current ratio' - use code to select your answer:
    1. It is ratio of a firm's current assets to current liabilities
    2. It is an indicator of a firm's ability to meet short-term financial obligations.
    Solution
    It is derived by dividing current assets with current liabilities. Though every industry has its own range of this ratio, a ratio of $$2 : 1$$ is considered desirable in most sectors.
  • Question 9
    1 / -0
    In order to calculate EPS, Profit after Tax and Preference Dividend is divided by ________________.
    Solution
    Earning per share (EPS) is a very important measure which indicates the profitability of the organization in terms of outstanding shares on a particular date. Term EPS is very much important for the shareholders and the people who deals in stock. The higher is the EPS , more is the profitability of the company. 
    It is calculated  by :
    EPS= Net profit after tax and preference dividend / Number of equity shares.
  • Question 10
    1 / -0
    Operating Leverage is calculated as ______________.
    Solution
    Operating leverage is the measurement of degree to which a firm incurs a combination of fixed cost and variable cost. Operating leverage relates to the result of combination of fixed cost and variable cost. A company with greater  proportion of fixed cost is said to be using more operating leverage.

    Operating leverage can be calculated as:
    DOL=Sales- Variable cost/Profit
    =Contribution/EBIT

    For example: Fixed Cost is Rs.780000, variable cost is Rs.8 per unit, Sales price is Rs.25 per unit, no of units sold 300000 units.

    Particulars Units Rate P/Unit Total
    Sales 300000 25 7500000
    Variable Cost 300000 8 2400000
    Contribution     5100000
    Fixed Cost     780000
    EBIT/Profit     4320000

    Financial Leverage=5100000/4320000
    =1.18
    It signifies that for every increase of 1% in sales, there will be an increase in EBIT by 1.18%.
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