Statement Analysis Tools and Accounting Ratios Test

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Statement Analysis Tools and Accounting Ratios Test - 44

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Weekly Quiz Competition

Question 1
1 / -0

Consider the following :
i)Basic defensive and interval ratio
ii)Current ratio
iii)Superquick ratio
iv)Quick ratio
Arrange these ratios in sequence to reflect the liquidity in descending order.

A
(ii), (iv), (iii) and (i)

B
(i), (ii), (iv) and (iii)

C
(iv), (ii), (iii) and (i)

D
(iii), (iv),(i) and (ii)
Solution
1. Current ratio = Current assets/Current liabilities
2. Quick ratio = [Current assets minus inventory]/ Current liabilities
3. Super quick ratio = [Cash + Marketable securities]/ Current liabilities
4. Basic defensive and interval ratio = [Cash + Marketable securities + Trade receivables] / Average daily expenditures
As we move from ratio number $$1$$ to ratio number $$4$$ we are calculating the liquidity on more and more conservative basis as it can be seen that as we move from ratios $$1$$ to $$3$$ we are considering few and fewer assets and in the $$4$$th ratio we are considering average daily expenditures instead of the whole of current liabilities as this ratio helps us to understand that for how many days can the company survive without having to liquidate its long term assets.
Question 2
1 / -0

The Revenue Profits of a Subsidiary company S Ltd. is $$Rs.1,20,000$$. Ratio between holding and minority is $$3 : 1$$. What is share of revenue profits of Holding Company H. Ltd.?

A
$$Rs. 30,000$$

B
$$Rs. 60,000$$

C
$$Rs. 90,000$$

D
$$Rs. 45,000$$

Solution

The revenue profits of the subsidiary company is $$Rs.120000$$ and the Holding : Minority ratio is $$3 : 1$$ so the share of revenue profits of the Holding Company H. Ltd. is calculated as follows: $$Rs. 120000$$ x $$3/4 = Rs. 90000$$.
Question 3
1 / -0

To test the liquidity of a concern, which of the following ratios are useful?
I. Acid test ratio
II. Capital turnover ratio
III. Bad debts to sales ratio
IV. Inventory turnover ratio
Select the correct answer using the codes given.

A
I and III

B
I and IV

C
II and IV

D
II and III
Solution
The ability of the business to pay its stakeholders when it is due is known as liquidity. And the ratios used to calculate are known as liquidity ratios and are essentially short term in nature. The following are the type of liquidity ratios:
Current ratio
Quick ratio or Acid test ratio
Cash Ratio or Absolute liquidity ratio
Net working capital ratio ( This can be further segregated into Inventory turnover ratio, Debtors turnover ratio and Creditors turnover ratio. So these $$3$$ ratios can also be interpreted as liquidity ratios).
Question 4
1 / -0

Overall Profitability ratio is calculated by ___________.

A
$$\dfrac {\text {Capital employed}}{\text {Operating profit}}\times 100$$

B
$$\dfrac {\text {Operating profit}}{\text {Capital employed}}\times 100$$

C
$$\dfrac {\text {Net operating profit before interest and tax}}{\text {Total capital employed}}$$

D
$$\dfrac {\text {Capital employed}}{\text {Operating profit after interest and tax}}$$

Solution

Overall profitability ratio is also called as return on investment. It indicates the percentage of return on the total capital employed in the business. It is also called as return on investments, return on capital employed. It is calculated by dividing capital employed by operating profit. It is calculated as a percentage.
Question 5
1 / -0

Which one of the following is correct?
i) A ratio is an arithmetical relationship of one number to another number.
ii) Quick ratio is also known as acid test ratio.
iii) Rule of thumb for current ratio is $$2:1$$.
iv) Debt equity ratio is the relationship between outsiders fund and shareholders fund.

A
All (i), (ii), (iii) and (iv) are correct.

B
Only (i), (ii) and (iii) are correct.

C
Only (ii), (iii) and (iv) are correct.

D
Only (ii) and (iii) are correct.
Solution
1. A ratio is an arithmetical relationship of one number to another number. in terms of accountancy, an accountancy ratio would be the relationship between two figures obtained from the account statement. For example Net profit ratio is the ratio of Net profit to the Net sales made.
2. Quick ratio is also known as acid test ratio because it measures the ability of the company to meet unexpected liabilities without having to depend on the sale of inventories.
3. The rule of thumb for current ratio is $$2:1$$, this is not a constant rule but rather relative. Whether or not the current ratio is satisfactory completely depends on the nature of business, current assets and current liabilities
4. Debt equity ratio is calculated as Total outside liabilities/ Shareholders equity and so it can be said that it is the relationship between outsiders fund and shareholders funds.
Question 6
1 / -0

When opening stock is $$Rs.50,000$$, closing stock is $$Rs 60,000$$ and the cost of goods sold is $$Rs.2,20,000$$, the stock turnover ratio is _________.

A
2 times

B
3 times

C
4 times

D
5 times

Solution

Stock turnover ratio = Cost of goods sold/ average inventory
Cost of goods sold = $$Rs.2,20,000$$
Average Inventory= [Opening inventory + Closing Inventory]/$$2$$
= [$$50000 + 60000$$] / $$2$$
= $$Rs. 55000$$
Now,
Stock turnover ratio = $$220000/ 55000$$
= $$4$$ times.
Question 7
1 / -0

If stock turnover ratio = $$6$$ times; Average stock = $$Rs.8,000$$; Selling price = $$25$$% above cost. What is the amount of gross profit?

A
$$Rs.2,000$$

B
$$Rs.4,000$$

C
$$Rs.10,000$$

D
$$Rs.12,000$$

Solution

Stock turnover ratio = Cost of goods sold/Average inventory
$$6$$ = Cost of goods sold/ $$8000$$
Cost of goods sold = $$Rs. 48000$$
Selling price = $$25$$ % above cost
Therefore Gross profit = Cost of goods sold x $$25$$%
= $$ 48000$$ x $$25$$%
= $$Rs. 12000$$
Question 8
1 / -0

'X' Ltd. has a liquid ratio of 2:1. If its stock is Rs. 40,000 and its current liabilities are of Rs. 1 Lakh, What will be the current ratio________.

A
1.4 times

B
2.4times

C
1.2 times

D
3.4 times

Solution

Liquid Ratio = [Current Assets minus Stock]/ Current Liabilities
2 = [Current Assets - $$40000$$]/ $$100000$$
$$200000$$ = Current Assets - $$40000$$
Therefore Current Assets = $$Rs.240000$$
Now,
Current Ratio = Current assets/Current liabilities
= $$240000/100000$$
= $$2.4$$ times
Question 9
1 / -0

Calculate debt equity ratio, from the following information:
Total external liabilities = Rs. 5,00,000
Balance sheet total = Rs. 10,10,000
Current liabilities = Rs. 1,00,000
Fictitious assets = Rs. 10,000

A
5:4

B
6:5

C
5:6

D
4:5

Solution

Long-term debt = Total external liabilities - Current liabilities
= Rs. 5,00,000 - Rs. 1,00,000
= Rs. 4,00,000
Total non-fictitious assets = Total Assets - Fictitious assets
= Rs. 10,10,000 - Rs. 10,000
= Rs. 10,00,000
Shareholders funds = Non-fictitious total assets - Total liabilities
= Rs. 10,00,000 - Rs. 5,00,000
= Rs. 5,00,000
Debt equity ratio = Rs. 4,00,000/Rs. 5,00,000
= 4:5
Question 10
1 / -0

Calculate debt ratio, from the following information:
Total external liabilities = Rs. 5,00,000
Balance sheet total = Rs. 10,10,000
Current liabilities = Rs. 1,00,000
Fictitious assets = Rs. 10,000

A
0.444

B
0.488

C
0.499

D
0.469

Solution

Long-term debt = Total external liabilities - Current liabilities
= Rs. 5,00,000 - Rs. 1,00,000
= Rs. 4,00,000
Total non-fictitious assets = Total assets - Fictitious assets
= Rs. 10,10,000 - Rs. 10,000
= Rs. 10,00,000
Net assets = Total non-fictitious assets - Current liabilities
= Rs. 10,00,000 - Rs. 1,00,000
= Rs. 9,00,000
Debt ratio = Debt/Net assets
= Rs. 4,00,000/Rs. 9,00,000
= 0.444

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Statement Analysis Tools and Accounting Ratios Test - 44

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Statement Analysis Tools and Accounting Ratios Test - 44

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Question 1

(ii), (iv), (iii) and (i)

(i), (ii), (iv) and (iii)

(iv), (ii), (iii) and (i)

(iii), (iv),(i) and (ii)

Solution

Question 2

$$Rs. 30,000$$

$$Rs. 60,000$$

$$Rs. 90,000$$

$$Rs. 45,000$$

Solution

Question 3

I and III

I and IV

II and IV

II and III

Solution

Question 4

$$\dfrac {\text {Capital employed}}{\text {Operating profit}}\times 100$$

$$\dfrac {\text {Operating profit}}{\text {Capital employed}}\times 100$$

$$\dfrac {\text {Net operating profit before interest and tax}}{\text {Total capital employed}}$$

$$\dfrac {\text {Capital employed}}{\text {Operating profit after interest and tax}}$$

Solution

Question 5

All (i), (ii), (iii) and (iv) are correct.

Only (i), (ii) and (iii) are correct.

Only (ii), (iii) and (iv) are correct.

Only (ii) and (iii) are correct.

Solution

Question 6

2 times

3 times

4 times

5 times

Solution

Question 7

$$Rs.2,000$$

$$Rs.4,000$$

$$Rs.10,000$$

$$Rs.12,000$$

Solution

Question 8

1.4 times

2.4times

1.2 times

3.4 times

Solution

Question 9

5:4

6:5

5:6

4:5

Solution

Question 10

0.444

0.488

0.499

0.469

Solution

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