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Statement Analysis Tools and Accounting Ratios Test - 45

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Statement Analysis Tools and Accounting Ratios Test - 45
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  • Question 1
    1 / -0
    When P/V ratio is 50% and Margin of Safety ratio is 20%, the profit on sales is ____________.
    Solution
    Profit Volume ratio is proportion of contribution to sales which signifies the percentage of contribution before considering the fixed cost.

    P/V Ratio= Contribution/sales*100

    Margin of safety is define as the sales over the break even sales. 

    Margin of Safety Ratio= Margin of Safety/Actual Sales*100

    Profit ratio =Margin of Safety Ratio*P/V Ratio
                      =50%*20%
                      =10%.
  • Question 2
    1 / -0
    Long-term solvency is indicated by                       .
    Solution
    Debt-equity ratio = Long term debts / Shareholders funds
    Debt-equity ratio indicates the long-term solvency of a firm by analyzing the relative proportions of capital contribution by creditors and shareholders.
    Scenario $$1$$ Long term debts = $$Rs.150000$$ and Shareholders funds = $$Rs.125000$$

    Scenario $$2$$ Long term debts = $$Rs.150000$$ and Shareholders funds = $$Rs.100000$$
    Debt-equity ratio :
    Scenario 1 = $$150000/125000$$ = $$1.2 : 1$$
    Scenario 2 = $$150000/100000$$ = $$1.5 : 1$$

    So, in  scenario 1 the debt-equity ratio is $$1.2 : 1$$ which means that the outside liabilities are only 0.2 times more than the shareholders funds whereas in scenario 2 the debt-equity ratio is $$1.5 : 1 $$ which means that the outside liabilities are 0.5 times more than the shareholders funds.
    On analyzing scenario 1  and 2 we can see that the protection to the debt holders is more in scenario 1 than in scenario 2.
  • Question 3
    1 / -0
    Improvement of profit-volume ratio can be done by________.
    Solution
    Profit-volume ratio(P/V ratio) = Contribution/Sales
    Contribution is the excess of sales over the variable cost.
    1. If the selling price is increased and the variable cost is constant then, the contribution would be increase and so would the P/V ratio.
    2.  If the sales mixture is altered and the product with high contribution is sold more then the total contribution would increase and so would the P/V ratio.
    3. If the selling price remains constant but the variable cost is reduced then the contribution would increase and so would the P/V ratio.
  • Question 4
    1 / -0
    Calculate the creditor's turnover ratio from the following data:
    Credit purchase during the year = $$Rs. 12,00,000$$
    (Creditor + bills payables) in the beginning of year = $$Rs. 4,00,000$$
    (Creditor + bills parables) at the end of year = $$Rs. 2,00,000$$
    Solution
    Average accounts payable = (Rs. 4,00,000 + Rs. 2,00,000)/2
                                                  = Rs. 3,00,000
    Credit turnover ratio = Net credit purchases/Average accounts payable
                                       = Rs. 12,00,000/Rs. 3,00,000
                                       = 4 Times
  • Question 5
    1 / -0
    Higher the ratio, the more favorable it is. This does not apply to__________.
    Solution
    1. Operating profit ratio is the ratio between operating profit and the net sales .Higher the ratio, higher would be the operating profit and it would be more favorable.
    2. Stock turnover ratio is the relationship between the COGS and the average inventory. It indicates how fast the inventory is sold or used. A high ratio is favorable from the point of view of liquidity and vice versa.
    3. ROI shows the  returns made from the funds invested by the owners. A higher ratio is always preferred in case of returns.
    4. Operating ratio is the ratio of operating expenses to the net sales. Higher this ratio higher would be the operating expense and lower the operating profit. So a lower ratio is more favorable in terms of business.
  • Question 6
    1 / -0
    Information given is as follows:
    Fixed Long term Loans   Rs $$3,50,000$$
    Fixed Assets                    Rs $$12,00,000$$
    Share capital                    Rs $$8,00,000$$
    Current Liabilities           Rs $$2,50,000$$
    Current Assets                 Rs $$4,00,000$$

    Solvency Ratio is                      .
    Solution
    Solvency Ratio = Proprietary fund / Total asset 
                              = Share capital / [Fixed asset + Current asset]
                               = $$800000/[1200000 + 400000]$$
                               = $$0.5 : 1 $$
  • Question 7
    1 / -0
    Given information is as follows:
    Total assets turnover = $$3$$ times
    Net profit margin = $$10\%$$
    Total assets  = $$Rs.2,00,000$$
    The Net profit is                      .
    Solution
    Total assets turnover ratio = Sales / Total assets
                                     $$3$$ = Sales / $$200000$$
    Therefore, Sales = $$Rs. 600000$$
    Net profit margin = [Net profit / Sales] x $$100$$
                   $$10/100$$ = [Net profit / $$600000$$] x $$100$$
    Therfore Net profit = $$Rs. 60000$$
  • Question 8
    1 / -0
    When current ratio is $$2 : 1$$, an equal increase in current assets and current liabilities would                .
    Solution
    When the current ratio is $$2 : 1$$ , an equal increase in current assets and current liabilities would decrease the current ratio. Let us understand this through an example;
    Current Assets = $$Rs. 100000$$ and Current Liabilities = $$Rs. 50000$$
    Current ratio = Current assets/ Current liabilities
                           = $$100000/50000$$
                           = $$2 : 1 $$ 
    Now let us increase the current assets and current liabilities by $$Rs. 50000$$ and calculate the new current ratio ;
     Current ratio = $$150000/100000$$
                            = $$1.5 : 1$$.
  • Question 9
    1 / -0
    The statistical yard stick that provides a measure of the relationship between two accounting figures is a                       .
    Solution
    1. Current ratio is the ratio to measure relationship between current assets and current liability.
    2. Capital output ratio is the ratio which measures that, how much capital is required to produce one unit of output.
    3. Debt to equity ratio measures the proportion of debt funds to the owners capital.
    4. Ratios are mathematical relationship between two figures. Accounting ratios are ratios that compare relationship between between two accounting figures. 
  • Question 10
    1 / -0
    Which of the following items is not taken into account when computing quick ratio?
    Solution
    Quick Ratio = [Current assets minus Inventory and prepaid expenses] /
                           [Current liabilities minus Bank overdraft/ Cash credit]
    Here inventory is considered as less secure than other current assets  and prepaid expenses  as the name suggests are paid in advance for a reason, bank overdraft and cash credit are usually secured against inventory and so all these $$4$$ items are excluded while calculating quick ratio.
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