### Accounting Ratios - Test Papers

CBSE Test Paper 01

Accounting Ratios

The relationship between two financial variables can be expressed in:

Percentage

Rate or time

Pure ratio

None of these

The main purpose of activities ratios is --------

To know the solvency

To know the profitability

To know how effectively the resources have been used

To meet short term liabilities

Revenue from operations – Cost of Revenue from operations =?

Net Profit

Net Purchases

Net Sales

Gross Profit

INVENTORY TURNOVER RATIO is also called as

Debtor turnover ratio

Working capital turnover ratio

Creditor’s turnover ratio

Stock turnover ratio

Shareholders’ Funds + Non-current Liabilities = ?

Share Capital

Current Liabilities

Capital Employed

Total Debt

- Fill in the blanks:
An Analysis of financial statements with the help of accounting ratios is termed as ________.

How will you calculate Capital Employed?

A company has a current ratio of 4:1 and Quick ratio is 2.5;1. Assuming that the inventories are Rs 22500, find out total current assets and current liabilities.

A firm has a Current Ratio of 4 : 1 and a Quick Ratio of 2.5 : 1. Assuming Inventories are ₹ 22,500, find out total Current Assets and Total Current Liabilities.

Wye Ltd. has furnished the following information regarding its Current Assets and Current Liabilities:

Current Assets: ₹ Current Liabilities: ₹ Cash and Cash Equivalents 5,000 Sundry Creditors 25,000 Debtors 29,000 Bills Payable 16,000 Bills Receivable 5,000 Outstanding Expenses 8,000 Marketable Securities 15,000 Provision for Expenses 5,000 Inventories 54,000 1,08,000 54,000 Calculate Current Ratio and Liquid Ratio of the company.

The proprietary ratio of M Ltd is 0.80 : 1. State with reasons whether the following transactions will increase, decrease or not change the proprietary ratio.

- Obtained a loan from bank Rs. 2,00,000 payable after five years.
- Purchased machinery for cash Rs. 75,000
- Redeemed 5% redeemable preference shares Rs. 1,00,000.
- Issued equity shares to the vendors of machinery purchased for Rs. 4,00,000.

From the following information obtained from the books of Kundan Ltd, calculate inventory turnover ratio for the years 2015-16 and 2016-17.

2015-16 (Rs.) 2016-17 (Rs.) Inventory on 31st March 7,00,000 17,00,000 Revenue from operations 50,00,000 75,00,000 (Gross profit is 25% on cost of revenue from operations)

In the year 2015-16, inventory increased by Rs.2,00,000.Calculate Opening and Closing Trade Receivables from the following information if Trade Receivables Turnover Ratio is 3 Times:

- Cash Revenue from Operations is rd of Credit Revenue from Operations.
- Cost of Revenue from Operations ₹2,40,000.
- Gross Profit 25% on Cost of Revenue from Operations.
- Trade Receivables at the end were 3 times more than that of in the beginning.

From the following information, calculate any two of the following ratios:

- Operating Ratio
- Stock Turnover Ratio
- Proprietary Ratio

Information:

Cash Sales Rs. 10,00,000 Credit Sales 120% of cash sales Operating Expenses 10 % of total sales The rate of Gross Profit 40% Operating Stock Rs. 1,50,000 Closing Stock Rs. 20,000 more than opening stock Current Assets Rs. 3,00,000 Current Liabilities Rs. 2,00,000 Fixed Assets Rs. 5,00,000 From the following information, prepare a summarised Balance Sheet as at March 31, 2019.

Working capital 2,40,000 Bank Overdraft 40,000 Fixed Asset to Proprietary Ratio 0.75 Reserve & Surplus 1,60,000 Current Ratio 2.5 Liquid Ratio 1.5

CBSE Test Paper 01

Accounting Ratios

Solution

- (d) None of these

Explanation: None of these - (c) To know how effectively the resources have been used

Explanation: Activity ratios measure the relative efficiency of a firm based on its assets, leverage or other such balance sheet items and are important in determining whether a company's management is doing a good enough job of generating revenues and cash from its resources. - (d) Gross Profit

Explanation: Gross Profit is calculated by deducting cost of revenue from operations from Revenue from operations. i.e Net sale – Cost of goods sold - (d) Stock turnover ratio

Explanation: Inventory turnover ratio is also known as stock turnover ratio. Inventory is wider term whereas stock is a narrow term. - (c) Capital Employed

Explanation: It is the value of all the assets employed in a business and can be calculated by adding fixed assets to working capital or subtracting current liabilities from total assets. Ratio Analysis

[By Assets Route] Capital Employed

= Non Current Assets + Current Assets - Current Liabilities

OR

[By Liabilities Route] Capital Employed

= Share Holders' Fund + Non Current Liabilities

Current ratio = 4:1(Current Asset/ Current Liability)

Quick ratio = 2.5:1 (Quick Asset / Current Liability)

Inventory = 4 - 2.5 = 1.5*

If inventory is 1.5, then Current assets = 4

If inventory is 22500, then current assets = 4 22500/1.5 = 60,000

Current Liabilities = 60,000/4 = Rs 15000.

Note: Quick Asset = Current Asset - Inventory

Let Current Liabilities (CL) be x

Current Ratio is 4 : 1, hence Current Assets = 4x

Quick Ratio is 2.5 : 1, hence Liquid Assets or Quick Assets = 2.5x

Quick Assets + Inventories = Current Assets

or 2.5x + ₹ 22,500 = 4x

or 1.5x = ₹ 22,500

x = = ₹ 15,000

Thus, Current Liabilities = ₹ 15,000

Current Assets = ₹ 15,000 4 = ₹ 60,000- Current Ratio = = = 2 : 1.
- Liquid Ratio = = = 1 : 1.

Liquid Assets = Total Current Assets - Inventories

= ₹1,08,000 - ₹54,000 = ₹54,000

Proprietory ratio establishes the relationship between proprietors funds and total assets. This ratio is computed as follows:

Proprietory ratio=

Proprietors funds = Liabilities Approach: Share capital + Reserves and Surplus

- Decrease: Loan obtained from bank will increase the total assets but the shareholders' funds will remain the same, so proprietary ratio will decrease.
- No change: Machinery purchased for cash will increase the total assets and simultaneously decrease the total assets, therefore proprietary ratio will remain unchanged.
- Decrease: Redemption of preference shares will decrease total assets and shareholders' funds simultaneously, so proprietary ratio will decrease.
- Increase: Machinery purchased by issue of equity shares will increase total assets and shareholders' funds simultaneously, so proprietary ratio will increase.

__For 2015 -16 :-__

Inventory Turnover Ratio = 6.67 times

WN 1.*Cost of revenue from Operations = Revenue from Operations - Gross Profit

= 50,00,000 - 25% of Cost of revenue from Operations

= 50,00,000 -

= 50,00,000 - 10,00,000

= Rs.40,00,000

WN 2.**Average Inventory

= Rs.6,00,000

__For 2016 - 17 :-__

Inventory Turnover Ratio = 5 times

WN 3.*Cost of Revenue from Operations

= 75,00,000 -= 75,00,000 - 15,00,000

= Rs.60,00,000

WN 4.**Average Inventory

= Rs.12,00,000

Total Revenue from Operations = Cost of Revenue from Operations + Gross Profit

= ₹2,40,000 + 25% of ₹2,40,000 = ₹3,00,000

Calculation of Credit Revenue from Operations:

Let Credit Revenue from Operations = x

Cash Revenue from Operations =

x + = 3,00,000

3x + x = ₹9,00,000

x = = ₹ 2,25,000 (Credit Revenue from Operations).

Trade Receivables Turnover Ratio =

Average Trade Receivables = = ₹75,000

Calculation of Opening and Closing Trade Receivables:

Average Trade Receivables =

Let Opening Trade Receivables = x, Closing Trade Receivables = x + 3x = 4x

₹75,000 =

x + 4x = ₹1,50,000; x = ₹1,50,000/5 = ₹30,000 (Opening Trade Receivables)

Closing Trade Receivables = 4x = ₹30,000 4 = ₹1,20,000.(i) Operating Ratio =

= 70%

Working Note :

Credit Sales = 10,00,000 x 120% = Rs. 12,00,000

Net Sales = 10,00,000 + 12,00,000 = Rs. 22,00,000

Gross Profit = 22,00,000 x 40% = Rs. 8,80,000

Cost of Goods Sold = Net Sales - Gross Profit

= 22,00,000 - 8,80,000 = Rs. 13,20,000

Operating Expenses = 22,00,000 x 10% = Rs. 2,20,000(ii) Stock Turnover Ratio =

= 8.25 times

Working Note :

Average Stock =

= = Rs. 1,60,000(iii) Proprietary Ratio =

= 0.75: 1

Working Note :

Total Assets = 3,00,000 + 5,00,000 = Rs. 8,00,000Construction of Balance Sheet:

Liability Rs. Assets Rs. Capital 800000 Fixed Asset 7,20,000 Reserve & Surplus 160000 Stock 160000 Bank Overdraft 40000 Other Current Asset 240000 Sundry Creditors 120000 11,20,000 11,20,000 Working Note :

Proprietary Ratio = = 0.75

Fixed Asset = 0.75Proprietary Fund

Net working Capital = 0.25Proprietary Fund

Proprietary Fund = 240000/0.25= 960000

Fixed Asset = 0.75960000 = 720000

Capital = 960000-160000 = 800000

Creditors = 160000-40000= 120000

Current Asset and current liability computation

Current Asset = 2.5Current liability

Working capital = C.A. - C.L.

240000 = 2.5C.L. - C.L.

240000 = 1.5C.L.

Curret liability = 240000/1.5 = 160000

Current Asset = 1600002.5 = 400000

Computation of Stock

Liquid Ratio =

1.5160000 = 400000- Stock

Stock = 160000