Accounting Ratios - Test Papers

 CBSE Test Paper 01

Accounting Ratios

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1. The relationship between two financial variables can be expressed in:

   1. Percentage

   2. Rate or time

   3. Pure ratio

   4. None of these

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

   1. To know the solvency

   2. To know the profitability

   3. To know how effectively the resources have been used

   4. To meet short term liabilities

3. Revenue from operations – Cost of Revenue from operations =?

   1. Net Profit

   2. Net Purchases

   3. Net Sales

   4. Gross Profit

4. INVENTORY TURNOVER RATIO is also called as

   1. Debtor turnover ratio

   2. Working capital turnover ratio

   3. Creditor’s turnover ratio

   4. Stock turnover ratio

5. Shareholders’ Funds + Non-current Liabilities = ?

   1. Share Capital

   2. Current Liabilities

   3. Capital Employed

   4. Total Debt

6. Fill in the blanks:

   An Analysis of financial statements with the help of accounting ratios is termed as ________.

7. How will you calculate Capital Employed?

8. 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.

9. 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.

10. 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.

11. 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.

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

12. 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.

13. Calculate Opening and Closing Trade Receivables from the following information if Trade Receivables Turnover Ratio is 3 Times:

    1. Cash Revenue from Operations is 13$\frac{1}{3}$rd of Credit Revenue from Operations.
    2. Cost of Revenue from Operations ₹2,40,000.
    3. Gross Profit 25% on Cost of Revenue from Operations.
    4. Trade Receivables at the end were 3 times more than that of in the beginning.

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

    1. Operating Ratio
    2. Stock Turnover Ratio
    3. 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

15. 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

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Solution

1. (d) None of these
   Explanation: None of these
2. (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.
3. (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
4. (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.
5. (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.

6. Ratio Analysis

7. [By Assets Route] Capital Employed

   = Non Current Assets + Current Assets - Current Liabilities

   OR

   [By Liabilities Route] Capital Employed

   = Share Holders' Fund + Non Current Liabilities

8. 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 ×$\times$ 22500/1.5 = 60,000

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

   Note: Quick Asset = Current Asset - Inventory 

9. 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 = ₹22,50015$\frac{₹22,500}{15}$ = ₹ 15,000
   Thus, Current Liabilities = ₹ 15,000
   Current Assets = ₹ 15,000 ×$\times$ 4 = ₹ 60,000

10. • Current Ratio =  Current Assets  Current Liabilities $\frac{\text{ Current Assets }}{\text{ Current Liabilities }}$ = Rs.1,08,000Rs.54,000$\frac{Rs.1,08,000}{Rs.54,000}$ = 2 : 1.
    • Liquid Ratio =  Liquid Assets  Current Liabilities $\frac{\text{ Liquid Assets }}{\text{ Current Liabilities }}$ = Rs.54,000Rs.54,000$\frac{Rs.54,000}{Rs.54,000}$ = 1 : 1.
      Liquid Assets = Total Current Assets - Inventories
      = ₹1,08,000 - ₹54,000 = ₹54,000

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

     Proprietory ratio= Proprietor′sFundsorshareholder′sfundsTotalassets$\frac{Proprieto{r}^{\prime }sFundsorshareholde{r}^{\prime }sfunds}{Totalassets}$

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

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

12. For 2015 -16 :-
    Inventory Turnover Ratio =CostofRevenuefromOperations∗AverageInventory∗∗$=\frac{CostofRevenuefromOperation{s}^{\ast }}{AverageInventor{y}^{\ast \ast }}$=40,00,0006,00,000$=\frac{40,00,000}{6,00,000}$ = 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 - (50,00,000×25125)$(50,00,000\times \frac{25}{125})$

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

    = Rs.40,00,000
    WN 2.

    **Average Inventory

    =Operating Inventory + Closing Inventory2$=\frac{OperatingInventory+ClosingInventory}{2}$

    =5,00,000 + 7,00,0002$=\frac{5,00,000+7,00,000}{2}$

    = Rs.6,00,000
    For 2016 - 17 :-
    Inventory Turnover Ratio =CostofRevenuefromOperations∗AverageInventory∗∗$=\frac{CostofRevenuefromOperation{s}^{\ast }}{AverageInventor{y}^{\ast \ast }}$ =60,00,00012,00,000$=\frac{60,00,000}{12,00,000}$ = 5 times
    WN 3.

    *Cost of Revenue from Operations
    = 75,00,000 - (75,00,000×25125)$(75,00,000\times \frac{25}{125})$

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

    = Rs.60,00,000
    WN 4.

    **Average Inventory

    =7,00,000 + 17,00,0002$=\frac{7,00,000+17,00,000}{2}$

    = Rs.12,00,000

13. 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 = x3$\frac{x}{3}$
    x + x3$\frac{x}{3}$ = 3,00,000
    3x + x = ₹9,00,000
    x = ₹9,00,0004$\frac{₹9,00,000}{4}$ = ₹ 2,25,000 (Credit Revenue from Operations).
    Trade Receivables Turnover Ratio =  Credit Revenue from Operations  Average Trade Receivables $\frac{\text{ Credit Revenue from Operations }}{\text{ Average Trade Receivables }}$
    3=₹2,25,000 Average Trade Receivables $3=\frac{₹2,25,000}{\text{ Average Trade Receivables }}$
    Average Trade Receivables = ₹2,25,0003$\frac{₹2,25,000}{3}$ = ₹75,000
    Calculation of Opening and Closing Trade Receivables:
    Average Trade Receivables =  Opening Trade Receivables + Closing Trade Receivables 2$\frac{\text{ Opening Trade Receivables }+\text{ Closing Trade Receivables }}{2}$
    Let Opening Trade Receivables = x, Closing Trade Receivables = x + 3x = 4x
    ₹75,000 = x+4x2$\frac{x+4x}{2}$
    x + 4x = ₹1,50,000; x = ₹1,50,000/5 = ₹30,000 (Opening Trade Receivables)
    Closing Trade Receivables = 4x = ₹30,000 ×$\times$ 4 = ₹1,20,000.

14. (i) Operating Ratio =  Cost of Goods Sold + Operating Expenses  Net Sales ×100$\frac{\text{ Cost of Goods Sold }+\text{ Operating Expenses }}{\text{ Net Sales }}\times 100$
    =13,20,000+2,20,00022,00,000×100$=\frac{13,20,000+2,20,000}{22,00,000}\times 100$ = 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 =  Cost of Goods Sold  Average Stock $\frac{\text{ Cost of Goods Sold }}{\text{ Average Stock }}$
    =13,20,0001,60,000$=\frac{13,20,000}{1,60,000}$ = 8.25 times
    Working Note :
    Average Stock =  Opening Stock + Closing Stock 2$\frac{\text{ Opening Stock }+\text{ Closing Stock }}{2}$
    = 1,50,000+(1,50,000+20,000)2$\frac{1,50,000+(1,50,000+20,000)}{2}$ = Rs. 1,60,000

    (iii) Proprietary Ratio =  Equity or Shareholder's Funds  Total Assets $\frac{\text{ Equity or Shareholder's Funds }}{\text{ Total Assets }}$
    =6,00,0008,00,000$=\frac{6,00,000}{8,00,000}$= 0.75: 1
    Working Note :
    Total Assets = 3,00,000 + 5,00,000 = Rs. 8,00,000

15. Construction 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 = FAPropreitary Fund$\frac{FA}{PropreitaryFund}$ = 0.75

    Fixed Asset = 0.75×$\times$Proprietary Fund
    Net working Capital = 0.25×$\times$Proprietary Fund
    Proprietary Fund = 240000/0.25= 960000
    Fixed Asset = 0.75×$\times$960000 = 720000
    Capital = 960000-160000 = 800000
    Creditors = 160000-40000= 120000
    Current Asset and current liability computation
    CurrentAssetCurrentLiability=2.51$\frac{CurrentAsset}{CurrentLiability}=\frac{2.5}{1}$
    Current Asset = 2.5×$\times$Current liability
    Working capital = C.A. - C.L.
    240000 = 2.5×$\times$C.L. - C.L.
    240000 = 1.5×$\times$C.L.
    Curret liability = 240000/1.5 = 160000
    Current Asset = 160000×$\times$2.5 = 400000
    Computation of Stock
    Liquid Ratio = LACL$\frac{LA}{CL}$
    1.5×$\times$160000 = 400000- Stock
    Stock = 160000