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Accounting Ratios

CBSE · Class 12 · Accountancy

NCERT Solutions for Accounting Ratios — CBSE Class 12 Accountancy.

125 questions80 flashcards5 concepts

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52 Questions Solved · 4 Sections

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Test your Understanding – I

1(a)The only purpose of financial reporting is to keep the managers informed about the progress of operations.Show solution
The chapter says financial reporting is meant to provide financial information to meet the information needs of decision-makers. It is not only for managers.

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1(b)Analysis of data provided in the financial statements is termed as financial analysis.Show solution
The chapter states that the analysis of data provided in financial statements is termed financial statement analysis. So the statement is correct in meaning.

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1(c)Long-term borrowings are concerned about the ability of a firm to discharge its obligations to pay interest and repay the principal amount.Show solution
The chapter explains that solvency ratios are concerned with a firm's ability to meet long-term obligations, including paying interest and repaying the principal amount. So the statement is true.

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1(d)A ratio is always expressed as a quotient of one number divided by another.Show solution
A ratio can be expressed as a fraction, proportion, percentage, or a number of times. So it is not always a quotient only.

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1(e)Ratios help in comparisons of a firm's results over a number of accounting periods as well as with other business enterprises.Show solution
The chapter says ratios help in comparative analysis over many accounting periods and also with other business enterprises. Therefore the statement is true.

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1(f)A ratio reflects quantitative and qualitative aspects of results.Show solution
Ratios reflect mainly quantitative or monetary aspects and ignore qualitative or non-monetary aspects. So the statement is false.

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Test your Understanding – II

(i)The following groups of ratios are primarily measure risk:Show solution
The chapter states that the functional classification includes liquidity, solvency, activity, and profitability ratios. These groups are primarily measures of risk, return, and operating efficiency. Among the options, liquidity, debt and profitability is the correct match given the printed choices for risk-related groups.

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(ii)The _______ ratios are primarily measures of return:Show solution
The chapter says profitability ratios are related to analysis of profits and are measures of return. So the correct option is profitability.

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(iii)The _______ of business firm is measured by its ability to satisfy its short-term obligations as they become due:Show solution
The ability of a firm to satisfy its short-term obligations as they become due is called liquidity. So the correct option is B.

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(iv)_______ ratios are a measure of the speed with which various accounts are converted into revenue from operations or cash:Show solution
Ratios that measure the speed with which accounts are converted into revenue from operations or cash are activity ratios. So the correct option is A.

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(v)The two basic measures of liquidity are:Show solution
The chapter says the two basic measures of liquidity are current ratio and liquid ratio (quick ratio). So option B is correct.

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(vi)The _______ is a measure of liquidity which excludes _______, generally the least liquid asset:Show solution
The liquid ratio is the liquidity measure that excludes inventory, because inventory is generally the least liquid current asset. So the correct option is D.

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Test your Understanding – III

(i)The _______ is useful in evaluating credit and collection policies.Show solution
The chapter says average collection period helps in judging the speed of collection from trade receivables and is useful in evaluating credit and collection policies. So option C is correct.

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(ii)The _______ measures the activity of a firm's inventory.Show solution
The ratio that measures the activity of a firm's inventory is inventory turnover ratio. So option B is correct.

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(iii)The _______ may indicate that the firm is experiencing stockouts and lost sales.Show solution
A very high inventory turnover ratio may indicate stockouts and lost sales because inventory is being sold too quickly. So option B is correct.

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(iv)ABC Co. extends credit terms of 45 days to its customers. Its credit collection would be considered poor if its average collection period was.Show solution
If credit terms are 45 days, then an average collection period greater than 45 days would be poor. Among the options, 47 days is the poor collection period. So option C is correct.

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(v)_______ are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm.Show solution
The chapter says lenders and suppliers are especially interested in the average payment period because it shows the bill-paying pattern of the firm. So option C is correct.

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(vi)The _______ ratios provide the information critical to the long run operation of the firmShow solution
The ratios that provide information critical to the long-run operation of the firm are solvency ratios. So option C is correct.

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Questions for Practice

1What do you mean by Ratio Analysis?Show solution
Ratio Analysis is a technique of financial statement analysis in which financial data are regrouped and compared by using arithmetical relationships. It helps in understanding the relationship between two accounting numbers and in assessing the firm's liquidity, solvency, efficiency, and profitability.

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2What are various types of ratios?Show solution
The chapter gives two classifications of ratios:

1. Traditional classification
- Statement of Profit and Loss ratios
- Balance Sheet ratios
- Composite ratios

2. Functional classification
- Liquidity ratios
- Solvency ratios
- Activity (or turnover) ratios
- Profitability ratios

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3aInventory turnoverShow solution
The relationship studied for inventory turnover is Cost of Revenue from Operations / Average Inventory. The ratio is called the Inventory Turnover Ratio.

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3bTrade receivables turnoverShow solution
The relationship studied for trade receivables turnover is Net Credit Revenue from Operations / Average Trade Receivables. The ratio is called the Trade Receivables Turnover Ratio.

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3cTrade payables turnoverShow solution
The relationship studied for trade payables turnover is Net Credit Purchases / Average Trade Payables. The ratio is called the Trade Payables Turnover Ratio.

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3dWorking capital turnoverShow solution
The relationship studied for working capital turnover is Net Revenue from Operations / Working Capital. The ratio is called the Working Capital Turnover Ratio.

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4The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. What are the ratios used for this purpose?Show solution
For studying the solvency position of a firm, the chapter says the following ratios are used:

1. Debt-Equity Ratio
2. Debt to Capital Employed Ratio
3. Proprietary Ratio
4. Total Assets to Debt Ratio
5. Interest Coverage Ratio

These ratios show the firm's ability to meet its long-term obligations.

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5The average age of inventory is viewed as the average length of time inventory is held by the firm for which explain with reasons.Show solution
The average age of inventory means the average length of time inventory is held before it is sold. It is related to the inventory turnover ratio and helps judge how fast stock moves. A shorter average age means inventory is sold quickly, while a longer age may indicate slow-moving or old stock.

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1What are liquidity ratios? Discuss the importance of current and liquid ratio.
2How would you study the Solvency position of the firm?
3What are various profitability ratios? How are these worked out?
4The current ratio provides a better measure of overall liquidity only when a firm's inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity. Explain.
1Following is the Balance Sheet of Raj Oil Mills Limited as at March 31, 2017. Calculate current ratio.
2Calculate Current Ratio and Liquid Ratio.
3Current Ratio is 3.5 : 1. Working Capital is Rs. 90,000. Calculate the amount of Current Assets and Current Liabilities.
4Shine Limited has a current ratio 4.5 : 1 and quick ratio 3 : 1; if the inventory is 36,000, calculate Current Liabilities and Current Assets.
5Current Liabilities of a company are Rs. 75,000. If current ratio is 4:1 and Liquid Ratio is 1 : 1, calculate value of Current Assets, Liquid Assets and Inventory.
6Handa Ltd. has inventory of Rs. 20,000. Total liquid assets are Rs. 1,00,000 and quick ratio is 2 : 1. Calculate current ratio.
7Calculate debt-equity ratio from the following information:
8Calculate Current Ratio if:
9Compute Inventory Turnover Ratio from the following information:
10Calculate following ratios from the following information:
11From the following information calculate:
12Compute Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information:
13Calculate Inventory Turnover Ratio if:
14Calculate Inventory Turnover Ratio from the data given below:
15A trading firm's average inventory is Rs. 20,000 (cost). If the inventory turnover ratio is 8 times and the firm sells goods at a gross profit of 20% on sales, ascertain the gross profit of the firm.
16Calculate Inventory Turnover Ratio and Trade Receivables Turnover Ratio
17From the following Balance Sheet and other information, calculate following ratios:
18From the following information, calculate the following ratios:
19From the following, calculate (a) Debt-Equity Ratio (b) Total Assets to Debt Ratio (c) Proprietary Ratio.
20Cost of Revenue from Operations is Rs. 1,50,000. Operating expenses are Rs. 60,000. Revenue from Operations is Rs. 2,50,000. Calculate Operating Ratio.
21Calculate the following ratio on the basis of following information:
22From the following information calculate Gross Profit Ratio, Inventory Turnover Ratio and Trade Receivable Turnover Ratio.

26 more solved questions in Accounting Ratios

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Frequently Asked Questions

What are the important topics in Accounting Ratios for CBSE Class 12 Accountancy?
Accounting Ratios covers several key topics that are frequently asked in CBSE Class 12 board exams. Focus on the core concepts listed on this page and practise related questions to build confidence.
How to score full marks in Accounting Ratios — CBSE Class 12 Accountancy?
Understand the core concepts first, then work through the 125 practice questions available for this chapter. Revise formulas and definitions regularly, and use flashcards for quick recall before the exam.
Where can I get free NCERT Solutions for Accounting Ratios Class 12 Accountancy?
This page has free step-by-step NCERT Solutions for every exercise question in Accounting Ratios (CBSE Class 12 Accountancy) — written the way examiners award marks: given, formula, working, answer.

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