Choose the correct answer<\/span><\/p>\nQuestion 1.
\nThe mathematical expression that provides a measure of the relationship between two figures is called
\n(a) Conclusion
\n(b) Ratio
\n(c) Model
\n(d) Decision
\nAnswer:
\n(b) Ratio<\/p>\n
Question 2.
\nCurrent ratio indicates
\n(a) Ability to meet short term obligations
\n(b) Efficiency of management
\n(c) Profitability
\n(d) Long term solvency
\nAnswer:
\n(a) Ability to meet short term obligations<\/p>\n
<\/p>\n
Question 3.
\nCurrent assets excluding inventory and prepaid expenses is called
\n(a) Reserves
\n(b) Tangible assets
\n(c) Funds
\n(d) Quick assets
\nAnswer:
\n(d) Quick assets<\/p>\n
Question 4.
\nDebt equity ratio is measure of
\n(a) Short term solvency
\n(b) Long term solvency
\n(c) Profitability
\n(d) Efficiency
\nAnswer:
\n(b) Long term solvency<\/p>\n
<\/p>\n
Question 5.
\nWhich of the following is not a tool of financial statement analysis?
\n
\nAnswer:
\n(a) (i) – 1,(ii) – 4,(iii) – 3,(iv) – 2<\/p>\n
Question 6.
\nTo test the liquidity of a concern, which of the following ratios are useful?
\n(i) Quick ratio
\n(ii) Net Profit ratio
\n(iii) Debt – equity ratio
\n(d) Current ratio
\nSelect the correct answer using the codes given below:
\n(a) (i) and (ii)
\n(b) (i) and (iv)
\n(c) (ii) and (iii)
\n(d) (ii) and iv)
\nAnswer:
\n(b) (i) and (iv)<\/p>\n
<\/p>\n
Question 7.
\nProportion of share holders’ funds to total assets is called
\n(a) Proprietary ratio
\n(b) Capital gearing ratio
\n(c) Debt equity ratio
\n(d) Current ratio
\nAnswer:
\n(a) Proprietary ratio<\/p>\n
Question 8.
\nWhich one of the following is not correctly matched?
\n(a) Liquid ratio – Proportion
\n(b) Gross profit ratio – Percentage
\n(c) Fixed assets turnover ratio – Percentage
\n(d) Debt – equity ratio – Proportion
\nAnswer:
\n(c) Fixed assets turnover ratio – Percentage<\/p>\n
Question 9.
\nCurrent liabilities \u20b9 40,000; Current assets \u20b9 1,00,000; Inventory \u20b9 20,000. Quick ratio is
\n(a) 1:1
\n(b) 2,5:1
\n(c) 2:1
\n(d) 1:2
\nHint:
\nQuick ratio or Liquid ratio = \\(\\frac{\\text { Liquid Assets }}{\\text { Current liabilities }}\\)
\nLiquid assets = Current Assets – Inventory
\n= 1,00,000 – 20,000
\n= 80,000
\n= \\(\\frac{80,000}{40,000}\\)
\n= 2:1
\n= 110%
\nAnswer:
\n(c) 2:1<\/p>\n
<\/p>\n
Question 10.
\nCost of revenue from operation 3,00,000; Inventory at the beginning of the year 60,000; Inventory at the close of the year\u2019 40,000. Inventory turnover ratio is.
\n(a) 2 times
\n(b) 3 times
\n(c) 6 times
\n(d) 8 times
\nHint:
\n
\nAnswer:
\n(c) 6 times<\/p>\n
II Very Short Answer Questions<\/span><\/p>\nQuestion 1.
\nWhat is meant by accounting ratios?
\nAnswer:
\nThe ratio is a mathematical expression of the relationship between two related or interdependent items. It is the numerical or quantitative relationship between two items. It is calculated by dividing one item by the other related item. When ratios are calculated on the basis of accounting information, these are called \u2018accounting ratios\u2019.<\/p>\n
Question 2.
\nWhat is the quick ratio?
\nAnswer:
\nThe quick ratio gives the proportion of quick assets to current liabilities. It indicates whether the business concern is in a position to pay its current liabilities and when they become due, out of its quick assets.<\/p>\n
Question 3.
\nWhat is meant by debt-equity ratio?
\nAnswer:
\nIt is calculated to assess the long-term solvency position of a business concern. The debt equity ratio expresses the relationship between long term debt and shareholder\u2019s funds.
\nDebt equity ratio = \\(\\frac{\\text { Long term debt }}{\\text { Shareholders funds }}\\)
\nCapital employed = Shareholder\u2019s funds + Noncurrent liabilities
\nGreater the return on investment better is than the profitability of a business and vice versa.<\/p>\n
<\/p>\n
Question 4.
\nWhat does the return on investment ratio indicate?
\nAnswer:
\nReturn on investment shows the proportion of net profit before interest and tax to capital employed (shareholders’ funds and long term debts). This ratio measures how efficiently the capital employed is used in the business. It is an overall measure of the profitability of a business concern.<\/p>\n
Question 5.
\nStatement any two limitations of ratio analysis.
\nAnswer:
\nRatios are only means: Ratios are not ended in themselves but they are only means to achieve a particular purpose. Analysis of related items must be done by the management or experts with the help of ratios. Change in price level: Ratio analysis may not reflect price level changes and current values as they are calculated based on historical data given in the financial statement.<\/p>\n
<\/p>\n
III Short Answer Questions<\/span><\/p>\nQuestion 1.
\nExplain the objectives of ratio analysis.
\nAnswer:
\nFollowing are the objectives of ratio analysis:<\/p>\n
\n- To simplify accounting figures<\/li>\n
- To facilitate analysis of financial statements<\/li>\n
- To analysis the operational efficiency of a business<\/li>\n
- To help in budgeting and forecasting<\/li>\n
- To facilitate intra firm and inter-firm comparison of performance<\/li>\n<\/ul>\n
Question 2.
\nWhat is the inventory conversion period? How is it calculated?
\nAnswer:
\nThe inventory conversion period is the time taken to sell the inventory. A shorter inventory conversion period indicates more efficiency in the management of inventory. It is computed as follows:
\n
\nQuestion 3.
\nHow is operating profit ascertained?
\nAnswer:
\nOperating profit = Revenue from operations – Operating cost
\nCost of revenue from operations = Purchases of stock – in – trade + Change in inventories of stock in trade + Direct expenses.
\nOperating expenses = Administrative expenses + Selling and distribution expenses.
\nOperating cost = Cost of revenue from operations + Operating expenses.<\/p>\n
<\/p>\n
Question 4.
\nState any three advantages of ratio analysis.
\nAnswer:
\nFollowing are the advantage of ratio analysis:<\/p>\n