Tag: elements of accounts

Questions Related to elements of accounts

If gross profit ratio is $50\%$ on cost, it is __________$\%$ on sales.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $33.33\%$

  2. $20\%$

  3. $25\%$

  4. $50\%$

Show answer
Correct Option: A
Explanation:

Assume Cost = $200$ and Gross profit = $50\% $ on cost = $100$

Cost + Gross profit = Sales
$200$ + $100$ = Sales
Sales = $300$
Now, Gross profit % on Sales = Gross Profit  x $100$ 
                                                      Sales
                                               = [$100/300$ ] x $100$
                                               = $33.33\%$.                                    

The stock turnover ratio is a/an _______ ratio.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Insolvency

  2. Activity Ratio

  3. Liquidity

  4. Total Investment

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Correct Option: B
Explanation:
Stock turnover ratio indicates how efficiently the firm’s investment in inventories is converted to sales and thus depicts the inventory management skills of the organization. It is considered an activity ratio as it measures the efficiency of the company in using its resources. So, the correct option is 'Activity ratio'.

From the following data, calculate Inventory Turnover Ratio:
Total Sales Rs. 5,00,000; Sales Return Rs. 50,000; 
Gross Profit Rs. 90,000; Closing Inventory Rs. 1,00,000; Excess of Closing Inventory over opening inventory Rs. 20,000.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 6 times

  2. 3 times

  3. 4 times

  4. 5 times

Show answer
Correct Option: C
Explanation:
Inventory turnover ratio = Cost of goods sold ( WN 1)
                                          ----------------------------------------
                                               Average inventory (WN 2)
                                          = 3,60,000
                                           -----------------
                                             90,000 
                                         = 4 Times

Working notes:-
1) Cost of goods sold = Gross sales - (Sales return + gross profit)
                                    = 5,00,000 - (50,000 + 90,000)
                                    = 3,60,000.
2) Average Inventory = 1,00,000 + 80,000
                                      -------------------------------
                                                      2
                                    = 90,000. 
Closing inventory is 20,000 more than opening inventory hence opening inventory is 1,00,000 - 20,000 = 80,000.
                                         

Credit Revenue from Operations, i.e.,
Net credit sales for the year - 1,20,000
Debtors - 12,000
Bills Receivable - 8,000
Calculate Trade Receivable or Debtors' Turnover Ratio.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 4 times

  2. 3 times

  3. 6 times

  4. 5 times

Show answer
Correct Option: C
Explanation:
Debtor's turnover ratio =             Credit sales
                                               -------------------------------
                                               Average receivables 
                                    
                                       =         1,20,000
                                                -----------------
                                                    20,000                              
                                       =       6 times.

There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. That the capital employed has reduced

  2. That the profitability has gone up

  3. That debtors collection period has increased

  4. That sales has decreased

Show answer
Correct Option: C
Explanation:

Debtor collection period is the time that it takes to convert balances from account receivables back into cash flow. This can apply to an individual transaction or to the business's overall transaction history for a period of time. The lower the debtor collection period the more efficient is the company in collecting payment from its customers.

In response to market expectations, the credit period has been increased from 45 days to 60 days. This would result in a _____________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Decrease in sales

  2. Decrease in debtors

  3. Increase in bad debts

  4. Increase in average collection period

Show answer
Correct Option: D
Explanation:

Credit policy of an organization consists of various elements like cash discount, collection period etc. Collection period means the period of credit allowed to the customer by the organization against the credit sales.


If the credit period is increased from 45 days to 60 days, this will result more blockage of funds and will increase in average collection period.

Securitization is related to conversion of _____________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Receivables

  2. Stock

  3. Investments

  4. Creditors

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Correct Option: A
Explanation:

Accounts receivables represents the amount due from the customers to whom organization has done sales. Recovery of money from receivables can take a larger time which depends on the credit policy. 


Organization can convert the receivable in cash by doing the securitization. In such case, receivables are converted in to securities and sold to an investor who will provide immediate cash to the organization.
Securitization allows company to get immediate cash rather than waiting for payment from the customers. By this organization can pass the risk of non payment to investors. 

When opening stock is $Rs.50,000$, closing stock is $Rs 60,000$ and the cost of goods sold is $Rs.2,20,000$, the stock turnover ratio is _________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 2 times

  2. 3 times

  3. 4 times

  4. 5 times

Show answer
Correct Option: C
Explanation:

Stock turnover ratio = Cost of goods sold/ average inventory

Cost of goods sold = $Rs.2,20,000$
Average Inventory= [Opening inventory + Closing Inventory]/$2$
                               = [$50000 + 60000$] / $2$
                               = $Rs. 55000$
Now,
Stock turnover ratio = $220000/ 55000$
                                  = $4$ times.

If stock turnover ratio = $6$ times; Average stock = $Rs.8,000$; Selling price = $25$% above cost. What is the amount of gross profit?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $Rs.2,000$

  2. $Rs.4,000$

  3. $Rs.10,000$

  4. $Rs.12,000$

Show answer
Correct Option: D
Explanation:

Stock turnover ratio = Cost of goods sold/Average inventory

                   $6$    = Cost of goods sold/ $8000$
Cost of goods sold  = $Rs. 48000$
Selling price = $25$ % above cost
Therefore Gross profit = Cost of goods sold x $25$%
                                      = $ 48000$ x $25$%
                                      = $Rs. 12000$

Given below are two statements, identify the correctness of the following:
I. Activity ratios show where the company is going.
II. Balance sheet ratios show how the company stands.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. I is correct, but II is wrong

  2. Both I and II are correct

  3. I is wrong, but II is correct

  4. Both I and II are wrong

Show answer
Correct Option: B
Explanation:

Activity ratios are used to assess the efficiency with which the firm manages and utilises  its assets. These ratios usually compare the revenue growth with respect to the asset deployed giving an idea of where the company is headed, towards growth or decline.

Balance sheet ratios are those in which the variables used are those which are present in the balance sheet. A balance sheet is a statement which shows a picture of how the company stands as on a particular date and so the balance sheet ratios carry out the same task.