Tag: elements of accounts

Questions Related to elements of accounts

Which of the following ratios is termed as 'acid test ratio' or 'quick ratio'?

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  1. Fixed assets Ratio

  2. Current Ratio

  3. Liquidity ratio

  4. Debt-Equity ratio

Show answer
Correct Option: C
Explanation:

Liquidity ratio measures the company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio and quick ratio. It also indicates cash flow positioning. It is also called as acid test ratio and quick ratio.

Quick ratio is calculated by using the following formula ___________________.

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  1. $\cfrac { Cash+near  cash+debtors - Inventories }{ Current\quad liabilities } $

  2. $\cfrac { Cash+debtors }{ Current\quad liabilities } $

  3. $\cfrac { Cash }{ Current\quad liabilities } $

  4. $\cfrac { Cash+near\quad cash+debtors }{ Current\quad assets } $

Show answer
Correct Option: A
Explanation:

Quick ratio is calculated by dividing liquid current assets by total current liabilities. Liquid current assets include cash, marketable securities and receivables. Cash includes cash in hand and cash at bank.

If the current ratio is $2 : 1$ and working capital is $Rs. 60,000$, what is the value of the current assets?

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. $Rs. 60,000$

  2. $Rs. 1,00,000$

  3. $Rs. 1,20,000$

  4. $Rs. 1,80,000$

Show answer
Correct Option: C
Explanation:

Current Ratio = Current Assets (C.A)/ Current Liabilities (C.L)  = $2/1$

So, CA= $2$ CL

Now, Working Capital = Current Assets(C.A) minus Current Liabilities (C.L) = $Rs.60000$
So, C.A - C.L = $60000$
       $2$ C.L-CL = $60000$
        C.L = $Rs. 60000$

Now, C.A = $2$ x $60000$ = $Rs. 120000$

The current ratio is _________________________.

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  1. $\cfrac { Current\quad assets }{ Current\quad liabilities } $

  2. $\cfrac { Cash+near\quad cash+debtors }{ Current\quad liabilities } $

  3. $\cfrac { Liquid\quad assets }{ Current\quad liabilities } $

  4. $\cfrac { Current\quad liabilities }{ Current\quad assets } $

Show answer
Correct Option: A
Explanation:

Using the Balance Sheet, the current ratio is calculated by dividing current assets by current liabilities:

Which one of the following is not a leverage ratio?

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. Total debt ratio

  2. Debt-Equity ratio

  3. Interest coverage ratio

  4. Quick ratio

Show answer
Correct Option: D
Explanation:

Quick ratio is a liquidity ratio or short term solvency ratio. Whereas the remaining three ratios are leverage ratios.

Liquidity ratio is also known as :-
a. Quick ratio
b. Acid test ratio
c. Working capital ratio
d. Stock turnover ratio

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. A and B

  2. A and C

  3. B and C

  4. C and D

Show answer
Correct Option: A
Explanation:

A liquidity ratio is an indicator of whether a company's current assets will be sufficient to meet the company's obligations when they become due. The liquidity ratios include the current ratio and the acid test or quick ratio. The current ratio and quick ratio are also referred to as solvency ratios.

Consider the following :
i)Basic defensive and interval ratio
ii)Current ratio
iii)Superquick ratio
iv)Quick ratio
Arrange these ratios in sequence to reflect the liquidity in descending order.

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  1. (ii), (iv), (iii) and (i)

  2. (i), (ii), (iv) and (iii)

  3. (iv), (ii), (iii) and (i)

  4. (iii), (iv),(i) and (ii)

Show answer
Correct Option: A
Explanation:

  1. Current ratio = Current assets/Current liabilities
  2. Quick ratio = [Current assets minus inventory]/ Current liabilities
  3. Super quick ratio = [Cash + Marketable securities]/ Current liabilities
  4. Basic defensive and interval ratio = [Cash + Marketable securities + Trade receivables] / Average daily expenditures
 As we move from ratio number $1$ to ratio number $4$ we are calculating the liquidity on more and more conservative basis as it can be seen that as we move from ratios $1$ to $3$ we are considering few and fewer assets  and in the $4$th  ratio we are considering average daily expenditures instead of the whole of current liabilities as this ratio helps us to understand that for how many days can the company survive without having to liquidate its long term assets.

Which of the following is correct?
i.Liquidity ratios measure long term solvency of a concern.
ii.Inventory is a part of current assets.
iii.Rule of thumb for acid test ratio is 1 : 1.
iv.The amount of gross assets is equal to net capital employed.

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  1. (i), (ii) and (iv)

  2. (ii), (iii) and (iv)

  3. (i), (ii), (iii) and (iv)

  4. None of the above

Show answer
Correct Option: B
Explanation:
  1. The liquidity ratios measure the ability of a concern to pay off its short term obligations.
  2. Inventory is a part of current assets and not liquid assets.
  3. Rule of thumb for acid test ratio is $1:1$
  4. The amount of gross assets minus the current liabilities is equal to net capital employed. 

The ideal level of liquid ratio is _______.

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. 1:1

  2. 2:1

  3. 3:1

  4. All of the above

Show answer
Correct Option: A
Explanation:

Ideal level of quick ratio or acid test ratio is 1:1. Usually, a high acid-test ratio is an indication that the firm is liquid has ability to meet its current or liquid liabilities in time and on the other hand a low quick ratio represents that the firm's liquidity position is not good.

The appropriate ratio for indicating liquidity crisis is_________.

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  1. Operating ratio

  2. Sales turnover ratio

  3. Current ratio

  4. Acid test ratio

Show answer
Correct Option: D
Explanation:

Acid test ratio or Quick ratio = Quick Assets/ Current Liabilities

                                                = [Current Assets minus Inventory]/Current Liabilities
The Quick ratio is a much more conservative measure of short term liquidity than the Current ratio. We reduce the amount of funds held up in inventory  form the current assets ,so that we can get a clear picture of how much fund can we mobilize for payment of dues in case of a cash crunch or a liquidity crisis.