Tag: elements of accounts

Questions Related to elements of accounts

Which of the following is not included in current assets?

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

  1. Debtors

  2. Opening Stock

  3. Cash at bank

  4. Cash in hand

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Correct Option: B
Explanation:

Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within one year. current assets include cash and cash equivalents, accounts receivable, marketable securities, prepaid expenses, debtors etc.

 The most precise test of liquidity is ______________.

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

  1. Quick ratio

  2. Current ratio

  3. Absolute liquid ratio

  4. None of the above

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Correct Option: C
Explanation:

The most precise test of liquidity is "absolute liquid ratio". The ideal absolute liquidity ratio is 1:2. If the ratio is 1:2 or more than this the concern can be considered as liquid. This ratio establishes a relationship between absolute liquid assets and quick liabilities. 

Current ratio is chiefly used to assess the                   .

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

  1. effective utilization of capital

  2. application of debt

  3. liquidity position

  4. levels of inventory piled up in different forms.

  5. prompt payment of long-term liabilities.

Show answer
Correct Option: C
Explanation:

Current ratio is chiefly used to assess the liquidity position of a company. Let us look at the following example.


Let Current asset = $Rs.100000$ and Current liability = $Rs. 50000$

Current ratio = Current asset/Current liability
                       = $100000/50000$
                       = $2$
So, if at any given point of time if there is a liquidity crisis then the company has twice the amount of  assets to liquidate and pay off the dues. 

The most rigorous test of liquidity is ___________.

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

  1. Current ratio

  2. Acid ratio test

  3. Absolute measure

  4. Stock turnover ratio

Show answer
Correct Option: C
Explanation:

Absolute measure ratio = absolute cash/current liabilities
Absolute cash = cash + Bank + Marketable Securities

Which of the following transaction change the current ratio?

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

  1. Purchase of goods for cash

  2. Plant acquire on account

  3. Sold goods on credit

  4. Debentures converted into equity capital

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Correct Option: B
Explanation:

When plant is acquired on account the fixed asset would increase and there would be increase in the creditors amount, hence the current ratio would decrease. When goods are sold on credit the stock would decrease and the debtors would increase and hence there would be no effect on current ratio.

Formula for current ratio is                   .

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

  1. Current liabilities/current assets

  2. Current assets/current liabilities

  3. Fixed asset/ fixed liabilities

  4. Fixed liabilities/fixed assets

Show answer
Correct Option: B
Explanation:

Current ratio = Current Assets/Current liabilities

                       = [Inventories + Sundry Debtors + Cash and Bank balances + Receivables +
                          Loans and advances + Disposable Investments etc] /
                          [Creditors + Short term loans + Bank Overdraft + Cash credit+ 
                          Outstanding Expenses+ Provisions etc}

Ratio which comes under liquidity ratios is 

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

  1. Debt ratio

  2. Quick ratio

  3. Proprietary ratio

  4. Debt-equity ratio

Show answer
Correct Option: B
Explanation:

Liquidity ratio includes the following ratios :

  • Current ratio
  • Quick Ratio
  • Cash Ratio
  • Net working capital ratio

 The ability of the business to pay the amount due to stakeholders is calculated by ___________.

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

  1. Solvency ratios

  2. Activity ratios

  3. Liquidity ratios

  4. Profitability ratios

Show answer
Correct Option: C
Explanation:

Liquidity ratios calculate the ability of the business to pay its due to the stakeholders. Examples of liquidity ratios are Current asset ratio, Quick ratio, Cash ratio and Net working capital ratio

Which of the following statement(s) is/are true?

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

  1. Average collection period evaluates all aspects of credit policy

  2. All other things remaining the same, issue of new shares for cash will improve the current ratio.

  3. Ratio analysis is technique of planning and control

  4. All of the above

  5. Both (A) and (C) above

Show answer
Correct Option: B

If a firm has realized its debtors and has paid off its creditors to the same extent then                       .

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

  1. The current ratio will increase if it was less than 1 previously

  2. The current ratio will decrease if it was more than 1 previously

  3. The current ratio will remain the same if it was equal to 1 previously

  4. All of the above

  5. Both (A) and (C) above

Show answer
Correct Option: C
Explanation:

If the firm has realized its debtors and paid-off its creditors to same extent then the current assets will increase and the current liabilities will decrease by the same amount and consequently the current ratio will remain unchanged.

Let Current Asset be $Rs. 500000$ and Current liabilities be $Rs.500000 $
So, Current ratio = Current asset/ Current liabilities

                             =$500000/500000$
                              =$1$
Now, if the amount realized from debtors = $Rs .100000$ and the amount paid off to creditors is $Rs. 100000$ then,
New Current ratio = $[500000-100000]/[500000-100000]$
                                = $1$.