Tag: elements of accounts

Questions Related to elements of accounts

The ability of a company to meet its short-term obligations known as                     .

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

  1. Liquidity

  2. Solvency

  3. Profitability

  4. Trading on equity

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Correct Option: A
Explanation:

Liquidity refers to both an enterprise's ability to pay short-term obligations and a company's capability to sell assets quickly to raise cash.

Given current ratio = $2.5$
Quick ratio = $1.5$
Net working capital = Rs $30,000$
What is the amount of current liabilities?

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

  1. $Rs20,000$

  2. $Rs30,000$

  3. $Rs50,000$

  4. $Rs60,000$

Show answer
Correct Option: A
Explanation:
Net working capital = Current assets - Current liabilities
$Rs. 30000$ = Current assets - Current liabilities
Therefore, Current assets = Current liabilities + $Rs. 30000$
Current ratio = Current assets/ Current liabilities
$2.5$ = [Current liabilities + $Rs. 30000$] / Current liabilities
 $2.5$ Current liabilities  = Current liabilities + $Rs. 30000$
Current liabilities = $Rs. 30000/ 1.5$
Therefore, Current liabilities = $Rs. 20000$

Given current ratio = $2.5$
Quick ratio = $1.5$
Net working capital = Rs $30,000$
What is the amount of quick assets?

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

  1. $Rs 20,000$

  2. $Rs 30,000$

  3. $Rs 50,000$

  4. $Rs 60,000$

Show answer
Correct Option: B
Explanation:
Net working capital = Current assets - Current liabilities
$Rs. 30000$ = Current assets - Current liabilities
Therefore, Current assets = Current liabilities + $Rs. 30000$
Current ratio = Current assets/ Current liabilities
$2.5$ = [Current liabilities + $Rs. 30000$] / Current liabilities
 $2.5$ Current liabilities  = Current liabilities + $Rs. 30000$
Current liabilities = $Rs. 30000/ 1.5$
Therefore, Current liabilities = $Rs. 20000$
Now,
Current assets = Current liabilities + $Rs. 30000$
                          = $Rs.20000 + Rs. 30000$
                          =$Rs. 50000$
Now, Quick Ratio = Quick Assets/ Current liabilities
                     $1.5$   = Quick Assets/ $20000$
Therefore,
                  Quick Assets = $Rs. 30000$

Quick assets include which of the following?

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

  1. Cash

  2. Accounts Receivable

  3. Inventories

  4. Only (a) and (b)

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Correct Option: D
Explanation:

Quick assets are assets that can be converted to cash quickly. Typically, they include cash, accounts receivable, marketable securities, and sometimes (not usually) inventory.

Current liabilities of a company were Rs. 1,75,000 and its current ratio was 2: 1. It paid Rs. 30,000 to a creditor. Calculate current ratio after payment :

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

  1. 2: 1

  2. 1: 1

  3. 1: 5: 1

  4. 2.21: 1

Show answer
Correct Option: D
Explanation:

Given,
Current liabilities = Rs-1,75,000
Current Ratio = 2:1

If 30,000 is paid to a creditor it will reduce both current assets as well as current liabilities as cash is being paid and creditors are reduced. Hence, new ratio will be:- 

Current Ratio = Current Assets
                       -------------------------     
                        Current liabilities

                      =  3,50,000 (WN 1) - 30,000

                         --------------------------------------
                           1,75,000 - 30,000
                      = 3,20,000
                          --------------
                          1,45,000
                     = 2.2 : 1

Working note 1) = Current assets 
Current Ratio = Current Assets

                       -------------------------     
                        Current liabilities
Current Assets = Current liabilities x current ratio 
                         = 1,75,000 x 2
                         = 3,50,000.

                  

For calculation of current ratio which of the following is relevant ?

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

  1. Current assets and Fixed liabilities.

  2. Current assets and Current liabilities.

  3. Fixed asset and Fixed liabilities.

  4. Fixed liabilities and Current liabilities.

Show answer
Correct Option: B
Explanation:

The current ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations. It compares a firm's current assets to its current liabilities, and is expressed as follows: The current ratio is an indication of a firm's liquidity.

Collection of sundry debtors would _______________.

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

  1. Increase current ratio

  2. Decrease current ratio

  3. Have no effect on current ratio

  4. Increase debtors turnover

Show answer
Correct Option: C
Explanation:

Current ratio measures the liquidity of the firm and also checks the ability of an organisation to repay to current debts. The ratio is calculated by comparing the current assets with current liabilities. 

Collection of sundry debtors would increase cash inflow and reduce the amount of debtors and hence there is nil affect or say no change in the Current assets. Thereby, having no effect on the current ratio.  

Given that,
Current Ratio = 2.5
Acid-test ratio = 1.5
Net working capital = Rs. 60,000
The value of current liabilities will be ___________ .

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

  1. Rs. 15,000

  2. Rs. 40,000

  3. Rs. 60,000

  4. Rs. 1,00,000

Show answer
Correct Option: B
Explanation:
Given,
Current ratio = 2.5 : 1
Quick Ratio = 1.5 : 1
Net working capital  = 60,000

Net working capital = Current assets - Current liabilities
Current Assets        = Net working capital + Current liabilities
                                 = 60,000 +  Current liabilities (1) 
Current ratio           = Current assets
                                 -------------------------
                                 Current liabilities
Current Assets      = Current liabilities x 2.5 (2) 
Merging equation (1) and (2)
60,000 + Current liabilities = 2.5Current liabilities 
60,000                                 = 2.5 current liabilities - Current liabilities
60,000                                 = 1.5 Current liabilities
Current liabilities                 = 60,000
                                              --------------
                                                1.5 
                                              = 40,000 
Therefore, current liabilities = 40,000. 

Current Ratio $2.5$, Liquid Ratio $1.5$ and Working Capital $Rs. 60,000$. What is  the amount of Current Assets?

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

  1. $Rs. 60,000$

  2. $Rs. 80,000$

  3. $Rs. 1,00,000$

  4. $Rs. 1,20,000$

Show answer
Correct Option: C
Explanation:

Current Ratio = Current Assets (C.A)/ Current Liabilities (C.L)  = $2.5$

So, CA= $2.5$ CL

Now, Working Capital = Current Assets(C.A) minus Current Liabilities (C.L) = $Rs.60000$
So, C.A - C.L = $60000$
       $2.5$ C.L-CL = $60000$
        C.L = $Rs. 40000$

Now, C.A = $2.5$ x $40000$ = $Rs. 100000$

To test the liquidity of a concern, which of the following ratios are useful?
I. Acid test ratio
II. Capital turnover ratio
III. Bad debts to sales ratio
IV. Inventory turnover ratio
Select the correct answer using the codes given.

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

  1. I and III

  2. I and IV

  3. II and IV

  4. II and III

Show answer
Correct Option: B
Explanation:

The ability of the business to pay its stakeholders when it is due is known as liquidity. And the ratios used to calculate are known as liquidity ratios and are essentially short term in nature. The following are the type of liquidity ratios:

  • Current ratio
  • Quick ratio or Acid test ratio
  • Cash Ratio or Absolute liquidity ratio
  • Net working capital ratio ( This can be further segregated into Inventory turnover ratio, Debtors turnover ratio and Creditors turnover ratio. So these $3$ ratios  can also be interpreted as liquidity ratios).