Tag: accounting ratios

Questions Related to accounting ratios

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.

Calculate the creditor's turnover ratio from the following data:
Credit purchase during the year = $Rs. 12,00,000$
(Creditor + bills payables) in the beginning of year = $Rs. 4,00,000$
(Creditor + bills parables) at the end of year = $Rs. 2,00,000$

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

  1. 6 times

  2. 4 times

  3. 2 times

  4. 5 times

Show answer
Correct Option: B
Explanation:

Average accounts payable = (Rs. 4,00,000 + Rs. 2,00,000)/2

                                              = Rs. 3,00,000
Credit turnover ratio = Net credit purchases/Average accounts payable
                                   = Rs. 12,00,000/Rs. 3,00,000
                                   = 4 Times

Given information is as follows:
Total assets turnover = $3$ times
Net profit margin = $10\%$
Total assets  = $Rs.2,00,000$
The Net profit is                      .

elements of accounts ratio analysis activity (or turnover) 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: D
Explanation:

Total assets turnover ratio = Sales / Total assets

                                 $3$ = Sales / $200000$
Therefore, Sales = $Rs. 600000$
Net profit margin = [Net profit / Sales] x $100$
               $10/100$ = [Net profit / $600000$] x $100$
Therfore Net profit = $Rs. 60000$

Which of the following items is not taken into account while computing quick ratio?

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

  1. Cash

  2. Bank Balance

  3. Bank overdraft

  4. Sundry creditors

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Correct Option: C
Explanation:

The quick ratio is a financial ratio used to gauge a company's liquidity. The quick ratio is also known as the acid test ratio. The quick ratio compares the total amount of cash and cash equivalents + marketable securities + accounts receivable to the amount of current liabilities.

Which of the following liabilities are taken into account for acid test ratio?
(i) Trade creditors
(ii) Bank overdraft
(iii) Cash credit
(iv) Outstanding expenses

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

  1. i & ii

  2. i & iv

  3. i, ii, iii & iv

  4. ii, iii & iv

Show answer
Correct Option: C
Explanation:

Acid test ratio = quick assets / current liabilities. All current liabilities are considered while calculating acid test ratio.

The excess of current assets over current liabilities is called as ___________.

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

  1. Net tangible worth

  2. Net worth

  3. Gross working capital

  4. Net working capital

Show answer
Correct Option: D
Explanation:

The formula for calculation of "Net working capital" is as follows:

Net working capital = Total current assets - Total current liabilities
Net working capital is the aggregate amount of all current assets minus current liabilities. It is used to measure the short-term liquidity of a business, and can also be used to obtain a general impression of the ability of a company management to utilize assets in an efficient manner.