Tag: accounting ratios

Questions Related to accounting ratios

Current ratio is increased by :
1) Issue of redeemable debentures.
2) Selling of old machine for cash.
3) Converting debentures into equity capital.
4) Cash received from debtors.

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

  1. 1, 2 and 4

  2. 3 and 4

  3. 1 and 2

  4. 4 only

Show answer
Correct Option: C
Explanation:

Current ratio = Current assets/ Current liabilities

  1. When Redeemable debentures are issued, long term liabilities and the current assets increase,while  the current liabilities remain constant so  the current ratio would increase.
  2. When old machine is sold for cash, fixed assets would decrease and the current assets would increase, while  the current liabilities remain constant so  the current ratio would increase.
  3. When debentures are converted into equity capital there would be no changes in the current assets and the current liabilities and ultimately no change in the current ratio.
  4. When cash is received from debtors there would be no net changes on the current assets as the cash balance would increase and the debtors balance would decrease by the same amount and hence there would no change in the current ratio.

Current ratio may be increased by                    .

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

  1. Overstating the current assets

  2. Overstating the current liabilities

  3. Understating current assets

  4. None of these

Show answer
Correct Option: A
Explanation:

Current ratio = Current assets/ current liabilities

So when current assets = $Rs 150000$ and current liabilities = $Rs. 100000$ then,
Current ratio = $100000 / 50000$
                       = $2 : 1$
Now if we overstate the current assets by $Rs. 50000$ then ,
Revised Current ratio = $150000/50000$
                                     = $3: 1 $
So, the current ratio may be increased if we overstate the current assets. 

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

Show answer
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?

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  1. Cash

  2. Accounts Receivable

  3. Inventories

  4. Only (a) and (b)

Show answer
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.