Tag: accounting ratios

Questions Related to accounting ratios

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

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  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.

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  1. I and III

  2. I and IV

  3. II and IV

  4. II and III

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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).

Quick ratio is 1.8:1, current ratio is 2.7:1 and current liabilities are Rs. 60,000. Determine value of stock.

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  1. Rs. 54,000

  2. Rs. 60,000

  3. Rs. 1,62,000

  4. None of the above

Show answer
Correct Option: A
Explanation:
QA = Quick assets; CL = Current liabilities; CA = Current assets
QA = 1.8 x CL
QA = 1.8 x Rs. 60,000
QA = Rs. 1,08,000
CA = 2.7 x CA
CA = 2.7 x Rs. 60,000
CA = Rs. 1,62,000
Stock = CA - QA
Stock = Rs. 1,62,000 - Rs. 1,08,000
Stock = Rs. 54,000
Hence, the value of stock is Rs. 54,000.

Which one of the following is correct?
i) A ratio is an arithmetical relationship of one number to another number.
ii) Quick ratio is also known as acid test ratio.
iii) Rule of thumb for current ratio is $2:1$.
iv) Debt equity ratio is the relationship between outsiders fund and shareholders fund.

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  1. All (i), (ii), (iii) and (iv) are correct.

  2. Only (i), (ii) and (iii) are correct.

  3. Only (ii), (iii) and (iv) are correct.

  4. Only (ii) and (iii) are correct.

Show answer
Correct Option: A
Explanation:
  1.  A ratio is an arithmetical relationship of one number to another number. in terms of accountancy, an accountancy ratio would be the relationship between two figures obtained from the account statement. For example Net profit ratio is the ratio of Net profit to the Net sales made.
  2. Quick ratio is also known as acid test ratio because it measures the ability of the company to meet unexpected liabilities without having to depend on the sale of inventories.
  3. The rule of thumb for current ratio is $2:1$, this is not a constant rule but rather relative. Whether or not the current ratio is satisfactory completely depends on the nature of business, current assets and current liabilities
  4. Debt equity ratio is calculated as Total outside liabilities/ Shareholders equity and so it can be said that it is the relationship between outsiders fund and shareholders funds. 

'X' Ltd. has a liquid ratio of 2:1. If its stock is Rs. 40,000 and its current liabilities are of Rs. 1 Lakh, What will be the current ratio________.

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  1. 1.4 times

  2. 2.4times

  3. 1.2 times

  4. 3.4 times

Show answer
Correct Option: B
Explanation:

Liquid Ratio = [Current Assets minus Stock]/ Current Liabilities

             2      = [Current Assets - $40000$]/ $100000$
        $200000$ = Current Assets - $40000$
Therefore Current Assets = $Rs.240000$
Now,
Current Ratio = Current assets/Current liabilities
                        = $240000/100000$
                         = $2.4$ times

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. 

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

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  1. Cash.

  2. Bank Balance.

  3. Bank Overdraft.

  4. Sundry Creditors.

Show answer
Correct Option: C
Explanation:

Quick Ratio = [Current assets minus Inventory and prepaid expenses] /

                       [Current liabilities minus Bank overdraft/ Cash credit]
Here inventory is considered as less secure than other current assets  and prepaid expenses  as the name suggests are paid in advance for a reason, bank overdraft and cash credit are usually secured against inventory and so all these $4$ items are excluded while calculating quick ratio.

When current ratio is $2 : 1$, an equal increase in current assets and current liabilities would                .

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  1. Increase the current ratio

  2. Decrease the current ratio

  3. No change in current ratio

  4. None of these

Show answer
Correct Option: B
Explanation:

When the current ratio is $2 : 1$ , an equal increase in current assets and current liabilities would decrease the current ratio. Let us understand this through an example;

Current Assets = $Rs. 100000$ and Current Liabilities = $Rs. 50000$
Current ratio = Current assets/ Current liabilities
                       = $100000/50000$
                       = $2 : 1 $ 
Now let us increase the current assets and current liabilities by $Rs. 50000$ and calculate the new current ratio ;
 Current ratio = $150000/100000$
                        = $1.5 : 1$.

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

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  1. $Rs 20,000$

  2. $Rs 30,000$

  3. $Rs 50,000$

  4. $Rs 60,000$

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 = $Rs. 20000$
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 Ratio = Quick Assets/ Current liabilities
Quick Ratio = [Current Assets - Stock ]/ Current liabilities
            $1.5$ = [$50000$ - Stock] / $20000$
Stock = $50000 - 30000$
          = $Rs. 20000$

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

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  1. $Rs 20,000$

  2. $Rs 30,000$

  3. $Rs 50,000$

  4. $Rs 60,000$

Show answer
Correct Option: C
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 + $Rs. 30000$
                          = $Rs.20000 + Rs. 30000$
                          =$Rs. 50000$.