Tag: ratio analysis

Questions Related to ratio analysis

The ideal level of liquid ratio is _______.

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

  1. 1:1

  2. 2:1

  3. 3:1

  4. All of the above

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Correct Option: A
Explanation:

Ideal level of quick ratio or acid test ratio is 1:1. Usually, a high acid-test ratio is an indication that the firm is liquid has ability to meet its current or liquid liabilities in time and on the other hand a low quick ratio represents that the firm's liquidity position is not good.

The appropriate ratio for indicating liquidity crisis is_________.

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

  1. Operating ratio

  2. Sales turnover ratio

  3. Current ratio

  4. Acid test ratio

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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 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.

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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

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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

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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

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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

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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