Test: Accounting Ratios- Assertion & Reason Type Questions - Commerce MCQ

(A): A high operating ratio indicates a favorable position.

• In finance, the Operating ratio is a company's operating expenses as a percentage of revenue.
• This financial ratio is most commonly used for industries that require a large percentage of revenues to maintain operations, such as railroads. In railroading, an operating ratio of 80 or lower is considered desirable. 
• Operating Ratio refers to a metric used by a company to determine how efficient a company’s management is at keeping operating costs low while at the same time generating revenues or sales, by comparing the total operating expenses of a company to that of its net sales. 
• A higher ratio would indicate that expenses are more than the company’s ability to generate sufficient revenue and may be considered inefficient.
• Similarly, a relatively low ratio would be considered a good sign as the company’s expenses are less than that of its revenue.

(R): A high operating ratio leaves a high margin to meet non-operating expenses.

• Operating Ratio = (Operating Expenses / Net Sales) * 100.
• A low operating ratio means a high net profit ratio (i.e., more operating profit) and vice versa. 
• It shows whether or not the cost component in the sales figure is within the normal range.
• A high operating ratio leaves less margin to meet non-operating expenses.
• The operating ratio is used to measure the operational efficiency of the management.

Hence Both Assertion And Reason Are Incorrect.