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


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

Test: Accounting Ratios- Assertion & Reason Type Questions for Commerce 2024 is part of Commerce preparation. The Test: Accounting Ratios- Assertion & Reason Type Questions questions and answers have been prepared according to the Commerce exam syllabus.The Test: Accounting Ratios- Assertion & Reason Type Questions MCQs are made for Commerce 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests for Test: Accounting Ratios- Assertion & Reason Type Questions below.
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Test: Accounting Ratios- Assertion & Reason Type Questions - Question 1

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Higher the Gross Profit ratio, good for the business, lower ratio not good for the business.

Reason (R): It reflects the efficiency with which a firm produces its products. A high gross profit ratio indicates that the organization is able to produce at a relatively lower cost.

Detailed Solution for Test: Accounting Ratios- Assertion & Reason Type Questions - Question 1
The gross profit should be sufficient to cover all operating expenses and to build up reserves after paying all fixed interest charges and dividends.
Test: Accounting Ratios- Assertion & Reason Type Questions - Question 2

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Debt to Equity Ratio of 2 : 1 is considered satisfactory. Generally a Low Ratio is considered favourable.

Reason (R): This ratio indicates the proportionate claims of owners and outsiders on a firm's assets. High Ratio shows claims of outsiders are greater but Low Ratio shows outsiders claims are less.

Detailed Solution for Test: Accounting Ratios- Assertion & Reason Type Questions - Question 2
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.
Test: Accounting Ratios- Assertion & Reason Type Questions - Question 3

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): A high operating ratio indicates a favourable position.

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

Detailed Solution for Test: Accounting Ratios- Assertion & Reason Type Questions - Question 3

(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.

Test: Accounting Ratios- Assertion & Reason Type Questions - Question 4

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Liquid ratio reveals strength of liquidity of a business unit.

Reason (R): Liquid ratio is the one of the various ratios used to measure the ability of a company to meet its long-term debts.

Detailed Solution for Test: Accounting Ratios- Assertion & Reason Type Questions - Question 4
Liquid ratio analyses liquid assets and liquid liabilities of a business unit in order to assess the extent of liquidity.
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