Accountancy: CUET Mock Test - 5 - Commerce MCQ

Ratio analysis is a financial analysis tool that involves evaluating various financial ratios to gain insights into a company's performance, financial health, and efficiency. By comparing different ratios and trends over time, ratio analysis can help identify areas of strength and weakness in a company's operations. This information can be used to determine potential areas that could be improved with focused efforts in the desired direction.

Working capital = Current assets - Current liabilities
Current liabilities = Current assets - Working capital
= 6,00,000 - 2,00,000 = ₹ 4,00,000
Current ratio = Current assets/Current liabilities = 6,00,000/4,00,000 = 1.5

Working capital = Current assets - Current liabilities 

If the numerator and denominator reduces by the same amount the ratio improves.

Operating Ratio = Operating Cost/Net Sales × 100

Also, Operating Cost = Cost of Goods Sold + Operating Expenses

Since cost of goods sold includes purchases as well as closing stock so a purchase of ₹ 40,000 worth of goods will increase the value of both closing stock as well as purchases and hence will lead to change in the value of COGS.

Thus, the operating ratio will remain unchanged.

Accounting data provides information about quantitative (or monetary) aspects of business. Hence, the ratios also reflect only the monetary aspects, ignoring completely the non-monetary (qualitative) factors.

Repayment of bills payable will reduce current assets and liabilities by the same amount. This will improve the current ratio. Other two options will deteriorate it

Repayment of bills payable will reduce current assets and liabilities by the same amount. This will improve the current ratio.

There are differing accounting policies for valuation of inventory, calculation of depreciation, etc., available for various aspects of business transactions. As there are variations in accounting practices followed by different business enterprises, ratios may not be comparable.

Liquid ratio measures short-term solvency of an enterprise. It indicates whether a firm is able to pay its current liabilities immediately.

Quick assets = Current assets - Inventories - Prepaid expenses

Quick assets = Current assets - Inventories - Prepaid expenses
= 6,00,000 - 1,50,000 - 50,000 = ₹ 4,00,000 
Quick ratio = Quick assets/Current liabilities = 4,00,000/2,00,000 = 2

Generally, higher the current ratio the better it is because it indicates that the firm will be able to meet its current liabilities.

This is purchase of machinery for cash will reduce the current assets but current liabilities remain unchanged, so the ratio will decrease.

Debt to equity ratio = Debt/Equity
Debt = Total debt - Current liabilities = 25,00,000 - 8,00,000 = ₹ 17,00,000
Equity = Total assets - Total debts = 35,00,000 - 25,00,000 = ₹ 10,00,000
Debt to equity ratio = 17,00,000/10,00,000 = 1.7 : 1

Interest coverage ratio — PBIT/Interest on long-term debt = 5,00,000/1,25,000 = 4 times.

Total assets will increase by the amount of loan but Shareholders’ funds will remain the same so proprietary ratio will decrease.

It will improve the ratio as COGS remains unchanged but average stock decreases.

Debt-equity ratio = Long-term debt/Shareholder’s funds

Inventory turnover ratio = COGS/Average inventory
Opening inventory = Closing inventory - 20,000 = 60,000 - 20,000 = ₹ 40,000
Average inventory = (Opening inventory + Closing inventory)/2 = 40,000 + 60,000/2
= 1,00,000/2
= ₹ 50,000
Inventory turnover ratio = 1,50,000/50,000 = 3 times

A higher operating ratio indicates a decline in efficiency. It is a cost ratio. Higher operating ratio will mean there is a greater component of cost in price and hence lesser profits.

Purchase of a fixed asset for 5,00,000 on long-term deferred payment basis will increase the debt component but not the equity component and hence ratio will increase.

Average collection period = 12/Debtor’s turnover ratio = 12/6 = 2

Trade payables turnover ratio indicates the speed with which amount is being paid to creditors.

If the average collection period exceeds the credit terms its credit collection would be considered poor.

By considering liquidity, debt, and profitability ratios together, stakeholders can gain a comprehensive understanding of a company's financial risk. Liquidity ratios indicate short-term risk, debt ratios assess financial risk, and profitability ratios provide insight into the company's ability to manage risk and generate returns.

Operating profit ratio = Operating Profit / Net Sales x 100

Net working capital = 0
Current assets - Current liabilities = 0
So, Current assets = Current liabilities ....(i)
Current ratio = Current assets/Current liabilities
Using Eq.(i); Current ratio = Current liabilities/Current liabilities = 1 

The debt to equity ratio will decrease at the time of issue of equity shares for cash.

Inventories take some time before it is converted into cash and prepaid expenses are the expenses paid in advance and cannot be converted into cash.