Chapter accounting-ratios: Accounting Ratios Application Questions | accountancy Class 12 CBSE

ByteNotes

Chapter accounting-ratios: Accounting Ratios Application Questions | accountancy Class 12 CBSE | ByteNotes.in

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 1

Applied Concept

XYZ Ltd. has a current ratio of 2:1 and current assets of Rs. 50,000. A credit purchase of Rs. 10,000 worth of goods is made. Analyse the effect of this transaction on the current ratio with calculations.

Before transaction: Current Assets = Rs. 50,000; Current Ratio = 2:1, so Current Liabilities = Rs. 25,000. The current ratio is greater than 1:1.
Effect of credit purchase: Inventories (current asset) increase by Rs. 10,000 (new CA = Rs. 60,000) and trade payables (current liability) increase by Rs. 10,000 (new CL = Rs. 35,000).
New Current Ratio = Rs. 60,000 / Rs. 35,000 = 1.71:1. The current ratio has reduced because when the original ratio is greater than 1:1, a transaction that increases both current assets and current liabilities by the same amount reduces the ratio.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 2

Applied Concept

A company has current assets of Rs. 1,34,000 including inventories of Rs. 50,000 and advance tax of Rs. 4,000. Current liabilities are Rs. 1,04,000. Calculate the Current Ratio and Quick Ratio, and comment on the liquidity position of the company.

Current Ratio = Current Assets / Current Liabilities = Rs. 1,34,000 / Rs. 1,04,000 = 1.29:1. This is below the ideal of 2:1, indicating a relatively tight short-term liquidity position.
Quick Assets = Current Assets minus (Inventories + Advance Tax) = Rs. 1,34,000 minus Rs. 54,000 = Rs. 80,000. Quick Ratio = Rs. 80,000 / Rs. 1,04,000 = 0.77:1, which is below the ideal of 1:1.
Both ratios are below their ideal levels, suggesting the company may face difficulty meeting short-term obligations promptly. The firm is heavily reliant on inventory conversion to pay current liabilities, which increases liquidity risk.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 3

Applied Concept

A Ltd. has a current ratio of 3.5:1 and quick ratio of 2:1. If the excess of current assets over quick assets (inventories) is Rs. 24,000, find the current assets, current liabilities and quick assets.

Let Current Liabilities = x. Then Current Assets = 3.5x and Quick Assets = 2x. Inventories = Current Assets minus Quick Assets = 3.5x minus 2x = 1.5x.
Given: 1.5x = Rs. 24,000, so x = Rs. 16,000. Current Liabilities = Rs. 16,000. Current Assets = 3.5 × Rs. 16,000 = Rs. 56,000. Quick Assets = 2 × Rs. 16,000 = Rs. 32,000.
Verification: Current Ratio = 56,000 / 16,000 = 3.5:1 ✓. Quick Ratio = 32,000 / 16,000 = 2:1 ✓. Inventories = 56,000 minus 32,000 = Rs. 24,000 ✓.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 4

Applied Concept

From a balance sheet, Shareholders' Funds are Rs. 15,00,000 and Long-term Debts are Rs. 5,00,000. Total Assets are Rs. 25,00,000 and Current Liabilities are Rs. 5,00,000. Calculate Debt-Equity Ratio, Proprietary Ratio and Debt to Capital Employed Ratio, and comment on the capital structure.

Debt-Equity Ratio = Long-term Debts / Shareholders' Funds = Rs. 5,00,000 / Rs. 15,00,000 = 0.33:1. This is well below the safe level of 2:1, indicating a very conservative capital structure with dominant equity financing.
Capital Employed = Total Assets minus Current Liabilities = Rs. 25,00,000 minus Rs. 5,00,000 = Rs. 20,00,000. Proprietary Ratio = Shareholders' Funds / Capital Employed = Rs. 15,00,000 / Rs. 20,00,000 = 0.75:1. Debt to Capital Employed = Rs. 5,00,000 / Rs. 20,00,000 = 0.25:1.
The capital structure is predominantly equity-funded (75% by owners, 25% by long-term debt). This provides high security to lenders but may limit returns to equity shareholders through limited use of trading on equity.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 5

Applied Concept

A trader's inventory turnover ratio is 8 times and average inventory is Rs. 40,000. The trader sells goods at a profit of 20% on revenue from operations. Calculate the gross profit.

Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory. 8 = Cost of Revenue from Operations / Rs. 40,000. Therefore, Cost of Revenue from Operations = 8 × Rs. 40,000 = Rs. 3,20,000.
Since profit is 20% on revenue from operations, cost is 80% of revenue from operations. Revenue from Operations = Rs. 3,20,000 × (100/80) = Rs. 4,00,000.
Gross Profit = Revenue from Operations minus Cost of Revenue from Operations = Rs. 4,00,000 minus Rs. 3,20,000 = Rs. 80,000.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 6

Applied Concept

XYZ Company's Net Profit after tax is Rs. 60,000, tax rate is 40%, and the company has 15% long-term debt of Rs. 10,00,000. Calculate the Interest Coverage Ratio and comment on the safety of interest payments.

Net Profit before Tax = Net Profit after Tax × 100 / (100 minus Tax rate) = Rs. 60,000 × 100/60 = Rs. 1,00,000. Interest on Long-term Debt = 15% of Rs. 10,00,000 = Rs. 1,50,000.
Net Profit before Interest and Tax = Net Profit before Tax + Interest = Rs. 1,00,000 + Rs. 1,50,000 = Rs. 2,50,000. Interest Coverage Ratio = Rs. 2,50,000 / Rs. 1,50,000 = 1.67 times.
A ratio of only 1.67 times is quite low and indicates that interest is barely covered by available profits. This is a concern for lenders as any decline in profitability could make it difficult for the company to service its interest obligations on long-term debt.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 7

Applied Concept

From the following data, calculate Trade Receivables Turnover Ratio and Average Collection Period: Total Revenue from Operations Rs. 4,00,000; Cash Revenue from Operations 20% of total; Opening Trade Receivables Rs. 40,000; Closing Trade Receivables Rs. 1,20,000.

Cash Revenue = 20% of Rs. 4,00,000 = Rs. 80,000. Net Credit Revenue from Operations = Rs. 4,00,000 minus Rs. 80,000 = Rs. 3,20,000.
Average Trade Receivables = (Opening + Closing) / 2 = (Rs. 40,000 + Rs. 1,20,000) / 2 = Rs. 80,000. Trade Receivables Turnover Ratio = Rs. 3,20,000 / Rs. 80,000 = 4 times.
Average Collection Period = 365 / 4 = approximately 91 days. This means the firm takes about 91 days on average to collect its credit sales, which may indicate a need to tighten credit policies to improve cash flow.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 8

Applied Concept

From the following, calculate Trade Payables Turnover Ratio and Average Payment Period: Credit Purchases Rs. 12,00,000; Opening Creditors Rs. 3,00,000; Opening Bills Payable Rs. 1,00,000; Closing Creditors Rs. 1,30,000; Closing Bills Payable Rs. 70,000.

Average Trade Payables = (Opening Creditors + Opening Bills Payable + Closing Creditors + Closing Bills Payable) / 2 = (Rs. 3,00,000 + Rs. 1,00,000 + Rs. 1,30,000 + Rs. 70,000) / 2 = Rs. 6,00,000 / 2 = Rs. 3,00,000.
Trade Payables Turnover Ratio = Net Credit Purchases / Average Trade Payables = Rs. 12,00,000 / Rs. 3,00,000 = 4 times.
Average Payment Period = 365 / 4 = approximately 91 days. The firm takes about 91 days to pay its suppliers, which means it is using approximately 3 months of supplier credit — this is relatively long and should be assessed against the credit terms offered to ensure it does not harm supplier relationships.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 9

Applied Concept

A company has Revenue from Operations Rs. 3,40,000, Cost of Revenue from Operations Rs. 1,20,000, Selling Expenses Rs. 80,000 and Administrative Expenses Rs. 40,000. Calculate the Gross Profit Ratio and Operating Ratio, and interpret the results.

Gross Profit = Revenue from Operations minus Cost of Revenue from Operations = Rs. 3,40,000 minus Rs. 1,20,000 = Rs. 2,20,000. Gross Profit Ratio = (Rs. 2,20,000 / Rs. 3,40,000) × 100 = 64.71%. This is a high gross profit ratio, indicating strong margin on trading operations.
Operating Cost = Cost of Revenue from Operations + Selling Expenses + Administrative Expenses = Rs. 1,20,000 + Rs. 80,000 + Rs. 40,000 = Rs. 2,40,000. Operating Ratio = (Rs. 2,40,000 / Rs. 3,40,000) × 100 = 70.59%.
Although the gross profit ratio is high (64.71%), the operating ratio of 70.59% means operating profit ratio is only 29.41% (100 minus 70.59). The high operating expenses (particularly selling and administrative) reduce the operating margin significantly, suggesting the company should focus on controlling overhead costs.

ByteNotes

Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 10

Applied Concept

XYZ Ltd. has Equity Share Capital Rs. 4,00,000 (face value Rs. 10), 12% Preference Share Capital Rs. 1,00,000, General Reserve Rs. 1,84,000, 10% Debentures Rs. 4,00,000, and Net Profit after Tax Rs. 1,50,000. Calculate EPS, Return on Investment (given Tax = Rs. 50,000) and Return on Shareholders' Funds.

Number of Equity Shares = Rs. 4,00,000 / Rs. 10 = 40,000 shares. Preference Dividend = 12% of Rs. 1,00,000 = Rs. 12,000. Profit for equity shareholders = Rs. 1,50,000 minus Rs. 12,000 = Rs. 1,38,000. EPS = Rs. 1,38,000 / 40,000 = Rs. 3.45.
Profit before Interest and Tax = Net Profit after Tax + Tax + Debenture Interest = Rs. 1,50,000 + Rs. 50,000 + (10% of Rs. 4,00,000) = Rs. 1,50,000 + Rs. 50,000 + Rs. 40,000 = Rs. 2,40,000. Capital Employed = Rs. 4,00,000 + Rs. 1,00,000 + Rs. 1,84,000 + Rs. 4,00,000 = Rs. 10,84,000. ROI = Rs. 2,40,000 / Rs. 10,84,000 × 100 = 22.14%.
Shareholders' Funds = Equity Share Capital + Preference Share Capital + General Reserve = Rs. 4,00,000 + Rs. 1,00,000 + Rs. 1,84,000 = Rs. 6,84,000. Return on Shareholders' Funds = Rs. 1,50,000 / Rs. 6,84,000 × 100 = 21.93%. RONW (21.93%) is slightly lower than ROI (22.14%), suggesting leverage is not significantly enhancing equity returns.

ByteNotes

Premium Access

Unlock all Application Questions

You are viewing 10 free application questions from this chapter. Upgrade to Premium to unlock the remaining 13 questions.

Upgrade to Premium13 questions locked

Chapter sections

Chapter accounting-ratios: Accounting Ratios | Application Questions

XYZ Ltd. has a current ratio of 2:1 and current assets of Rs. 50,000. A credit purchase of Rs. 10,000 worth of goods is made. Analyse the effect of this transaction on the current ratio with calculations.

A company has current assets of Rs. 1,34,000 including inventories of Rs. 50,000 and advance tax of Rs. 4,000. Current liabilities are Rs. 1,04,000. Calculate the Current Ratio and Quick Ratio, and comment on the liquidity position of the company.

A Ltd. has a current ratio of 3.5:1 and quick ratio of 2:1. If the excess of current assets over quick assets (inventories) is Rs. 24,000, find the current assets, current liabilities and quick assets.

From a balance sheet, Shareholders' Funds are Rs. 15,00,000 and Long-term Debts are Rs. 5,00,000. Total Assets are Rs. 25,00,000 and Current Liabilities are Rs. 5,00,000. Calculate Debt-Equity Ratio, Proprietary Ratio and Debt to Capital Employed Ratio, and comment on the capital structure.

A trader's inventory turnover ratio is 8 times and average inventory is Rs. 40,000. The trader sells goods at a profit of 20% on revenue from operations. Calculate the gross profit.

XYZ Company's Net Profit after tax is Rs. 60,000, tax rate is 40%, and the company has 15% long-term debt of Rs. 10,00,000. Calculate the Interest Coverage Ratio and comment on the safety of interest payments.

From the following data, calculate Trade Receivables Turnover Ratio and Average Collection Period: Total Revenue from Operations Rs. 4,00,000; Cash Revenue from Operations 20% of total; Opening Trade Receivables Rs. 40,000; Closing Trade Receivables Rs. 1,20,000.

From the following, calculate Trade Payables Turnover Ratio and Average Payment Period: Credit Purchases Rs. 12,00,000; Opening Creditors Rs. 3,00,000; Opening Bills Payable Rs. 1,00,000; Closing Creditors Rs. 1,30,000; Closing Bills Payable Rs. 70,000.

A company has Revenue from Operations Rs. 3,40,000, Cost of Revenue from Operations Rs. 1,20,000, Selling Expenses Rs. 80,000 and Administrative Expenses Rs. 40,000. Calculate the Gross Profit Ratio and Operating Ratio, and interpret the results.

Unlock all Application Questions