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

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 1

Logic Check

Assertion (A): A very high Current Ratio is always beneficial for a business. Reason (R): A very high Current Ratio implies heavy investment in current assets, which may reflect under-utilisation of resources.

Reasoning Options

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Assertion-Reason

Easy difficulty • Check the statement and reason

Easy

Question 2

Logic Check

Assertion (A): The Quick Ratio is also known as the Acid-Test Ratio. Reason (R): It excludes inventories and other non-liquid current assets from quick assets, making it a stricter test of liquidity.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 3

Logic Check

Assertion (A): Ratio analysis provides complete information to resolve all business problems. Reason (R): Ratios are means to an end and only indicate areas needing attention; they cannot provide solutions.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 4

Logic Check

Assertion (A): Inventory Turnover Ratio uses Cost of Revenue from Operations in its numerator. Reason (R): Using cost (not selling price) provides a better measure of how efficiently inventory is being converted into sales relative to its actual cost.

Reasoning Options

ByteNotes

Assertion-Reason

Hard difficulty • Check the statement and reason

Hard

Question 5

Logic Check

Assertion (A): A high Debt-Equity Ratio is always considered unfavourable. Reason (R): A high Debt-Equity Ratio can increase returns to equity shareholders through trading on equity if ROCE exceeds the rate of interest.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 6

Logic Check

Assertion (A): The sum of the Debt to Capital Employed Ratio and Proprietary Ratio is always equal to 1. Reason (R): Capital Employed is financed entirely by either long-term debt or shareholders' funds; together they constitute 100% of capital employed.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 7

Logic Check

Assertion (A): Ratios calculated for two companies using different inventory valuation methods are directly comparable. Reason (R): Variations in accounting practices affect the value of assets and profits, making cross-firm ratio comparisons potentially misleading.

Reasoning Options

ByteNotes

Assertion-Reason

Easy difficulty • Check the statement and reason

Easy

Question 8

Logic Check

Assertion (A): A higher Interest Coverage Ratio provides greater safety to lenders. Reason (R): A higher Interest Coverage Ratio means profit before interest and tax covers interest obligations many times, reducing the risk of default.

Reasoning Options

ByteNotes

Assertion-Reason

Easy difficulty • Check the statement and reason

Easy

Question 9

Logic Check

Assertion (A): Prepaid Expenses are excluded from Quick Assets. Reason (R): Quick Assets include only those assets that can be quickly converted into cash; prepaid expenses cannot be converted into cash.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 10

Logic Check

Assertion (A): Gross Profit Ratio reflects the overall efficiency of a business. Reason (R): Net Profit Ratio reflects overall efficiency while Gross Profit Ratio only measures the margin on production and trading operations.

Reasoning Options

ByteNotes

Assertion-Reason

Easy difficulty • Check the statement and reason

Easy

Question 11

Logic Check

Assertion (A): A low Operating Ratio is a healthy sign for a business. Reason (R): A low Operating Ratio means a lower proportion of revenue is consumed by operating costs, leaving more for profit.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 12

Logic Check

Assertion (A): Higher Trade Receivables Turnover Ratio always indicates poor credit management. Reason (R): A higher Trade Receivables Turnover Ratio indicates faster collection from trade receivables, reflecting efficient credit management.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 13

Logic Check

Assertion (A): Ratio analysis can ignore the impact of inflation on financial data. Reason (R): Financial accounting is based on the stable money measurement principle and does not adjust for changes in the price level.

Reasoning Options

ByteNotes

Assertion-Reason

Hard difficulty • Check the statement and reason

Hard

Question 14

Logic Check

Assertion (A): Return on Capital Employed is calculated using Profit after Tax in the numerator. Reason (R): Profit before Interest and Tax is used in ROCE because it represents returns available to all providers of long-term capital before financing costs.

Reasoning Options

ByteNotes

Assertion-Reason

Hard difficulty • Check the statement and reason

Hard

Question 15

Logic Check

Assertion (A): Payment of a current liability when Current Ratio is greater than 1 will improve the Current Ratio. Reason (R): Payment of a current liability reduces both current assets and current liabilities equally, but the ratio improves because the proportionate reduction in liabilities is greater.

Reasoning Options

ByteNotes

Assertion-Reason

Easy difficulty • Check the statement and reason

Easy

Question 16

Logic Check

Assertion (A): Solvency Ratios are essentially short-term in nature. Reason (R): Liquidity Ratios are short-term in nature while Solvency Ratios assess a firm's ability to meet long-term obligations.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 17

Logic Check

Assertion (A): A ratio calculated using creditors and furniture is a useful indicator of solvency. Reason (R): Ratios must be calculated using numbers that are meaningfully correlated; creditors and furniture have no logical relationship, making such a ratio meaningless.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 18

Logic Check

Assertion (A): Book Value per Share uses Equity Shareholders' Funds (not total shareholders' funds) in its numerator. Reason (R): Preference share capital represents a fixed claim and is not included in equity shareholders' residual claim on assets.

Reasoning Options

ByteNotes

Assertion-Reason

Easy difficulty • Check the statement and reason

Easy

Question 19

Logic Check

Assertion (A): Ratio analysis enables SWOT analysis for a business. Reason (R): Ratios reveal strengths and weaknesses of the business by quantifying performance across profitability, liquidity, and efficiency dimensions, helping management understand threats and opportunities.

Reasoning Options

ByteNotes

Assertion-Reason

Medium difficulty • Check the statement and reason

Medium

Question 20

Logic Check

Assertion (A): Redemption of debentures will decrease the Debt-Equity Ratio. Reason (R): Redemption of debentures reduces long-term debt while shareholders' funds remain unchanged, thus reducing the numerator of the Debt-Equity Ratio.

Reasoning Options

ByteNotes

Chapter sections

Chapter accounting-ratios: Accounting Ratios | Assertion-Reason

Assertion (A): A very high Current Ratio is always beneficial for a business. Reason (R): A very high Current Ratio implies heavy investment in current assets, which may reflect under-utilisation of resources.

Assertion (A): The Quick Ratio is also known as the Acid-Test Ratio. Reason (R): It excludes inventories and other non-liquid current assets from quick assets, making it a stricter test of liquidity.

Assertion (A): Ratio analysis provides complete information to resolve all business problems. Reason (R): Ratios are means to an end and only indicate areas needing attention; they cannot provide solutions.

Assertion (A): Inventory Turnover Ratio uses Cost of Revenue from Operations in its numerator. Reason (R): Using cost (not selling price) provides a better measure of how efficiently inventory is being converted into sales relative to its actual cost.

Assertion (A): A high Debt-Equity Ratio is always considered unfavourable. Reason (R): A high Debt-Equity Ratio can increase returns to equity shareholders through trading on equity if ROCE exceeds the rate of interest.

Assertion (A): The sum of the Debt to Capital Employed Ratio and Proprietary Ratio is always equal to 1. Reason (R): Capital Employed is financed entirely by either long-term debt or shareholders' funds; together they constitute 100% of capital employed.

Assertion (A): Ratios calculated for two companies using different inventory valuation methods are directly comparable. Reason (R): Variations in accounting practices affect the value of assets and profits, making cross-firm ratio comparisons potentially misleading.

Assertion (A): A higher Interest Coverage Ratio provides greater safety to lenders. Reason (R): A higher Interest Coverage Ratio means profit before interest and tax covers interest obligations many times, reducing the risk of default.

Assertion (A): Prepaid Expenses are excluded from Quick Assets. Reason (R): Quick Assets include only those assets that can be quickly converted into cash; prepaid expenses cannot be converted into cash.

Assertion (A): Gross Profit Ratio reflects the overall efficiency of a business. Reason (R): Net Profit Ratio reflects overall efficiency while Gross Profit Ratio only measures the margin on production and trading operations.

Assertion (A): A low Operating Ratio is a healthy sign for a business. Reason (R): A low Operating Ratio means a lower proportion of revenue is consumed by operating costs, leaving more for profit.

Assertion (A): Higher Trade Receivables Turnover Ratio always indicates poor credit management. Reason (R): A higher Trade Receivables Turnover Ratio indicates faster collection from trade receivables, reflecting efficient credit management.

Assertion (A): Ratio analysis can ignore the impact of inflation on financial data. Reason (R): Financial accounting is based on the stable money measurement principle and does not adjust for changes in the price level.

Assertion (A): Return on Capital Employed is calculated using Profit after Tax in the numerator. Reason (R): Profit before Interest and Tax is used in ROCE because it represents returns available to all providers of long-term capital before financing costs.

Assertion (A): Solvency Ratios are essentially short-term in nature. Reason (R): Liquidity Ratios are short-term in nature while Solvency Ratios assess a firm's ability to meet long-term obligations.

Assertion (A): A ratio calculated using creditors and furniture is a useful indicator of solvency. Reason (R): Ratios must be calculated using numbers that are meaningfully correlated; creditors and furniture have no logical relationship, making such a ratio meaningless.

Assertion (A): Book Value per Share uses Equity Shareholders' Funds (not total shareholders' funds) in its numerator. Reason (R): Preference share capital represents a fixed claim and is not included in equity shareholders' residual claim on assets.

Assertion (A): Ratio analysis enables SWOT analysis for a business. Reason (R): Ratios reveal strengths and weaknesses of the business by quantifying performance across profitability, liquidity, and efficiency dimensions, helping management understand threats and opportunities.

Assertion (A): Redemption of debentures will decrease the Debt-Equity Ratio. Reason (R): Redemption of debentures reduces long-term debt while shareholders' funds remain unchanged, thus reducing the numerator of the Debt-Equity Ratio.

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