Accounting Ratios
All 19 Ratios — Formulas, Meanings and Numericals
The highest-weightage chapter in Part B. Covers all 19 ratios across four categories — Liquidity, Solvency, Activity, and Profitability — each with formula, meaning, ideal value, and worked numericals. Includes 10 board-exam solved questions (including missing-figure type), 40 MCQs, and a 40-question live quiz packed with calculations.
19Ratios
40MCQs
40Quiz Qs
📌 The Big Picture
What is a Ratio? What is Ratio Analysis?
A ratio is a mathematical relationship between two quantities expressed as a fraction, percentage, or proportion (e.g., 2:1). An accounting ratio is the relationship between two accounting figures drawn from financial statements.
Ratio Analysis is the technique of establishing and interpreting various ratios to draw meaningful conclusions about the financial health of a business. It converts raw financial data into standardised, comparable measures.
1. Objectives, Advantages and Limitations
O1
Objective: Assess Liquidity
Are there enough liquid assets to pay current obligations? Current Ratio and Quick Ratio answer this.
O2
Objective: Assess Solvency
Can the firm survive in the long run and service its debt? Debt-Equity and Interest Coverage Ratios measure this.
O3
Objective: Assess Efficiency
How effectively are assets being used? Turnover Ratios measure asset utilisation efficiency.
O4
Objective: Assess Profitability
Is the company earning enough relative to sales, assets, and capital? Profitability Ratios measure this.
Key Limitations of Ratio Analysis
Window dressing distorts ratios. Different accounting policies make inter-firm comparison misleading. Ratios use historical data and ignore price level changes. A single ratio tells little — ratios must be interpreted in context with industry averages and trends. They also ignore qualitative factors.
2. Master Formula Reference — All 19 Ratios
■ Category 1: Liquidity Ratios
1. Current Ratio
Current Assets ÷ Current Liabilities
Ideal: 2 : 1. Measures short-term solvency.
2. Quick Ratio (Liquid Ratio / Acid Test)
Quick Assets ÷ Current Liabilities
Quick Assets = CA − Inventories − Prepaid Expenses
Quick Assets = CA − Inventories − Prepaid Expenses
Ideal: 1 : 1. More stringent test of liquidity.
■ Category 2: Solvency Ratios
3. Debt to Equity Ratio
Long-term Debt ÷ Shareholders' Funds
Lower is better. Measures financial leverage.
4. Total Assets to Debt Ratio
Total Assets ÷ Long-term Debt
Higher is safer. Assets available per rupee of debt.
5. Proprietary Ratio
Shareholders' Funds ÷ Total Assets
Higher is better. Proportion financed by equity.
6. Interest Coverage Ratio
Net Profit Before Interest & Tax ÷ Interest on Long-term Debt
Higher is better. Times interest is earned.
7. Debt to Capital Employed Ratio
Long-term Debt ÷ Capital Employed
Capital Employed = Shareholders' Funds + Long-term Debt
■ Category 3: Activity (Turnover) Ratios
8. Inventory Turnover Ratio
Cost of Revenue from Operations ÷ Average Inventory
Average Inv = (Opening + Closing) ÷ 2. Days Inv = 365 ÷ ITR.
9. Trade Receivables Turnover Ratio
Net Credit Revenue from Operations ÷ Average Trade Receivables
Debtors Collection Period = 365 ÷ TRTR (days).
10. Trade Payables Turnover Ratio
Net Credit Purchases ÷ Average Trade Payables
Payables Payment Period = 365 ÷ TPTR (days).
11. Fixed Assets Turnover Ratio
Net Revenue from Operations ÷ Net Fixed Assets
How many rupees of sales per rupee of fixed assets.
12. Net Assets Turnover Ratio
Net Revenue from Operations ÷ Net Assets (Capital Employed)
Net Assets = Capital Employed = Shareholders' Funds + LTD.
13. Working Capital Turnover Ratio
Net Revenue from Operations ÷ Working Capital
Working Capital = Current Assets − Current Liabilities.
■ Category 4: Profitability Ratios
14. Gross Profit Ratio
(Gross Profit ÷ Net Revenue from Operations) × 100
Gross Profit = Net Revenue − Cost of Revenue from Operations
15. Operating Ratio
(Operating Cost ÷ Net Revenue from Operations) × 100
Operating Cost = Cost of Revenue + Operating Expenses. Operating Ratio + Operating Profit Ratio = 100%.
16. Operating Profit Ratio
(Operating Profit ÷ Net Revenue from Operations) × 100
Operating Profit = Gross Profit − Operating Expenses = PBIT (Profit Before Interest and Tax)
17. Net Profit Ratio
(Net Profit After Tax ÷ Net Revenue from Operations) × 100
Also computed using Net Profit Before Tax as per CBSE note.
18 & 19. Return on Investment (ROI)
(Net Profit Before Interest & Tax ÷ Capital Employed) × 100
Capital Employed = Shareholders' Funds + Long-term Debt = Total Assets − Current Liabilities.
🎯 Key Definitions to Memorise:
Capital Employed = Shareholders' Funds + Long-term Debt = Total Assets − Current Liabilities
Working Capital = Current Assets − Current Liabilities
Quick Assets = Current Assets − Inventories − Prepaid Expenses
Gross Profit = Net Revenue from Operations − Cost of Revenue from Operations
Operating Profit = Gross Profit − Operating Expenses (Depreciation is included; Finance Costs are NOT)
NPBIT = Operating Profit = PBT + Interest on long-term debt
Capital Employed = Shareholders' Funds + Long-term Debt = Total Assets − Current Liabilities
Working Capital = Current Assets − Current Liabilities
Quick Assets = Current Assets − Inventories − Prepaid Expenses
Gross Profit = Net Revenue from Operations − Cost of Revenue from Operations
Operating Profit = Gross Profit − Operating Expenses (Depreciation is included; Finance Costs are NOT)
NPBIT = Operating Profit = PBT + Interest on long-term debt
📈 Numerical 1 — Current Ratio and Quick Ratio
Question: From the following, calculate Current Ratio and Quick Ratio: Inventories ₹60,000 | Trade Receivables ₹50,000 | Cash and Bank ₹20,000 | Prepaid Expenses ₹5,000 | Short-term Investments ₹15,000 | Trade Payables ₹40,000 | Short-term Borrowings ₹30,000 | Outstanding Expenses ₹5,000
| Item | Amount (₹) | Classification |
|---|---|---|
| Inventories | 60,000 | Current Assets (excluded from Quick Assets) |
| Trade Receivables | 50,000 | Current Assets and Quick Assets |
| Cash and Bank | 20,000 | Current Assets and Quick Assets |
| Prepaid Expenses | 5,000 | Current Assets (excluded from Quick Assets) |
| Short-term Investments | 15,000 | Current Assets and Quick Assets |
| Total Current Assets | 1,50,000 | |
| Quick Assets | 85,000 | 1,50,000 − 60,000 − 5,000 |
| Trade Payables | 40,000 | Current Liabilities |
| Short-term Borrowings | 30,000 | Current Liabilities |
| Outstanding Expenses | 5,000 | Current Liabilities |
| Total Current Liabilities | 75,000 |
Current Ratio = 1,50,000 ÷ 75,000 = 2 : 1 (Ideal!)
Quick Ratio = 85,000 ÷ 75,000 = 1.13 : 1 (Above ideal of 1:1 — good liquidity)
📈 Numerical 2 — Solvency Ratios (All Five)
Question: Calculate all five solvency ratios from: Share Capital ₹4,00,000 | Reserves and Surplus ₹1,00,000 | Long-term Borrowings ₹2,50,000 | Total Assets ₹8,00,000 | Current Liabilities ₹50,000 | Net Profit Before Interest and Tax ₹80,000 | Interest on Long-term Debt ₹25,000
Working: Shareholders' Funds = 4,00,000 + 1,00,000 = ₹5,00,000. Capital Employed = 5,00,000 + 2,50,000 = ₹7,50,000 (also = Total Assets − CL = 8,00,000 − 50,000 = 7,50,000 ✔)
Debt to Equity = 2,50,000 ÷ 5,00,000 = 0.5 : 1
Total Assets to Debt = 8,00,000 ÷ 2,50,000 = 3.2 : 1
Proprietary Ratio = 5,00,000 ÷ 8,00,000 = 0.625 (62.5%)
Interest Coverage Ratio = 80,000 ÷ 25,000 = 3.2 times
Debt to Capital Employed = 2,50,000 ÷ 7,50,000 = 0.33 : 1
Interpretation: Debt to Equity at 0.5 means the company has only ₹0.50 of debt for every ₹1 of equity — low leverage. Proprietary Ratio of 62.5% means 62.5% of assets are funded by shareholders — a sound position. Interest Coverage of 3.2 times means profit covers interest 3.2 times — comfortable.
📈 Numerical 3 — Inventory Turnover Ratio
Question: Net Revenue from Operations ₹12,00,000 | Cost of Revenue from Operations ₹9,00,000 | Opening Inventory ₹1,20,000 | Closing Inventory ₹80,000. Calculate Inventory Turnover Ratio and Days Inventory.
Average Inventory = (1,20,000 + 80,000) ÷ 2 = ₹1,00,000
ITR = Cost of Revenue ÷ Avg Inventory = 9,00,000 ÷ 1,00,000 = 9 times
Days of Inventory = 365 ÷ 9 = 40.56 days ≈ 41 days (inventory is held for 41 days on average)
Interpretation: A high ITR (9 times) means the company sells and replaces its inventory quickly — efficient stock management and low holding costs.
📈 Numerical 4 — Trade Receivables and Trade Payables Turnover
Question: Net Credit Revenue ₹8,00,000 | Opening TR ₹80,000 | Closing TR ₹1,20,000 | Net Credit Purchases ₹7,00,000 | Opening TP ₹60,000 | Closing TP ₹1,00,000. Calculate Trade Receivables Turnover and Debtors Collection Period; Trade Payables Turnover and Payment Period.
Average Trade Receivables = (80,000 + 1,20,000) ÷ 2 = ₹1,00,000
TRTR = 8,00,000 ÷ 1,00,000 = 8 times
Debtors Collection Period = 365 ÷ 8 = 45.6 days ≈ 46 days
Average Trade Payables = (60,000 + 1,00,000) ÷ 2 = ₹80,000
TPTR = 7,00,000 ÷ 80,000 = 8.75 times
Payables Payment Period = 365 ÷ 8.75 = 41.7 days ≈ 42 days
Interpretation: Debtors pay in 46 days on average, while the company pays its creditors in 42 days. This means the company collects later than it pays — a potential cash flow concern. Ideally, collection period should be less than payment period.
📈 Numerical 5 — Fixed Assets, Net Assets and Working Capital Turnover
Question: Net Revenue from Operations ₹15,00,000 | Net Fixed Assets ₹5,00,000 | Capital Employed ₹10,00,000 | Current Assets ₹4,00,000 | Current Liabilities ₹1,50,000
Working Capital = 4,00,000 − 1,50,000 = ₹2,50,000
Fixed Assets Turnover = 15,00,000 ÷ 5,00,000 = 3 times
Net Assets Turnover = 15,00,000 ÷ 10,00,000 = 1.5 times
Working Capital Turnover = 15,00,000 ÷ 2,50,000 = 6 times
📈 Numerical 6 — Profitability Ratios (All Five)
Question: Net Revenue from Operations ₹10,00,000 | Cost of Revenue ₹6,00,000 | Operating Expenses ₹1,00,000 | Interest on Debt ₹50,000 | Tax ₹1,00,000 | Capital Employed ₹12,00,000
Working the P&L chain:
Gross Profit = 10,00,000 − 6,00,000 = ₹4,00,000
Operating Profit (PBIT) = 4,00,000 − 1,00,000 = ₹3,00,000
PBT = 3,00,000 − 50,000 = ₹2,50,000
PAT = 2,50,000 − 1,00,000 = ₹1,50,000
Operating Cost = Cost of Revenue + Operating Expenses = 6,00,000 + 1,00,000 = ₹7,00,000
Gross Profit Ratio = (4,00,000 ÷ 10,00,000) × 100 = 40%
Operating Ratio = (7,00,000 ÷ 10,00,000) × 100 = 70%
Operating Profit Ratio = (3,00,000 ÷ 10,00,000) × 100 = 30%
Check: Operating Ratio + Operating Profit Ratio = 70% + 30% = 100% ✔
Net Profit Ratio (after tax) = (1,50,000 ÷ 10,00,000) × 100 = 15%
Return on Investment = (3,00,000 ÷ 12,00,000) × 100 = 25%
📈 Numerical 7 — Missing Figure: Find Current Assets and Current Liabilities
Question (Board Pattern): Current Ratio = 2.5 : 1. Working Capital = ₹1,20,000. Find Current Assets and Current Liabilities.
Method: Let Current Liabilities = x. Then Current Assets = 2.5x.
Working Capital = CA − CL = 2.5x − x = 1.5x = ₹1,20,000
x = 1,20,000 ÷ 1.5 = ₹80,000 (Current Liabilities)
Current Assets = 2.5 × 80,000 = ₹2,00,000
Verify: CR = 2,00,000 ÷ 80,000 = 2.5 ✔. WC = 2,00,000 − 80,000 = 1,20,000 ✔
📈 Numerical 8 — Missing Figure: Find Inventories
Question (Board Pattern): Current Ratio = 3 : 1. Quick Ratio = 1.5 : 1. Current Liabilities = ₹60,000. Find Inventories. (Assume no prepaid expenses.)
Method:
Current Assets = 3 × 60,000 = ₹1,80,000
Quick Assets = 1.5 × 60,000 = ₹90,000
Inventories = CA − Quick Assets = 1,80,000 − 90,000 = ₹90,000
Logic: The difference between Current Assets and Quick Assets is exactly the illiquid portion — Inventories + Prepaid Expenses. If prepaid = 0, then Inventories = CA − QA.
📈 Numerical 9 — Missing Figure: Find Capital Employed from ROI
Question: ROI = 20%. Net Profit Before Interest and Tax = ₹2,40,000. Shareholders' Funds = ₹8,00,000. Find Long-term Debt.
Method:
ROI = (NPBIT / Capital Employed) × 100
20 = (2,40,000 / CE) × 100
CE = (2,40,000 / 20) × 100 = ₹12,00,000
Capital Employed = Shareholders' Funds + Long-term Debt
12,00,000 = 8,00,000 + LTD
Long-term Debt = 12,00,000 − 8,00,000 = ₹4,00,000
📈 Numerical 10 — Comprehensive: Multiple Ratios from One Data Set
Question: From the Balance Sheet extract of Jupiter Ltd., calculate: (a) Current Ratio, (b) Debt to Equity Ratio, (c) Proprietary Ratio, (d) Working Capital Turnover Ratio.
Share Capital ₹6,00,000 | General Reserve ₹2,00,000 | Surplus (P&L) ₹50,000 | 10% Debentures ₹3,00,000 | Trade Payables ₹1,00,000 | Provision for Tax ₹50,000 | Fixed Assets ₹8,00,000 | Inventories ₹2,00,000 | Trade Receivables ₹1,50,000 | Cash ₹50,000 | Net Revenue from Operations ₹12,00,000
Share Capital ₹6,00,000 | General Reserve ₹2,00,000 | Surplus (P&L) ₹50,000 | 10% Debentures ₹3,00,000 | Trade Payables ₹1,00,000 | Provision for Tax ₹50,000 | Fixed Assets ₹8,00,000 | Inventories ₹2,00,000 | Trade Receivables ₹1,50,000 | Cash ₹50,000 | Net Revenue from Operations ₹12,00,000
Identification: Shareholders' Funds = 6,00,000 + 2,00,000 + 50,000 = ₹8,50,000. Long-term Debt = ₹3,00,000. Current Liabilities = 1,00,000 + 50,000 = ₹1,50,000. Total Assets = 8,50,000 + 3,00,000 + 1,50,000 = ₹13,00,000. Current Assets = 2,00,000 + 1,50,000 + 50,000 = ₹4,00,000. Working Capital = 4,00,000 − 1,50,000 = ₹2,50,000.
(a) Current Ratio = 4,00,000 ÷ 1,50,000 = 2.67 : 1
(b) Debt to Equity = 3,00,000 ÷ 8,50,000 = 0.35 : 1
(c) Proprietary Ratio = 8,50,000 ÷ 13,00,000 = 0.654 (65.4%)
(d) Working Capital Turnover = 12,00,000 ÷ 2,50,000 = 4.8 times
⚡ Quick Recall — All 19 Ratios at a Glance
Liquidity: Current = CA/CL (ideal 2:1). Quick = QA/CL (ideal 1:1). QA = CA − Inv − Prepaid.
Solvency: D/E = LTD/SF. TA/Debt = Total Assets/LTD. Proprietary = SF/TA. ICR = NPBIT/Interest. D/CE = LTD/CE.
Activity: ITR = Cost/Avg Inv. TRTR = Credit Revenue/Avg TR. TPTR = Credit Purchases/Avg TP. FATR = Revenue/Net FA. NATR = Revenue/CE. WCTR = Revenue/WC.
Profitability: GP% = (GP/Rev)x100. Op Ratio = (OC/Rev)x100. Op Profit% = (OP/Rev)x100. NP% = (PAT/Rev)x100. ROI = (NPBIT/CE)x100.
Key: Capital Employed = SF + LTD = TA − CL. Operating Profit = GP − Operating Expenses. Operating Ratio + Operating Profit Ratio = 100%.
Days: Days Inventory = 365/ITR. Debtors Collection Period = 365/TRTR. Creditors Payment Period = 365/TPTR.
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40 MCQs — Accounting Ratios
Q 1–20: Formulas, meanings and types. Q 21–40: Numerical and board application.
📚 Section B1 — Concepts and Formulas (Q 1–20)
1
The ideal value of Current Ratio is:
A1 : 1
B2 : 1
C3 : 1
D0.5 : 1
Answer: B. Ideal Current Ratio = 2 : 1. This means Current Assets should be twice the Current Liabilities. Quick Ratio ideal is 1:1.
2
Quick Assets are calculated as:
ACurrent Assets − Trade Payables
BCurrent Assets − Inventories only
CCurrent Assets − Inventories − Prepaid Expenses
DTotal Assets − Fixed Assets
Answer: C. Quick Assets = CA − Inventories − Prepaid Expenses. Both are excluded because they cannot be quickly converted to cash — inventories need to be sold first; prepaid cannot be recovered.
3
Which of the following is NOT included in Quick Assets?
ATrade Receivables
BCash and Bank Balances
CStock (Inventories)
DShort-term Investments (Marketable Securities)
Answer: C. Inventories are excluded from Quick Assets because they require time to sell. Trade Receivables, Cash, and Short-term Investments are all liquid and included.
4
The Debt to Equity Ratio is calculated as:
ATotal Assets ÷ Shareholders' Funds
BLong-term Debt ÷ Shareholders' Funds
CTotal Liabilities ÷ Total Assets
DCurrent Liabilities ÷ Shareholders' Funds
Answer: B. Debt to Equity = Long-term Debt / Shareholders' Funds. Uses only long-term debt (not total liabilities). Shareholders' Funds = Share Capital + Reserves and Surplus.
5
Interest Coverage Ratio measures:
AThe proportion of total assets funded by equity
BThe ability to repay long-term principal
CHow many times operating profit covers the interest obligation
DNet profit as a percentage of revenue
Answer: C. ICR = NPBIT / Interest. It shows how many times the firm's operating earnings (before interest and tax) cover its interest expense. Higher = more comfortable margin of safety.
6
Capital Employed is correctly defined as:
ATotal Assets only
BFixed Assets + Inventories
CShareholders' Funds + Long-term Debt = Total Assets − Current Liabilities
DRevenue from Operations − Operating Expenses
Answer: C. Capital Employed = SF + LTD. Alternatively, CE = Total Assets − Current Liabilities. Both give the same answer and are used for Debt to CE Ratio, Net Assets Turnover, and ROI.
7
The formula for Inventory Turnover Ratio is:
AGross Profit ÷ Average Inventory
BCost of Revenue from Operations ÷ Average Inventory
CNet Revenue ÷ Closing Inventory
DAverage Inventory ÷ Cost of Revenue × 365
Answer: B. ITR = Cost of Revenue from Operations / Average Inventory. Use Average Inventory = (Opening + Closing) / 2. Use Net Revenue only when cost is not given.
8
Debtors Collection Period is calculated as:
ATrade Receivables Turnover × 365
B365 ÷ Trade Receivables Turnover Ratio
CAverage Trade Receivables × Net Credit Sales
DNet Credit Sales ÷ 365
Answer: B. DCP = 365 / TRTR. A lower DCP means the company collects cash from debtors faster — better liquidity management.
9
Which of the following ratios uses Net Credit Purchases (not Net Revenue) in its numerator?
ATrade Receivables Turnover Ratio
BInventory Turnover Ratio
CTrade Payables Turnover Ratio
DFixed Assets Turnover Ratio
Answer: C. TPTR = Net Credit Purchases / Average Trade Payables. This ratio measures how quickly the company pays its creditors.
10
Gross Profit Ratio is expressed as:
AGross Profit ÷ Total Assets × 100
BNet Profit ÷ Net Revenue × 100
C(Gross Profit ÷ Net Revenue from Operations) × 100
D(Gross Profit ÷ Cost of Revenue) × 100
Answer: C. GP Ratio = (GP / Net Revenue from Operations) × 100. GP = Net Revenue − Cost of Revenue from Operations. Always divide by Net Revenue (denominator), not Cost.
11
Operating Ratio + Operating Profit Ratio always equals:
AGross Profit Ratio
BNet Profit Ratio
C100%
D200%
Answer: C. Operating Ratio = (Operating Cost / Revenue) × 100. Operating Profit Ratio = (Operating Profit / Revenue) × 100. Since Operating Cost + Operating Profit = Revenue, together they = 100%.
12
Finance Costs (Interest Expense) are classified as:
AAn operating expense included in Operating Cost
BA non-operating expense excluded from Operating Cost
CPart of Cost of Revenue from Operations
DA direct manufacturing expense
Answer: B. Finance Costs (Interest) are non-operating expenses. They are NOT included in Operating Cost when computing Operating Ratio. Operating Profit = Gross Profit − Operating Expenses (excludes Finance Costs).
13
Return on Investment (ROI) is calculated as:
A(Net Profit After Tax / Revenue) × 100
B(Net Profit Before Interest and Tax / Capital Employed) × 100
C(Gross Profit / Total Assets) × 100
D(PAT / Shareholders' Funds) × 100
Answer: B. ROI = (NPBIT / Capital Employed) × 100. Uses profit BEFORE interest and tax so that the ratio reflects earnings power of all capital (debt + equity) without being distorted by financing or tax decisions.
14
Which ratio category includes Inventory Turnover, Trade Receivables Turnover, and Working Capital Turnover?
ALiquidity Ratios
BSolvency Ratios
CActivity (Turnover) Ratios
DProfitability Ratios
Answer: C. Activity Ratios (also called Turnover Ratios) measure how efficiently the company uses its assets to generate revenue. They include all 6 turnover ratios listed above.
15
Proprietary Ratio is calculated as:
AShareholders' Funds ÷ Total Assets
BTotal Assets ÷ Shareholders' Funds
CLong-term Debt ÷ Total Assets
DShareholders' Funds ÷ Long-term Debt
Answer: A. Proprietary Ratio = Shareholders' Funds / Total Assets. A higher ratio means more of the assets are equity-financed — lower financial risk. Note: this is the inverse of Financial Leverage.
16
Which of the following is a Solvency Ratio?
ACurrent Ratio
BGross Profit Ratio
CInventory Turnover Ratio
DTotal Assets to Debt Ratio
Answer: D. Total Assets to Debt Ratio is a Solvency Ratio. Current Ratio is Liquidity; Gross Profit Ratio is Profitability; Inventory Turnover is Activity.
17
A high Inventory Turnover Ratio generally indicates:
AEfficient stock management and fast-moving goods
BOverstocking of inventory
CSlow-moving or obsolete stock
DPoor sales performance
Answer: A. A high ITR means inventory is being sold and replaced quickly — products are moving fast. Low ITR suggests goods are piling up — slow movement or overstocking.
18
Which limitation of Ratio Analysis makes comparison between two companies in different accounting periods unreliable?
ADifferent accounting policies (e.g., FIFO vs LIFO for inventory valuation)
BBoth companies having the same auditor
CBoth companies being profitable
DRatios being too easy to compute
Answer: A. If two companies use different accounting methods (e.g., SLM vs WDV depreciation, or FIFO vs Weighted Average for inventory), their ratios are not directly comparable even for the same period.
19
[Assertion-Reason] Assertion (A): Quick Ratio is a better test of short-term liquidity than Current Ratio. Reason (R): Quick Ratio excludes inventories and prepaid expenses which are less liquid than other current assets.
ABoth A and R are true and R is the correct explanation of A
BBoth A and R are true but R does not explain A
CA is true; R is false
DA is false; R is true
Answer: A. A is correct — Quick Ratio is more stringent. R is correct and is the direct reason: inventories cannot be quickly turned to cash (need sale + collection), and prepaid expenses have no cash realisable value.
20
Which of the following BEST summarises the relationship between Operating Profit and Finance Costs?
AOperating Profit includes Finance Costs as an operating expense
BOperating Profit is calculated BEFORE deducting Finance Costs; PBT is calculated AFTER
CFinance Costs are added back to get Operating Profit from Net Profit
DOperating Profit and Net Profit are the same if there are no Finance Costs
Answer: B. Operating Profit = Gross Profit − Operating Expenses (Finance Costs excluded). PBT = Operating Profit − Finance Costs. So NPBIT = Operating Profit which is used for ROI and ICR.
Section B2 — Numerical and Application (Q 21–40)
21
Current Assets = ₹3,00,000; Current Liabilities = ₹1,50,000. Current Ratio is:
A0.5 : 1
B2 : 1
C3 : 1
D1.5 : 1
Answer: B. CR = 3,00,000 / 1,50,000 = 2 : 1 (exactly the ideal ratio).
22
Current Assets ₹2,40,000; Inventories ₹60,000; Prepaid Expenses ₹20,000; Current Liabilities ₹80,000. Quick Ratio is:
A3 : 1
B2 : 1
C1 : 1
D2.5 : 1
Answer: B. Quick Assets = 2,40,000 − 60,000 − 20,000 = ₹1,60,000. QR = 1,60,000 / 80,000 = 2 : 1.
23
Shareholders' Funds ₹6,00,000; Long-term Borrowings ₹4,00,000. Debt to Equity Ratio is:
A1.5 : 1
B0.67 : 1
C2 : 1
D0.5 : 1
Answer: B. D/E = 4,00,000 / 6,00,000 = 0.67 : 1. The company has ₹0.67 of debt per ₹1 of equity — moderate leverage.
24
Shareholders' Funds ₹5,00,000; Total Assets ₹8,00,000. Proprietary Ratio is:
A62.5%
B160%
C0.625 (or 62.5%)
D0.375
Answer: C. Proprietary Ratio = 5,00,000 / 8,00,000 = 0.625. Option A (62.5%) and C express the same value — C is more precise as it includes both forms. 62.5% of assets are equity-financed.
25
NPBIT = ₹1,20,000; Interest on Long-term Debt = ₹40,000. Interest Coverage Ratio is:
A0.33 times
B3 times
C1.2 times
D80,000
Answer: B. ICR = 1,20,000 / 40,000 = 3 times. The company earns 3 times its interest obligation — considered comfortable (above 2 is generally safe).
26
Cost of Revenue ₹9,00,000; Opening Inventory ₹60,000; Closing Inventory ₹1,40,000. ITR is:
A6.43 times
B9 times
C15 times
D6 times
Answer: B. Average Inventory = (60,000 + 1,40,000) / 2 = ₹1,00,000. ITR = 9,00,000 / 1,00,000 = 9 times.
27
Inventory Turnover Ratio = 6 times. Days Inventory is:
A6 days
B30 days
C60.83 days (approximately 61 days)
D12 days
Answer: C. Days Inventory = 365 / ITR = 365 / 6 = 60.83 days. Inventory is held for approximately 61 days on average before sale.
28
Net Credit Revenue ₹10,00,000; Opening Trade Receivables ₹50,000; Closing TR ₹1,50,000. Trade Receivables Turnover is:
A6.67 times
B10 times
C20 times
D5 times
Answer: B. Average TR = (50,000 + 1,50,000) / 2 = ₹1,00,000. TRTR = 10,00,000 / 1,00,000 = 10 times. DCP = 365/10 = 36.5 days.
29
Net Revenue ₹18,00,000; Net Fixed Assets ₹6,00,000. Fixed Assets Turnover Ratio is:
A3 times
B0.33 times
C6 times
D18 times
Answer: A. FATR = 18,00,000 / 6,00,000 = 3 times. For every ₹1 of fixed assets, the company generates ₹3 of revenue — efficient asset utilisation.
30
Net Revenue ₹12,00,000; Working Capital ₹2,00,000. Working Capital Turnover Ratio is:
A2 times
B0.17 times
C6 times
D24 times
Answer: C. WCTR = 12,00,000 / 2,00,000 = 6 times. Working Capital cycles through 6 times in the year to generate the annual revenue.
31
Net Revenue ₹8,00,000; Cost of Revenue ₹5,00,000. Gross Profit Ratio is:
A62.5%
B37.5%
C60%
D40%
Answer: B. GP = 8,00,000 − 5,00,000 = ₹3,00,000. GP Ratio = (3,00,000 / 8,00,000) × 100 = 37.5%.
32
Net Revenue ₹10,00,000; Cost of Revenue ₹6,00,000; Operating Expenses ₹1,50,000. Operating Ratio is:
A75%
B60%
C25%
D65%
Answer: A. Operating Cost = 6,00,000 + 1,50,000 = ₹7,50,000. Op Ratio = (7,50,000 / 10,00,000) × 100 = 75%. Operating Profit Ratio = 25% (since 75% + 25% = 100%).
33
If Operating Ratio is 68%, Operating Profit Ratio is:
A68%
B168%
C32%
DCannot be determined
Answer: C. Operating Ratio + Operating Profit Ratio = 100%. So Operating Profit Ratio = 100% − 68% = 32%. This relationship always holds true.
34
PAT = ₹1,80,000; Net Revenue = ₹9,00,000. Net Profit Ratio is:
A5 times
B20%
C2%
D50%
Answer: B. NP Ratio = (1,80,000 / 9,00,000) × 100 = 20%.
35
NPBIT = ₹3,00,000; Capital Employed = ₹15,00,000. Return on Investment is:
A5 times
B50%
C20%
D0.2 times
Answer: C. ROI = (3,00,000 / 15,00,000) × 100 = 20%.
36
[Missing Figure] Current Ratio = 3:1; Working Capital = ₹80,000. Find Current Liabilities.
A₹1,20,000
B₹40,000
C₹60,000
D₹80,000
Answer: B. Let CL = x, CA = 3x. WC = 3x − x = 2x = 80,000. x = ₹40,000 (CL). CA = 3 × 40,000 = ₹1,20,000. Verify: CR = 1,20,000/40,000 = 3 ✔
37
[Missing Figure] Current Ratio = 2.5:1; Quick Ratio = 1.5:1; Current Liabilities = ₹80,000. Inventories (assuming no prepaid) are:
A₹1,20,000
B₹2,00,000
C₹80,000
D₹40,000
Answer: C. CA = 2.5 × 80,000 = ₹2,00,000. Quick Assets = 1.5 × 80,000 = ₹1,20,000. Inventories = CA − QA = 2,00,000 − 1,20,000 = ₹80,000.
38
Share Capital ₹5,00,000; General Reserve ₹1,00,000; 12% Debentures ₹2,00,000; Current Liabilities ₹1,00,000. Capital Employed is:
A₹9,00,000
B₹8,00,000
C₹7,00,000
D₹6,00,000
Answer: B. CE = SF + LTD = (5,00,000 + 1,00,000) + 2,00,000 = ₹8,00,000. Current Liabilities are excluded from Capital Employed.
39
Trade Receivables Turnover Ratio = 8 times. Debtors Collection Period (in days) is:
A8 days
B46 days
C45.6 days (approximately 46 days)
D30 days
Answer: C. DCP = 365 / 8 = 45.625 days ≈ 46 days. Options B and C are very close; C is more precise. Debtors take about 46 days on average to pay.
40
[Board Pattern] If Current Ratio = 2:1 and a company repays a short-term loan of ₹50,000 using cash, the new Current Ratio will:
ADecrease below 2:1
BIncrease above 2:1
CRemain exactly 2:1
DBecome exactly 1:1
Answer: B. Example: CA = 4,00,000; CL = 2,00,000; CR = 2. After repayment: CA = 3,50,000; CL = 1,50,000; CR = 3,50,000/1,50,000 = 2.33 (above 2). When CR > 1, using cash to pay liabilities always INCREASES CR.
Chapter 12 — Live Quiz
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