DK Goel Solutions Class 12 Accountancy Chapter 5 Accounting Ratios

Short  Answer  Questions

Question . 1.  

Solution  . 1      Ratio analysis is the quantitative measurement of the performance of a business. It ignores the qualitative factors. For example while calculating the credit analysis of a customer seeking credit, he may deserve the credit to be granted on the basis of financial statements submitted by him but in reality his character and credit worthiness mat be doubtful.

Question . 2.  

Solution  . 2        

(a) Analysis for short term debts :- Liquidity Ratio 

(b) Analysis for long term debts :- Solution vency Ratio

Question . 3.     

Solution  . 3         The Current Ratio of a Company is 3:1 means that current assets of a business thrice of its current liabilities. The higher the ratio the better it is, because the firm will be able to pay its current liabilities more easily. But a much higher ratio may be considered to be adverse from the view point of management on account of the following reasons:

1.) A much higher ratio indicates that inventory might be pilling up because of poor sales.

2.) Large amount is locked up in trade receivables due to inefficient collection policy.

Question . 4. 

Solution  . 4      Window Dressing: Some companies in order to cover up their bad financial position resort to window dressing i.e., showing a better position than the one which really exists. They change their balance sheet in such a way that the important fact and truth may be concealed.

Question . 5.    

Solution  . 5      Some companies in order to cover up their bad financial position resort to window dressing i.e., showing a better position than the one which really exists. They change their balance sheet in such a way that the important fact and truth may be concealed. For example, the current assets of a company are Rs. 1,00,000 and its current liabilities are Rs. 50,000, so the current ratio is 2:1. After this, it purchased goods for Rs. 50,000 for credit in the month of March. If it records the purchases, the current assets will increase to Rs. 1,50,000 and current liabilities will increase to Rs. 1,00,000. As a result, the current ratio will be reduced to 3:2. The company may pass the entry for purchase in the beginning of the next year or may postpone the purchase itself for a few days.

Question . 6.     

Solution  . 6      Current Ratio:- The ratio explains the relationship between current assets and current liabilities of a business. The formula for calculating the ratio is

Quick Ratio:- Quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately. As such, the quick ratio is calculated by dividing liquid assets (Quick Current Assets) by current liabilities:

Question . 7.    

Solution  . 7      Quick Ratio is a better test of short-term financial position of the company than the current ratio, as it considers only those assets which can be easily and readily converted into cash. Inventory is not included in liquid assets as it may take a lot of time before it is converted into cash.

Question . 8.   

Solution  . 8      Shareholder’s Funds included Share Capital and Reserve & Surplus.

Question . 9. 

Solution  . 9      Equity shareholders fund included Equity Share Capital.

Question . 10.   

Solution  . 10    This ratio expresses the relationship between long term debts and shareholder’s funds. It indicates the proportion of funds which are acquired by long-term borrowings in comparison to shareholder’s funds. This ratio is calculated to ascertain the soundness of the long-term financial policies of the firm.

Question . 11.   

Solution  . 11       The higher ratio of inventory turnover ratio indicates that inventory is selling quickly. In a business where inventory turnover ratio is high goods can be sold at a low margin of profit and even then the profitability may be quite high.

A low inventory turnover ratio indicates that inventory does not sell quickly and remains lying in the godown for quite a long time. This results in increased storage costs, blocking of funds and losses on accounts of goods becoming obsolete or un-sale able.

Question . 12.   

Solution 12.

Working Note:-

Credit Revenue from Operations = Total Revenue from Operations – Cash Revenue from Operations

Credit Revenue from Operations = Rs. 2,00,000 – Rs. 40,000

Credit Revenue from Operations = Rs. 1,60,000

Trade Receivables Turnover Ratio indicates the  relationship between credit Revenue from Operations and average trade receivables during the year.

Question . 13.   

Solution . 13       I. A too low trade receivables turnover ratio will indicate the liberal and inefficient credit and collection policy of the management. It shows that more money is being locked-up in trade receivables which will result in higher bad-debts, increase in cost of collection and also the loss of interest on the money due form trade receivables. 

II. The higher ratio of inventory turnover ratio indicates that inventory is selling quickly. In a business where inventory turnover ratio is high goods can be sold at a low margin of profit and even then the profitability may be quite high.

Question .14.   

Solution . 14    A too low trade receivables turnover ratio will indicate the liberal and inefficient credit and collection policy of the management. It shows that more money is being locked-up in trade receivables which will result in higher bad-debts, increase in cost of collection and also the loss of interest on the money due form trade receivables.

Question . 15.  

Solution . 15    A high trade receivables turnover ratio indicates the prompt payment by trade receivables but a too high ratio may be the result of restrictive credit and collection policy of the management which may curtail the sales and hence may adversely affect the profits.

Question . 16.   

Solution  . 16    There may be different accounting policies adopted by different firms with regard to providing depreciation, creation of provision for doubtful debts, method of valuation of closing inventory etc. For instance, one firm may adopt the policy of charging depreciation on straight-line basis, while other way charges on written-down value method. Such difference makes the accounting ratios incomparable.

Question . 17. 

Solution  . 17    Price level over the years goes on charging, therefore, the ratio of various years cannot be compared. For example, one firm sells 1,000 Machines for Rs. 10 Lakhs during 2017; it again sells 1,000 Machines of the same type in 2018 but owing to rising price the sale price was Rs. 15 Lakhs. On the basis of ratios it will be concluded that the sales have increased by 50%, whereas in actual, sales have not increased at all. Hence the figures of the past year must be adjusted in the light of price level changes before the ratios for these years are compared.

Question . 18.

Solution  . 18       (i) Debt-Equity Ratio:- This ratio expresses the relationship between long term debts and shareholder’s funds. It indicates the proportion of funds which are acquired by long-term borrowings in comparison to shareholder’s funds. This ratio is calculated to ascertain the soundness of the long-term financial policies of the firm.

Question . 19.   

Solution . 19       (i) Gross Profit Ratio:- This Ratio establishes a relationship between Gross Profit and Revenue from Operations i.e. Net Sales. This ratio is computed and presented in percentage. The formula for computing this ratio is:

Question . 20.  

Solution . 20       (i) Debt-Equity Ratio:- This ratio expresses the relationship between long term debts and shareholder’s funds. It indicates the proportion of funds which are acquired by long-term borrowings in comparison to shareholder’s funds. This ratio is calculated to ascertain the soundness of the long-term financial policies of the firm.

Question . 21.   

Solution . 21       (i) Gross Profit Ratio:- This Ratio establishes a relationship between Gross Profit and Revenue from Operations i.e. Net Sales. This ratio is computed and presented in percentage. The formula for computing this ratio is:

Numerical Questions:-

Question .1.    

Solution .1

Question .2.     

Solution .2

Question .3.       

Solution .3.

Comment: The short term financial position of the company is quite satisfactory because its current ratio is 3;2;1, which is more than the ideal current ratio of 2:1. Liquid ratio of the company is 1.4:1, which is also more than the ideal liquid ratio of 1:1.

Therefore, it can be said that the company is in a position to pat its current liabilities instantly.

Question .4    

Solution . 4          

Comment: The ideal current ratio should be 2:1. But in this case the current ratio is 1.92:1 which is less than the ideal ratio. Therefore, it can be said that the short-term financial position of the company is not satisfactory.

The ideal quick ratio should be 1:1. But in this case the quick ratio is .78: 1, hence, the short- term financial position cannot be said to be satisfactory.

Question .5.     

Solution .5

Question .6.    

Solution .6

Question .7 (A) 

Solution .7(A)   Current Ratio as given in the question is 2:1. In order to understand the question in a simple manner, it may be assured that current assets are Rs. 2,00,000 and current liabilities are Rs. 1,00,000.

Question .7 (B)  

Solution .7 (B)     Current Ratio as given in the question 2.5:2. Hence, it may be assured that Current Assets are Rs. 2,50,000 and current Liabilities are RS. 1,00,000.

Question .8. 

Solution .8           Statement showing the effect of various transactions on Current Ratio:

Question .9.   

Solution .9          

Statement showing the effect of various transactions on Current Ratio;

Question .10.

Solution .10

Question .11. 

Solution .11

Question .12.  

Current liabilities = Total debt – Long term Debt

= Rs. 2,00,000 – Rs. 80,000 = Rs. 1,20,000

Current Assets = Working Capital + Current Liabilities

= Rs. 1,92,000 + Rs. 1,20,000 = Rs. 3,12,000

Question .13.   

Solution .13        Current liabilities = Trade Payables – Bank Overdraft

= Rs. 2,00,000 – Rs. 40,000 = Rs. 2,40,000

Current Assets = Working Capital + Current Liabilities

= Rs. 4,80,000 + Rs. 2,40,000 = Rs. 7,20,000

Question .14.    .

Solution .14.       

Question .15 (A). 

Solution .15 (A)

Question .15 (B).   

Solution .15 (B)  

Question .16.(A).  

Solution .16 (A)

Given: Question uick Ratio=1.5, Current Liabilities = Rs. 1,60,000

Question uick Assets = Rs. 1,60,000 × 1.5 = RS. 2,40,000

Inventory = Current Assets – liquid Assets

= Rs. 3,20,000 – Rs. 2,40,000 = RS. 80,000

Question .16.(B).

Solution .16 (B)

Given: Quick Ratio=0.95

Calculated: Current Liabilities = Rs. 6,80,000

Quick Assets = Rs. 6,80,000 × 0.95 = RS. 6,46,000

Inventory = Current Assets – liquid Assets

= Rs.17,00,000 – Rs.6,46,000 = RS. 10,54,000

Question .16.(C).   

Solution .16(C)

Question .17.  

Solution  .17

Working Capital = Current Assets – Current Liabilities

Current Ratio = 4:1 , therefore, based on current ratio, the working capital is 4-1=3

If Working Capital is 3, Current Assets = 4

Question .18. 

Solution  .18

Comment: the short term financial position of the enterprise is satisfactory because its liquid ratio is 1.35:1, which is above the ideal ratio of 1:1.

Question .19.   

Solution .19

Question .20.  

Solution .20

Question .21.    

Solution .21       

Current Ratio is 4.5 and Question uick ratio is 3

Difference between current ratio and quick ratio is inventory.

Therefore, inventory is 4.5-3=1.5.

If Inventory is 1.5, Current Assets = 4.5

Question .22.(A)     

Solution .22 (A) 

Calculation of Quick Ratio:

Quick Assets (Liquid Assets)        = Current Assets – Inventory – Prepaid Expenses

                                                                = Rs. 85,000 – Rs. 22,000 – Rs. 3,000

                                                                = Rs. 60,000

Current Liabilities                             = Current Assets – working Capital

                                                                = Rs. 85,000 -Rs. 45,000

                                                                = Rs. 40,000

Question .22.(B)      

Solution .22(B)              Calculation of Current Ratio:

Current Assets                                  = Quick Assets – Inventory – Prepaid Expenses

                                                                = Rs. 90,000 – Rs. 1,08,000 – Rs. 2,000

                                                                = Rs. 2,00,000

Current Liabilities                             = Current Assets – working Capital

                                                                = Rs. 2,00,000 -Rs. 1,50,000

                                                                = Rs. 50,000

Question .23.

Solution .23.

Current Liabilities                             = Total debt – Long term Debt

                                                                = Rs. 16,00,000 – Rs. 10,00,000

                                                                = Rs. 6,00,000

Current Assets                                  = Current Liabilities + working Capital

                                                                = Rs. 6,00,000 -Rs. 4,80,000

                                                                = Rs. 10,80,000

Liquid Assets                                      = Current Assets – Inventory – prepaid Insurance

                                                                = Rs. 10,80,000 – Rs. 3,40,000 – RS. 20,00

                                                                = Rs. 7,20,000

Question .24   

Solution .24        Payment of current liabilities will result in equivalent reduction both in the amount of current assets as well as current liabilities.

Let the amount of current liabilities to be paid =

Or RS. 40,00,000 – 2

= 8,00,000.

Current liabilities to the extent of Rs. 8,00,000 should be paid to achieve the Current Ratio at the level of 2:1.

Question .25. 

Solution .25

Therefore, current Assets of RS. 1,00,000 should be acquired on credit to maintain a Current Ratio of 2:1

Question .26. 

Solution .26

Question .27    

Solution .27

Question .28.   

Solution .28               

(i) Long term financial position of the Company can be assessed by calculating Debt-Equity Ratio.

Question .29.     

Solution .29

Long term Debts             = Long term Borrowings + Long term Provisions

                                              = Rs. 16,00,000 + Rs. 1,50,000

                                              = Rs. 17,50,000

Shareholder’s Funds     = Non-Current Assets + Working Capital – Non- Current Liabilities

Non- Current Assets     = Tangible Fixed Assets + Intangible Fixed Assets

                                              =Rs. 24,50,000 + Rs. 3,00,000

                                              =Rs. 27,50,000

Working Capital               = Current Assets – Current Liabilities

                                              = Rs. 3,34,000 – Rs. 84,000

                                              = Rs. 2,50,000

Non -Current Liabilities refer to Long term Debts Thus,

Shareholder’s Funds     = RS. 27,50,000 + RS. 2,50,000 – Rs. 17,50,000

                                              = RS. 12,50,000

Question .30.   

Solution .30

Question .31.  

Solution .31

In the above question, Debt – Equity Ratio is given as 1:2, therefore, it may be assumed that Long term Debts are Rs. 1,00,000 and share holders’ fund shares worth Rs. 2,00,000.

(i) Issue of Equity Shares : Suppose equity shares worth Rs. 1,00,000 are issued them by the issue of Equity shares, shareholder’s Funds will be increases and will stand at Rs. 2,00,000 + Rs. 1,00,000 = Rs. 3,00,000 therefore, the revised ratio will be ;

Therefore, it can be concluded that increased in shareholder’s funds decreased the ratio.

(ii) Cash Received from Trade Receivables: By receiving cash from Trade receivables there will be affect on the cash and trade receivables only. Hence, there will be no change in debt equity ratio because neither the long – term debt nor the shareholder’s funds are affected.

(iii) Sale of goods on cash Basis: Goods sold on cash will affect only the Inventories and Cash. Hence, there will be no change in debt- equity ratio because neither the long -term debts nor the Shareholder’s Funds are affected.

(iv) Repayment of long term Borrowings: Suppose there is repayment of long term borrowings for Rs. 50,000 then by the repayment of long-term borrowing of Rs. 50,000, Long Term Debts will be reduced by Rs. 50,000 and these will stand at Rs. 1,00,000 – Rs. 50,000 = Rs. 50,000. Therefore, the revised ratio will be:

(v) Purchase of Goods on credit: Goods purchased on Credit will affect only the inventories and trade payables. Hence, there will be no change in debt- equity ratio because neither the long -term debts nor the Shareholder’s Funds are affected.

Question .32.    

Solution .32       

Statement showing the effect of various transactions on Debt-Equity Ratio:-

Question .33.  

Solution .33

Question .34.  

Solution .34.

Note: Reserve and Surplus will be ignored since it is already included in Shareholder’s fund

Question .35  

Solution .35

Note: Surplus i.e., Balance is Statement of profit & loss will be ignored since it is already included in Reserve ad Surplus

Question .36   

Solution .36

Question .37     

Solution .37.

Question .38    

Solution .38

Question .39      

Solution .39

Question .40     

Solution .40

Question .41.     

Solution .41

Question .42.   

Solution .42

Question .43.    

Solution .43

Question .44.   

Solution .44

Comment:   Proprietary Ratio is only 20 % which means that the long term financial position of the company is not satisfactory because only 20% of the total assets of the company are funded by equity.

Comment: Normally, acceptable interest- coverage ratio is 6 or 7 times, where as the actual ratio for this company is 4. It means that the company may face difficulty in paying the interest on long- term loans regularly in case of fall of profits.

Question .45.    

Solution .45

Question .46.    

Solution  .46

Note : Carriage outwards, Salaries and Rent will by ignored while calculating Inventory Turnover Ratio.

Question .47.    

Solution .47

Note : Carriage outwards, Salaries and Rent will by ignored while calculating Inventory Turnover Ratio.

Question .48.     

Solution .48

Question . 49.     

Solution . 49

Question .50.   

Solution  .50

Question .51   

Solution .51

Question .52    

Solution .52

Question .53.    

Solution .53

Cost of revenue from Operations          = Revenue from Operations (Sales) + Gross Profit 

                                                       = Rs. 5,00,000 – 16% of 5,00,000 = Rs. 5,80,000

Cost of revenue from Operations          Opening Inventory + Purchases + Freight – Closing Inventory

Rs. 5,80,000                         = Opening Inventory + RS. 5,70,000 + RS. 20,000 – Rs. 70,000

RS. 5,80,000                         = Opening Inventory + RS. 5,20,000

Opening Inventory                 = Rs. 60,000

Question  .54.   

Solution .54

Question .55.     

Solution .55.

Cost of revenue from Operations          = Opening Inventory + Purchases + Direct Charges (i.e., Wages, carriage Inwards) – Closing Inventory

Rs. 5,60,000                                     = Rs. 75,000 + Rs. 4,40,000 + RS. 1,30,000 + Rs. 15,000 – Closing Inventory

Closing Inventory                               = RS. 6,60,000 = RS. 5,60,000 + Closing inventory

Question .56   

Solution . 56       Cost of revenue from Operations             = Revenue from operations – Gross profit

= RS. 2,00,000 – 25% of 2,00,000

= RS. 2,00,000 – RS. 50,000= RS. 1,50,000

Question .57.    

Solution .57

Gross Profit is 25% on cost. Therefore, goods costing RS. 100 is sold for RS. 125.

Hence, if Revenue from Operations are Rs. 125,

Cost of Revenue from Operations = Rs. 100

If Revenue from Operations are Rs. 10,00,000

Question .58.

Solution .58

Question .59

Solution .59

Question .60(A)         

Solution  .60(A)

Question .60 (B).   

Solution .60 (B)

Question .61. 

Solution .61

Question .62.   

Solution .62

Cost of Revenue from Operations        = 6 × 60,000 = Rs. 3,60,000

Revenue from Operations add a profit of 20% on sales.

Goods costing RS. 80 which have been sold for Rs. 100. As such:

If Cost of Revenue from operations is Rs. 80, revenue from Operations are 100.

If Cost of Revenue from Operations is 3,60,000, Revenue from Operations are   ¹⁰⁰/₈₀× 3,60,000 = RS. 4,50,000

Question .63.   

Solution .63       

Gross profit is 25% od cost. Therefore, goods costing RS. 100 is sold for RS. 125.

If Revenue from Operations are 125, Cost is 100

Current Liabilities are RS. 50,000 and Quick Ratio is 1 Therefore,

(iv) Quick Assets                                 = RS. 50,000 × 1 = Rs. 50,000

(v) Current Assets                                             = Quick Assets + Closing Inventory

                                                                      = RS. 50,000 + Rs. 50,000 = RS. 1,00,000

Question .64.     

Solution .64

Question .65.    

Solution .65

Question .66.  

Solution .66

Question .67      

Solution .67

Question . 68   

Solution .68      

In order to ascertain the Trade Receivables Turnover ratio, the figure of Credit Revenue from Operations will have to be ascertained. It is as follows:

If credit revenue from operations are 100, Cash revenue from operations will be 20 Therefore, Total revenue from operations will be 100 + 20 = 120

Again, if total revenue from operations are 120,

Credit revenue from operations=100

If total revenue from operations are 4,80,000,

It is to be noted that any fraction of a day such as .48 would, in practice, mean that the payment will be received next day. Hence, in the above case, 68.48 days would imply 69 days.

Question .69.  

Solution .69

Question .70. 

Solution .70

Calculation of closing receivables:                                                    

Opening Trade Receivables + Closing Trade Receivables = Average Trade receivables × 2

                                                                                =RS. 36,000 × 2= Rs. 72,000

As Closing Trade Receivables = Rs. 40,000,

Opening Trade Receivables = Rs. 72,000 – Rs. 40,000 = Rs. 32,000.

Question .71    

Solution .71

Question .72    

Solution .72

Question .73.  

Solution .73

Question .74.   

Solution .74

Question .75.   

Solution .75

Comment: 1.

In 2017, Trade Receivables Turnover ratio has increased from 6 times to 7.5 times. It indicates that amount from trade receivables is being collected more quickly.

2. In 2017, Inventory Turnover Ratio has also increased. It indicates that inventory is being rotated into revenue from operations more quickly. As such, the sales policy of the management is quite efficient.

Question .76.    

Solution .76

Question .77  

Solution .77

Question .78     

Solution .78

Question .79.    

Solution .79.                                           

Net Revenue from Operations           =Credit Revenue from Operations + Cash Revenue from operations- Revenue from Operations return

                                                     = Rs. 8,00,000 + Rs. 12,60,000 – Rs. 80,000

                                                     = Rs. 19,80,000

Working Capital                                =Current Assets – Current liabilities

                                                      = Rs. 7,20,000 – Rs. 3,24,000 = Rs. 3,96,000

Question .80     

Solution .80       

Current Assets = Inventory + Trade receivables + cash

                      = Rs. 6,00,000 + Rs. 5,00,000 + Rs. 1,00,000

                      = Rs. 12,00,000

Current Liabilities             = Trade Payables + Bank Overdraft

= Rs. 2,00,000 + Rs. 1,20,000

= Rs. 3,20,000

Working Capital                        =Current Assets – Current liabilities

                                             = Rs. 12,00,000 – Rs. 3,20,000

                                             = Rs. 8,80,000

Question .81.     

Solution .81

Question .82.  

Solution .82

Question .83     

Solution .83

Question .84. 

Solution .84

Question .85.(A)      

Solution .85(A)

Question .85. (B)          

Solution .85(B)

Comment: Gross Profit Ratio has decreased considerably, which indicates that the price of  materials Purchased, wages and other direct changes ,may have gone up but the sales price may not have increased in the same proportion.

Question .86(A)       

Solution .86(A)

Question .86 (B)     

Solution .86(B)

Question .87. 

Solution .87

Question .88. 

Solution .88.