Classification of Accounting Ratios

1 Mark Questions

1. State with reason whether repayment of long-term loan will result in increase,

decrease or no change of debt equity ratio. (All India 2012; hots)

Ans. Repayment of long-term loan will reduce the long-term debt but the share holders' funds will remain same. Therefore, the debt-equity ratio will decrease.

1. What will be the operating profit ratio, if operating ratio is 83.64%? (Delhi 2009) Ans. Operating Profit Ratio = 100 – Operating Ratio = 100-83.64 = 16.36%
2. What will be the operating profit ratio, if operating ratio is 88.94%? (Delhi 2009) Ans. Operating Profit Ratio = 100 – Operating Ratio = 100-88.94 = 11.06%
3. What will be the operating profit ratio, if operating ratio is 81.38%? (All India 2009) Ans. Operating Profit Ratio = 100 – Operating Ratio = 100- 81.38 = 18.62%
4. What will be the operating profit ratio, if operating ratio is 88.34%? (All India 2009) Ans. Operating Profit Ratio = <math>100 - \text{Operating Ratio} = 100 - 88.34 = 11.66\%</math>.
5. The gross profit ratio of a company is 50%. State with reason whether the decrease in rent received by Rs 15,000 will increase, decrease or not change the ratio.(Delhi 2009; HOTS)

Ans. Decrease in rent received by Rs 15,000 will not change the gross profit because rent received is a non-operating income.

1. The current ratio of a company is 3: 1. State with reason, whether the payment

of? 20,000 to the creditors will increase, decrease or not change the ratio.(All India 2009; HOTS)

Ans. After the payment of? 20,000 to the creditors, both the total of current assets and total of current liabilities will be reduced by the same amount. Therefore, the current ratio will increase.

1. Quick ratio of a company is 1.5:1. State giving reason whether the ratio will

improve, decline or not change on payment of dividend by the company. (Delhi 2008; hots)

Ans. Ratio will increase as both the current assets and current liabilities will decrease on the payment of dividend.

1. The inventory turnover ratio of a company is 3 times. State giving reason,

whether the ratio will improve, decline or not change because of increase in the value of closing Inventory by ? 5,000. (Delhi 2008; hots)

Ans. Stock turnover ratio will decline because increase in the value of closing stock by ?5,000 will increase the value of average Inventory and decrease the cost of goods sold.

1. The debt-equity ratio of a company is 0.8:1. State whether the long-term loan

obtained by the company will improve, decrease or not change the ratio. (All India 2008; hots)

Ans. Debt equity ratio will improve as the long-term debts will decrease, but total shareholders' funds remain unchanged.

3 Marks Questions

11.OM Ltd has a current ratio of 3.5: 1 and quick ratio of 2: 1. If the excess of current assets over quick assets as represented by inventory is Rs 1,50,000, calculate current assets and current liabilities. (Delhi2012)

Ans.

Let the current liabilities = x

Current ratio = 3.5:1 i.e. Current Assets <math>= \frac{3.5}{}</math> Current Liabilities

Therefore, current assets = 3.5x

Quick ratio = 2:1 i.e. <math>\frac{\text{Liquid Assets}}{\text{Current Liabilities}} = \frac{2}{1}</math>

Therefore, quick or liquid assets = 2x

Liquid Assets = Current Assets - Inventory

<math>2x = 3.5x - 1,50,000</math>

<math>2x - 3.5x = -1,50,000</math>

<math>-1.5 x = -1,50,000</math>

<math display="block">x = -\frac{1,50,000}{-1.5}</math>

<math>x = 7,00,000</math>

Current liabilities = ₹ 1,00,000

Current assets = <math>3.5 \times 1,00,000 = ₹ 3,50,000</math>