NCERT Solutions for Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 5

Accounting Ratios Class 12

Chapter 5 Accounting Ratios Exercise Solutions

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Short answerslong answers : Solutions of Questions on Page Number : 272

Q1 :  

What do you mean by Ratio Analysis?


Answer :

Ratio Analysis is a technique of financial analysis. It describes the relationship between various items of Balance Sheet and Income Statements. It helps us in ascertaining profitability, operational efficiency, solvency, etc. of a firm. It may be expressed as a fraction, proportion, percentage and in times. It enables budgetary controls by assessing qualitative relationship among different financial variables. Ratio Analysis provides vital information to various accounting users regarding the financial position and viability and performance of a firm. It also lays down the basic framework for decision making and policy designing by management.

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Q2 :  

Who are the users of financial ratio analysis? Explain the significance of ratio analysis to them?


Answer :

The users of financial ratio analysis are as follows:

1. Investors

2. Management

3. Short term Creditors

4. Long term Creditors.

The following points signify the importance of ratio analysis for these users.

1. Investors- The main concern for the investors is the security of the funds invested by them in the business and returns on their investments. The security of the funds is directly related to the profitability and operational efficiency of the business. Consequently, they are interested in knowing Earnings Per Share, Return on Investment and Return on Equity.

2. Management- They uses ratio analysis to determine how effectively the assets are being used. They are interested in future growth and prospects. They design various policy measures and draft future plans. Consequently, they are interested in Activity Ratios and Profitability Ratios like, Net Profit Ratio, Debtors Turnover Ratio, Fixed Assets Turnover Ratios, etc.

3. Short-term Creditors- Short-term creditors are interested in timely payment of their debts in short run. Consequently, they are interested in Liquidity Ratios like, Current Ratio, Quick Ratios etc. These ratios reveal the current financial position of the business.

4. Long-term Creditors- Long-term creditors provide funds for more than one year, so they are interested in long term solvency of the firm and in assessing the ability of the firm to pay timely interests. Consequently, they are interested in calculating Solvency Ratios like, Debt-Equity Ratio, Proprietary Ratio, Total Assets to Debt Ratio, Interest Coverage Ratio, etc.

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Q3 :  

What are the various types of ratios?


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Q4 :  

What are liquidity ratios? Discuss the importance of current and liquid ratio.


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Q5 :  

What relationships will be established to study:

a. Inventory Turnover

b. Debtor Turnover

c. Payables Turnover

d. Working Capital Turnover.


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Q6 :  

How would you study the solvency position of the firm?


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Q7 :  

Why would the inventory turnover ratio be more important when analysing a grocery store than an insurance company?


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Q8 :  

What are important profitability ratios? How are they worked out?


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Q9 :  

The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due? Comment.


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Q10 :  

Financial ratio analysis is conducted by four groups of analysts: managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?


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Q11 :  

The average age of inventory is viewed as the average length of time inventory is held by the firm or as the average number of day's sales in inventory. Explain.


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Q12 :  

The current ratio provides a better measure of overall liquidity only when a firm's inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity. Explain.


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<< Previous Chapter 4 : Analysis of Financial Statements Next Chapter 6 : Cash Flow Statement >>

Numerical questions : Solutions of Questions on Page Number : 273

Q1 :  

Following is the Balance Sheet of Rohit and Co. as on March 31, 2006

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Share Capital

1,90,000

Fixed Assets

1,53,000

Reserves

12,500

Stock

55,800

Profit and Loss

22,500

Debtors

28,800

Bills Payables

18,000

Cash at Bank

59,400

Creditors

54,000

 

 

 

2,97,000

 

2,97,000

 

 

 

 

 

Calculate Current Ratio

 


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Q2 :  

Following is the Balance Sheet of Title Machine Ltd. as on March 31, 2006.

 

Liabilities

Amount

Rs

Assets

Amount Rs

Equity Share Capital

24,000

Buildings

45,000

8% Debentures

9,000

Stock

12,000

Profit and Loss

6,000

Debtors

9,000

Bank Overdraft

6,000

Cash in Hand

2,280

Creditor

23,400

Prepaid Expenses

720

Provision for Taxation

600

 

 

 

69,000

 

69,000

 

 

 

 

 

Calculate Current Ratio and Liquid Ratio.

 


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Q3 :  

Current Ratio is 3:5. Working Capital is Rs 9,00,000. Calculate the amount of Current Assets and Current Liabilities.


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Q4 :  

Shine Limited has a current ratio 4.5:1 and quick ratio 3:1; if the stock is 36,000, calculate current liabilities and current assets.


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Q5 :  

Current liabilities of a company are Rs 75,000. If current ratio is 4:1 and liquid ratio is 1:1, calculate value of current assets, liquid assets and stock.


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Q6 :  

Handa Ltd.has stock of Rs 20,000. Total liquid assets are Rs 1,00,000 and quick ratio is 2:1. Calculate current ratio.


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Q7 :  

Calculate debt equity ratio from the following information:

 

 

Rs

Total Assets

15,00,000

Current Liabilities

6,00,000

Total Debts

12,00,000

 

 


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Q8 :  

Calculate Current Ratio if:

Stock is Rs 6,00,000; Liquid Assets Rs 24,00,000; Quick Ratio 2:1.


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Q9 :  

Compute Stock Turnover Ratio from the following information:

 

 

Rs

Net Sales

2,00,000

Gross Profit

50,000

Closing Stock

60,000

Excess of Closing Stock over Opening Stock

20,000

 

 


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Q10 :  

Calculate following ratios from the following information:

(i) Current ratio (ii) Acid test ratio (iii) Operating Ratio (iv) Gross Profit Ratio

 

 

Rs

Current Assets

35,000

Current Liabilities

17,500

Stock

15,000

Operating Expenses

20,000

Sales

60,000

Cost of Goods Sold

30,000

 

 


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Q11 :  

From the following information calculate:

(i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current Ratio (iv) Liquid Ratio (v) Net Profit Ratio (vi) Working capital Ratio:

 

 

Rs

Sales

25,20,000

Net Profit

3,60,000

Cast of Sales

19,20,000

Long-term Debts

9,00,000

Creditors

2,00,000

Average Inventory

8,00,000

Current Assets

7,60,000

Fixed Assets

14,40,000

Current Liabilities

6,00,000

Net Profit before Interest and Tax

8,00,000

 

 


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Q12 :  

Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information:

 

 

Rs

Paid-up Capital

5,00,000

Current Assets

4,00,000

Net Sales

10,00,000

13% Debentures

2,00,000

Current Liability

2,80,000

Cost of Goods Sold

6,00,000

 

 


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Q13 :  

Calculate Stock Turnover Ratio if:

Opening Stock is Rs 76,250, Closing Stock is 98,500, Sales is Rs 5,20,000, Sales Return is Rs 20,000, Purchases is Rs 3,22,250.


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Q14 :  

Calculate Stock Turnover Ratio from the data given below:

 

 

Rs

Stock at the beginning of the year

10,000

Stock at the end of the year

5,000

Carriage

2,500

Sales

50,000

Purchases

25,000

 


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Q15 :  

A trading firm's average stock is Rs 20,000 (cost). If the stock turnover ratio is 8 times and the firm sells goods at a profit of 20% on sale, ascertain the profit of the firm.


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Q16 :  

You are able to collect the following information about a company for two years:

 

 

 

2004

 

2005

Book Debts on Apr. 01

Rs

4,00,000

Rs

5,00,000

Book Debts on Mar. 30

 

 

Rs

5,60,000

Stock in trade on Mar. 31

Rs

6,00,000

Rs

9,00,000

Sales (at gross profit of 25%)

Rs

3,00,000

Rs

24,00,000

 

Calculate Stock Turnover Ratio and Debtor Turnover Ratio if in the year 2004 stock in trade increased by Rs 2,00,000.

 


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Q17 :  

The following Balance Sheet and other information, calculate following ratios:

(i) Debt Equity Ratio (ii) Working Capital Turnover Ratio (iii) Debtors Turnover Ratio

 

Liabilities

Amount

Rs

Assets

Amount

Rs

General Reserve

80,000

Preliminary Expenses

20,000

Profit and Loss

1,20,000

Cash

1,00,000

Loan @15%

2,40,000

Stock

80,000

Bills Payable

20,000

Bills Receivables

40,000

Creditors

80,000

Debtors

1,40,000

Share Capital

2,00,000

Fixed Assets

3,60,000

 

7,40,000

 

7,40,000

 

 

 

 

 

 


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Q18 :  

The following is the summerised Profit and Loss account and the Balance Sheet of Nigam Limited for the year ended March 31, 2007 :

 

Expenses/Losses

Amount

Rs

Revenue/Gains

Amount

Rs

Opening Stock

50,000

Sales

4,00,000

Purchases

2,00,000

Closing Stock

60,000

Direct Expenses

16,000

 

 

Gross Profit

1,94,000

 

 

 

4,60,000

 

4,60,000

Salary

48,000

Gross Profit

1,94,000

Loss on Sale of Furniture

6,000

 

 

Net Profit

1,40,000

 

 

 

1,94,000

 

1,94,000

 

 

 

 

 

Balance Sheet of Nigam Limited as on March 31, 2007

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Profit and Loss

1,40,000

Stock

60,000

Creditors

1,90,000

Land

4,00,000

Equity Share Capital

2,00,000

Cash

40,000

Outstanding Expenses

70,000

Debtors

1,00,000

 

6,00,000

 

6,00,000

 

 

 

 

 

Calculate:

(i) Quick Ratio

(ii) Stock Turnover Ratio

(iii) Return on Investment

 

 


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Q19 :  

From the following, calculate (a) Debt Equity Ratio (b) Total Assets to Debt Ratio (c) Proprietary Ratio.

 

 

Rs

Equity Share Capital

75,000

Preference Share Capital

25,000

General Reserve

50,000

Accumulated Profits

30,000

Debentures

75,000

Sundry Creditors

40,000

Outstanding Expenses

10,000

Preliminary Expenses to be written-off

5,000

 


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Q20 :  

Cost of Goods Sold is Rs 1,50,000. Operating expenses are Rs 60,000. Sales is Rs 2,60,000 and Sales Return is Rs 10,000. Calculate Operating Ratio.


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Q21 :  

The following is the summerised transactions and Profit and Loss Account for the year ending March 31, 2007 and the Balance Sheet as on that date.

 

Expenses/Losses

Amount

Rs

Revenue/Gains

Amount

Rs

Opening Stock

5,000

Sales

50,000

Purchases

25,000

Closing Stock

7,500

Direct Expenses

2,500

 

 

Gross Profit

25,000

 

 

 

57,500

 

57,500

Administrative Expenses

7,500

Gross Profit

25,000

Interest

1,500

 

 

Selling Expenses

6,000

 

 

Net Profit

10,000

 

 

 

25,000

 

25,000

 

 

 

 

 

Liabilities

Amount

Rs

Assets

Amount

Rs

Share Capital

50,000

Land and Building

25,000

Current Liabilities

20,000

Plant and Machinery

15,000

Profit and Loss

10,000

Stock

7,500

 

 

Sundry Debtors

7,500

 

 

Bills Receivables

6,250

 

 

Cash in Hand and at Bank

8,750

 

 

Furniture

10,000

 

80,000

 

80,000

 

 

 

 

 

Calculate (i) Gross Profit Ratio (ii) Current Ratio (iii) Acid Test Ratio (iv) Stock Turnover Ratio (v) Fixed Assets Turnover Ratio.

 


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Q22 :  

From the following information calculate Gross Profit Ratio, Stock Turnover Ratio and Debtors Turnover Ratio.

 

 

Rs

Sales

3,00,000

Cost of Gods Sold

2,40,000

Closing Stock

62,000

Gross Profit

60,000

Opening Stock

58,000

Debtors

32,000

 

 


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<< Previous Chapter 4 : Analysis of Financial Statements Next Chapter 6 : Cash Flow Statement >>

Company Accounts and Analysis of Financial Statements - Accountancy : CBSE NCERT Exercise Solutions for Class 12th for Accounting Ratios will be available online in PDF book form soon. The solutions are absolutely Free. Soon you will be able to download the solutions.

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