Ratio analysis MCQ Quiz in తెలుగు - Objective Question with Answer for Ratio analysis - ముఫ్త్ [PDF] డౌన్‌లోడ్ కరెన్

The correct answer is Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A). 

Key Points

Investment Fluctuation Reserves : 

• The Investment Fluctuation Reserve is a fund set aside from profits to cover losses in the market value of investments.
• It is created to compensate for the discrepancy between an investment's book value and market value.
• In their old profit sharing ratio, the excess of IFR over the difference between book value and market value is credited to old partners

Important Points
Assertion (A) is true because,

• If, at the time of change in the profit sharing ratio, there are Reserves or Accumulated profits/losses existing in the books of the firm, these should be transferred to the Partner's Capital Accounts (if capitals are fluctuating) or to Current Accounts (if capitals are fixed) in their old profit sharing ratio.
• The reason for such transfer is that these reserves and accumulated profits/losses have come into existence before the change in profit sharing ratio and hence belong to the partners in their old profit sharing ratio.

Reason (R) is also true because

It is required to adjust the fluctuation in the value of Investment by Investment Fluctuation Reserve and remaining amount written off by credit in Old/All partners' Capital Current Account in case of reconstitution of partnership because it's earning of old partners.

Additional Information

There are three cases for treatment of Investment Fluctuation Reserve, which are as follows:

Case 1: If book value and market value is same : 

The following entry will be passed :

Case 2: If market value of investment is less than book value :

The following entry will be passed:

Case 3: When there is an increase in Market Value of Investment :
The following entry will be passed :

Current Ratio: The current ratio is a liquidity ratio that assesses a company's capacity to pay short-term or one-year obligations. It explains to investors and analysts how a firm might use current assets on its balance sheet to pay off current debt and other obligations.

Important Points

Types of Profitability Ratio:

 1. Return on Investment (ROI):

• ROI is the most common profitability ratio.
• There are several ways to determine ROI, but the most frequently used method is to divide net profit by total assets.
• Return on investment isn't necessarily the same as profit.
• ROI deals with the money you invest in the company and the return you realize on that money based on the net profit of the business. 

 2. Earning Per Share (EPS):

• This ratio measures profitability from the point of view of the ordinary shareholder.
• A high ratio represents the better the company is.
• Formula: Net Profit ÷ Total no of shares outstanding

Current Ratio:

• The current ratio is a liquidity ratio.
• It is calculated by dividing the value of current assets by current liabilities.
• In many circumstances, a company with a current ratio of less than 1.00 may not have the capital on hand to cover all of its short-term obligations at once, whereas a current ratio greater than 1.00 suggests that the company has the financial resources to stay solvent in the short term.

Therefore, the Current ratio is not an example of profitability ratios.

James Horne has defined leverage as, "the employment of an asset or fund for which the firm pays a fixed cost or fixed return."

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1. The Degree of Combined Leverage (DCL) is the leverage ratio that sums up the combined effect of the Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL) has on the Earning per share or EPS or given a particular change in shares.
2. This ratio helps in ascertaining the best possible financial and operational leverage that is to be used in any firm or business.
3.  Since the degree of combined leverage is calculated by combining both the operational leverage and financial leverage, it helps us in ascertaining the total risk involved in the business. 
4. The degree of combined leverage (DCL) is the ratio of the percentage change in earnings per share to the percentage change in sales. It indicates the effect the sales changes will have on EPS. 

Thus, option 2 is the correct answer.

The correct answer is Rs. 67000.

Key Points

Cost of Sales = Sales - Gross Profit

Since the Rate of Gross Profit on cost is 20%, the Sales are 120% of the Cost of Sales.

Therefore, Cost of Sales = Sales / 120% = Rs. 6,00,000 / 1.2 = Rs. 5,00,000.

Then, we calculate the amount of closing stock:

Cost of Goods Sold (COGS) = Opening Stock + Purchases + Productive Wages + Carriage Inwards - Closing Stock

Solving for Closing Stock, we have:

Closing Stock = Opening Stock + Purchases + Productive Wages + Carriage Inwards - COGS

Substituting the known values, we get:

Closing Stock = Rs. 50,000 (Opening Stock) + Rs. 5,00,000 (Purchases) + Rs. 10,000 (Productive Wages) + Rs. 7,000 (Carriage Inwards) - Rs. 5,00,000 (COGS)

Closing Stock = Rs. 67,000.

So, the correct answer is: 2) Rs. 67,000

Key Points

 Working capital

• Working capital is the money you need to support short-term operations.
• Working capital is the difference between current assets and current liabilities.
• "Current" again refers to the fact that these items fluctuate in the short term, increasing or decreasing along with operating activities.
• Generally, these are assets that can be converted into cash within the next 12 months or an operating cycle, such as inventory and accounts receivable. 

 Working capital ratio.

• The working capital ratio is calculated simply by dividing total current assets by total current liabilities.
• It is a measure of liquidity, meaning the business’s ability to meet its payment obligations as they fall due.

Important Points

Current ratio

• This ratio compares a company's current assets to its current liabilities, testing whether it sustainably balances assets, financing, and liabilities.
• Typically, the current ratio is used as a general metric of financial health since it shows a company's ability to pay off short-term debts. In other words, it calculates liquidity, meaning the business’s ability to meet its payment obligations as they fall due.

So, the Current ratio will be considered the working capital ratio.

Additional Information

Quick ratio

• The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets.
• Since it indicates the company’s ability to instantly use its near-cash assets (assets that can be converted quickly to cash) to pay down its current liabilities, it is also called the acid test ratio.
• It only calculates the short-term liquidity and does not calculate the capacity to pay its liability for the operating cycle.

Liquid ratio

• A liquidity ratio is a type of financial ratio used to determine a company's ability to pay its short-term debt obligations.
• The metric helps determine if a company can use its current, or liquid, assets to cover its current liabilities.
• this ratio will only calculate the company's ability to pay its short-term debt obligations and does not calculate the capacity to pay its liability for the operating cycle.

Debt-­equity ratio

• The debt-to-equity ratio (D/E ratio) shows how much debt a company has compared to its assets.
• It is found by dividing a company's total debt by total shareholder equity.
• A higher D/E ratio means the company may have a harder time covering its liabilities.

The correct answer is Both A and R are correct and R is the correct explanation of A

Important Points Assertion A : Quick ratio is a more penetrating test of liquidity than the current ratio, yet a high quick ratio does not necessarily imply sound liquidity.

Explanation:

• The quick ratio is a tougher test of liquidity than the current ratio.
• It eliminates certain current assets such as inventory and prepaid expenses that may be more difficult to convert to cash.
• The higher the ratio, the more liquid it is, and the better able the company will be to ride out any downturn in its business.
• A high quick ratio does not always mean that a company enjoys sound liquidity.
• Hence, the Assertion is true.

Reason R : A company with a high value of quick ratio can suffer from a shortage of funds if it has slow-paying, doubtful and long duration outstanding debtors

Explanation:

• A company with a high value of quick ratio can suffer from a shortage of funds if it has slow-paying, doubtful and long duration outstanding debtors.
•  A quick ratio that is too high means that some of your money is not being put to work.
• This indicates inefficiency that can cost your company profits.
•  If your accounts receivable is difficult to collect, you will want to raise your quick ratio by putting aside additional cash.
• Hence, Reason is also true and correct explanation of Assertion.

The correct answer is Inventory.

Key PointsThe correct answer is Inventory because it is non-liquid assets. 

Liquid assets are ones that can be readily changed into cash without losing any value.

Liquid assets include cash, debts, bills receivables, and marketable securities.

Non-liquid assets are ones that cannot be cashed immediately and will take time to convert to cash. Non-liquid assets include stocks and inventories.

Important PointsLiquid Assets: Liquid assets are those that can be quickly converted into cash. While assets are valuable belongings that can be turned to cash, not all of them can be sold for cash right immediately or without incurring a loss. Examples of liquid assets are, Cash, Treasury Bills and treasury bonds, certificate of deposits, bonds, Debtors, Bank balance, Bills Receivable, etc.

Hence, it can be said that Liquid Assets = Current Assets - Inventory - Prepaid Expenses

The correct answer is High Growth prospect.

Important Points High price to earning ratio shows the company's High growth prospect , because growth stocks are frequently defined as companies having a high Price Earnings Ratio. This indicates that future performance will be favourable, and investors will be prepared to pay more for future earnings growth.

Additional Information Price/ Earning Ratio :This ratio indicates how much money should be invested in this company's stock in order to achieve a profit on each share. The ratio is used to determine whether a stock's market price is high or low. It is computed by dividing the market price of an equity share by the earning per share.P. E. Ratio = Market Price of the equity share / Earning Per Share ( E.P.S.)
For Example : If the EPS of X ltd. is Rs. 10 and market price is Rs. 100, the price earning ratio will be 10 (100/10). It reflects investors expectation about the growth in the firm's earnings and reasonableness of the market price of its shares. P/E Ratio vary from industry to industry and company to company in the same industry depending upon investor's perception of their future.

The correct answer is 10,000

Important Points Let cash sales = x

Credit sales is 25% of Cash sales

Credit sales = 25% of x

 Total sales = Cash sales + credit sales

 50000 = x + 25% of x

 50000 = 125% of x

 x= 50000 x 100/125

 x = 40000

 cash sales = x = 40000

 Credit sales = 50,000 - 40,000 = 10,000

The correct answer is 6.25 times

Key Points Receivables turnover ratio/Debtors Turnover Ratio/Trade Receivables Turnover Ratio

• This ratio is used to evaluate the efficiency with which a company manages the credit it extends to its customers and how long it takes for the company to collect outstanding debts throughout an accounting period.
• A high receivables turnover ratio shows that the company's collection method is very efficient, and that the company has a high proportion of customers that pay their bills fast in order to avoid debt collection.
• A low receivables' ratio, on the other hand, suggests that the company has a clear collection process, a defined credit policy, and customers who are not financially sustainable and are defaulting on payments.
• Formula : Receivables turnover ratio = Net Credit Sales / Average Accounts Receivable

Important Points Calculation of Net credit sales:

Revenue from operations or sales = ₹60,000 (Given)

Cash sales are 20% of credit sales (Given)

Let Credit sales = x

Total Sales = Cash sales + Credit sales

60000 = 20% of x + x

60000 = 120x/100

(60000 x 100)/120 = x

x = 50000

Credit Sales = 50000 

Calculation of Average Accounts Receivable

 Closing trade receivables = ₹10,000 (Given)

 Excess of closing trade receivables over opening = ₹4,000 (Given)

Excess = closing trade receivables - Opening Trade Receivables

4000 = 10000 + Opening Trade Receivables

Opening Trade Receivables = 6000

Average Accounts Receivable = (Opening trade receivables + Closing Trade Receivables)/2

Average Accounts Receivable = (6000 + 10000)/2

Average Accounts Receivable = 8000

Calculation of Receivables turnover ratio

Receivables turnover ratio = Net Credit Sales / Average Accounts Receivable

Receivables turnover ratio = 50000 / 8000

Receivables turnover ratio = 6.25 times