CUET UG Accountancy Booster Test 2 Fundamentals of Accounting Ratios -

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CUET UG Accountancy Booster Test 1 Fundamentals of Accounting Ratios

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 1 Fundamentals of Accounting Ratios

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QUESTION 1 OF 20

Financial statements aim to provide information to meet the needs of decision-makers. Which of the following best represents how this information is practically utilized by decision-makers?

Answer Review

1 Financial statements aim to provide information to meet the needs of decision-makers. Which of the following best represents how this information is practically utilized by decision-makers?

A By ignoring the data and relying on intuition.

B Through analysis, comparison, and interpretation of the provided data.

C By merely reading the gross profit figure in isolation.

D By forwarding the unanalyzed data directly to customers.

💡 Short Explanation

Financial information requires analysis. Comparisons help identify trends. Interpretation supports decision-making.

✅ Correct Answer Explanation

Financial statements provide raw financial information, but decision-makers derive value by analyzing, comparing, and interpreting the data. This process helps assess performance, financial position, profitability, and solvency. Therefore, Option B correctly describes the practical use of financial statement information.

❓ Why Other Options Are Incorrect

Option A → Decisions should be evidence-based.
Option C → One figure alone is insufficient.
Option D → Data must be analyzed before use.

🎯 Strategy

Used: Contextual/Tonal Matching

Application: Identify the activity that converts information into useful decisions.

Final Logic: Analysis and interpretation make financial data meaningful.

🧠 Memory Trick

Data → Analysis → Decision

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Financial Statement Analysis – Page X

2 Consider the following statements about the role of financial statement analysis:
(I) It is an integral and important part of accounting.
(II) It is used exclusively by internal users.

A Both I and II.

B Neither I nor II.

C Only II.

D Only I.

💡 Short Explanation

Financial analysis is part of accounting. Both internal and external users use it. Statement II is incorrect.

✅ Correct Answer Explanation

Financial statement analysis is an important component of accounting because it helps interpret financial information. However, it is not restricted to internal users; investors, creditors, lenders, and regulators also use it. Therefore, only Statement I is correct.

❓ Why Other Options Are Incorrect

Option A → Statement II is false.
Option B → Statement I is true.
Option C → Statement I is true.

🎯 Strategy

Used: Statement Verification

Application: Evaluate each statement separately.

Final Logic: Analysis serves both internal and external users.

🧠 Memory Trick

Accounting Serves Everyone

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Financial Statement Analysis – Page X

3 An accounting ratio can be expressed mathematically. If Current Assets are Rs. 1,34,000 and Current Liabilities are Rs. 1,04,000, what is the formula to find the Current Ratio proportion?

A Current Assets / Current Liabilities.

B Current Liabilities / Current Assets.

C Current Assets - Current Liabilities.

D Current Assets * Current Liabilities.

💡 Short Explanation

Current Ratio measures liquidity. Current Assets are compared with Current Liabilities. Standard liquidity formula.

✅ Correct Answer Explanation

The Current Ratio is calculated as: Current Ratio = Current Assets ÷ Current Liabilities This ratio measures the firm's ability to meet current obligations. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Reverse formula.
Option C → Gives working capital.
Option D → Not a ratio.

🎯 Strategy

Used: Formula Recognition

Application: Recall the standard Current Ratio formula.

Final Logic: Liquidity is measured by comparing current resources to current obligations.

🧠 Memory Trick

CA ÷ CL

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Current Ratio – Page X

4 Assertion (A):
Accounting ratios exhibit a relationship between numbers extracted from financial statements.
Reason (R):
Ratios are raw, fundamental numbers that do not depend on financial statements.

A Both A and R are true and R is the correct explanation.

B Both A and R are true but R is not the correct explanation.

C A is true but R is false.

D A is false but R is true.

💡 Short Explanation

Ratios are derived from accounting data. Financial statements are their source. Ratios are not raw numbers.

✅ Correct Answer Explanation

The Assertion is true because accounting ratios establish relationships between figures extracted from financial statements. The Reason is false because ratios are derived figures and depend entirely on accounting data contained in financial statements.

❓ Why Other Options Are Incorrect

Option A → Reason is false.
Option B → Reason is false.
Option D → Assertion is true.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Evaluate both statements independently.

Final Logic: Ratios depend on financial statement data.

🧠 Memory Trick

Ratios Are Derived, Not Raw

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Meaning of Ratios – Page X

5 Match the forms of ratios with their correct numerical examples.

List 1	List 2
1. Fraction	a. 2:1
2. Percentage	b. 3/4
3. Number of times	c. 10%
4. Proportion	d. 6 times

A 1-a, 2-b, 3-c, 4-d

B 1-d, 2-a, 3-b, 4-c

C 1-c, 2-d, 3-a, 4-b

D 1-b, 2-c, 3-d, 4-a

💡 Short Explanation

Fraction → 3/4. Percentage → 10%. Number of times → 6 times. Proportion → 2:1.

✅ Correct Answer Explanation

Ratios can be expressed in different forms: Fraction = 3/4 Percentage = 10% Number of times = 6 times Proportion = 2:1 Thus, Option D is correct.

❓ Why Other Options Are Incorrect

Options A, B, C → Incorrect matching.

🎯 Strategy

Used: Option Grouping

Application: Match each ratio form with its representation.

Final Logic: Each form has a unique numerical expression.

🧠 Memory Trick

Fraction–Percent–Times–Proportion

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Forms of Ratios – Page X

6 If the Revenue from Operations is Rs. 4,00,000 and Gross Profit is Rs. 40,000, what is the Gross Profit expressed as a percentage ratio?

A 8%

B 10%

C 12%

D 15%

💡 Short Explanation

Gross Profit Ratio = Gross Profit ÷ Revenue × 100. ��40,000 ÷ ₹4,00,000. Result = 10%.

✅ Correct Answer Explanation

Gross Profit Ratio = (₹40,000 ÷ ₹4,00,000) × 100 = 10% Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Options A, C, D → Incorrect calculations.

🎯 Strategy

Used: Substitution

Application: Insert values into the formula.

Final Logic: 40,000 ÷ 4,00,000 × 100 = 10%.

🧠 Memory Trick

Profit ÷ Sales × 100

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Gross Profit Ratio – Page X

7 Arrange the sequential process of utilizing accounting numbers for ratio calculation:
1. Identify meaningfully correlated variables.
2. Extract the numbers from financial statements.
3. Apply the mathematical formula.
4. Interpret the derived ratio.

A 2, 1, 3, 4.

B 1, 2, 4, 3.

C 3, 4, 1, 2.

D 4, 3, 2, 1.

💡 Short Explanation

Obtain data first. Select related variables. Calculate ratio. Interpret results.

✅ Correct Answer Explanation

The correct process is: 1. Extract numbers from financial statements. 2. Identify related variables. 3. Apply the ratio formula. 4. Interpret the result. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Options B, C, D → Do not follow logical analytical sequence.

🎯 Strategy

Used: Sequencing

Application: Follow the normal analytical process.

Final Logic: Calculation comes after data collection and selection.

🧠 Memory Trick

Extract → Select → Calculate → Interpret

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Ratio Calculation Process – Page X

8 The efficacy of a derived number (like an accounting ratio) depends heavily upon what factor?

A The font size used in the annual report.

B The geographical location of the firm's headquarters.

C The accuracy of the basic numbers from which it is calculated.

D The specific software used to print the financial statements.

💡 Short Explanation

Ratios are derived figures. Accuracy depends on source data. Errors flow into ratios.

✅ Correct Answer Explanation

Accounting ratios are derived from accounting figures. If the underlying figures are inaccurate, the resulting ratio will also be inaccurate. Therefore, the usefulness of any ratio depends on the quality of the source data.

❓ Why Other Options Are Incorrect

Options A, B, D → Do not affect ratio accuracy.

🎯 Strategy

Used: Conceptual Analysis

Application: Identify the factor influencing ratio reliability.

Final Logic: Reliable inputs produce reliable outputs.

🧠 Memory Trick

Good Data = Good Ratio

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Accuracy of Ratios – Page X

9 An analyst calculates the ratio of 'Creditors' (Rs. 1,00,000) to 'Furniture' (Rs. 1,00,000) as 1:1. According to the text, why is this an invalid use of ratio analysis?

A Because the amounts are too small to be significant.

B Because the figures are unrelated and do not serve any analytical purpose.

C Because creditors should only be compared with debtors.

D Because furniture is an intangible asset.

💡 Short Explanation

Ratios require meaningful relationships. Creditors and furniture are unrelated. Result lacks analytical value.

✅ Correct Answer Explanation

A ratio is meaningful only when the compared figures have a logical relationship. Creditors are liabilities, while furniture is a fixed asset. Comparing them does not provide useful financial insight. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Amount size is irrelevant.
Option C → Not a mandatory comparison rule.
Option D → Furniture is a tangible asset.

🎯 Strategy

Used: Odd One Out

Application: Check logical relationship between figures.

Final Logic: Unrelated figures produce meaningless ratios.

🧠 Memory Trick

Related Figures Only

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Meaningful Ratios – Page X

10 Comparing a firm's performance over a number of accounting periods with itself is known as:

A Cross-sectional analysis.

B Inter-firm comparison.

C Standard expectation analysis.

D Time Series Analysis / Intra-firm comparison.

💡 Short Explanation

Compares performance across years. Same firm is evaluated. Reveals trends over time.

✅ Correct Answer Explanation

Intra-firm comparison, also called Time Series Analysis, involves comparing a firm's performance across multiple accounting periods. It helps identify trends, strengths, weaknesses, and growth patterns.

❓ Why Other Options Are Incorrect

Option A → Cross-sectional analysis compares different firms.
Option B → Inter-firm comparison involves different companies.
Option C → Not a recognized ratio-analysis technique.

🎯 Strategy

Used: Contextual/Tonal Matching

Application: Identify the analysis performed within the same firm.

Final Logic: Same company across different periods = Intra-firm comparison.

🧠 Memory Trick

Intra = Inside the Firm

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Intra-firm Comparison – Page X

11 Which of the following is a direct limitation of ratio analysis stemming from its dependence on accounting data?

A Ratios solve all management problems automatically.

B Ratios are too complex to be understood.

C Any weakness or limitation in the original financial statements will creep into the ratio analysis.

D Ratios completely ignore mathematical relationships.

💡 Short Explanation

Ratios are derived from accounting data. Weak source data produce weak ratios. Errors are transferred into analysis.

✅ Correct Answer Explanation

Ratio analysis is based on figures extracted from financial statements. Therefore, any errors, omissions, accounting limitations, or inaccuracies present in the original statements will automatically affect the ratios derived from them. Option C correctly identifies this limitation.

❓ Why Other Options Are Incorrect

Option A → Ratios do not solve problems automatically.
Option B → Ratios are understandable when interpreted properly.
Option D → Ratios are based on mathematical relationships.

🎯 Strategy

Used: Elimination

Application: Remove unrealistic statements about ratio analysis.

Final Logic: Weak accounting data lead to weak ratio analysis.

🧠 Memory Trick

Bad Data = Bad Ratio

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Dependence on Accounting Data – Page X

12 Assertion (A):
Erroneous financial statements lead to an erroneous scenario in ratio analysis.
Reason (R):
Ratios are essentially derived numbers representing relationships between extracted accounting figures.

A Both A and R are true and R is the correct explanation.

B Both A and R are true but R is not the correct explanation.

C A is true but R is false.

D A is false but R is true.

💡 Short Explanation

Ratios depend on accounting figures. Errors in source data affect ratios. Reason explains the Assertion.

✅ Correct Answer Explanation

The Assertion is true because inaccurate financial statements produce inaccurate ratios. The Reason is also true because ratios are derived figures calculated from accounting numbers. Since ratios depend entirely on those figures, any error in the financial statements directly affects ratio analysis. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Reason directly explains Assertion.
Option C → Reason is true.
Option D → Assertion is true.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Check truthfulness and explanatory relationship.

Final Logic: Derived ratios inherit errors from source statements.

🧠 Memory Trick

Wrong Statements → Wrong Ratios

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Error Impact – Page X

13 For internal users, conducting a SWOT analysis using accounting ratios helps them understand which of the following?

A Only the threats from international markets.

B Current threats and opportunities, strengths, and weaknesses.

C The exact future stock price of the company.

D The personal financial status of external auditors.

💡 Short Explanation

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Ratios help identify business performance areas. Useful for managerial decisions.

✅ Correct Answer Explanation

Accounting ratios help management evaluate strengths, weaknesses, opportunities, and threats by analyzing financial performance and position. This information assists in strategic planning and decision-making. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → SWOT includes more than threats.
Option C → Ratios cannot predict exact stock prices.
Option D → Not related to SWOT analysis.

🎯 Strategy

Used: Contextual/Tonal Matching

Application: Recall the components of SWOT.

Final Logic: SWOT evaluates all four strategic dimensions.

🧠 Memory Trick

S-W-O-T = Strength, Weakness, Opportunity, Threat

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: SWOT Analysis – Page X

14 Why do external users, such as long-term lenders, rely on Solvency Ratios?

A To determine the ability of the business to service its debt in the long run.

B To check the daily attendance of employees.

C To measure the speed of inventory conversion.

D To decide the marketing strategy for new products.

💡 Short Explanation

Solvency ratios assess long-term stability. Important for lenders and creditors. Measure debt repayment capability.

✅ Correct Answer Explanation

Long-term lenders are concerned about whether the business can meet long-term obligations and repay borrowed funds. Solvency Ratios provide information regarding long-term financial stability and debt servicing capacity. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Human resource matter.
Option C → Activity ratio purpose.
Option D → Marketing decision, not solvency analysis.

🎯 Strategy

Used: Elimination

Application: Identify the objective of solvency analysis.

Final Logic: Solvency focuses on long-term debt repayment.

🧠 Memory Trick

Solvency = Long-Term Survival

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Solvency Ratios – Page X

15 In financial statement analysis, comparative statements are typically used alongside which other techniques?

A Only SWOT analysis.

B Employee performance appraisals only.

C Common size statements, trend analysis, and ratio analysis.

D Just graphical bar charts without numbers.

💡 Short Explanation

Financial analysis uses multiple techniques. Comparative statements support trend identification. Ratios provide deeper interpretation.

✅ Correct Answer Explanation

Financial statement analysis commonly uses comparative statements together with common-size statements, trend analysis, and ratio analysis. These techniques collectively improve interpretation and decision-making. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → SWOT alone is insufficient.
Option B → Not a financial statement analysis technique.
Option D → Graphs alone do not provide complete analysis.

🎯 Strategy

Used: Contextual/Tonal Matching

Application: Identify standard financial analysis tools.

Final Logic: Multiple analytical techniques are used together.

🧠 Memory Trick

Compare, Trend, Ratio

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Financial Analysis Techniques – Page X

16 Exploring visible trends in a business over several years using side-by-side data primarily helps in:

A Hiding financial anomalies.

B Decreasing the tax liability of the firm.

C Ignoring past mistakes.

D Making projections and estimates for the future.

💡 Short Explanation

Trend analysis studies historical patterns. Helps identify growth direction. Supports future planning.

✅ Correct Answer Explanation

Trend analysis compares financial performance over several years. The patterns observed help management estimate future performance and make informed projections. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Trend analysis reveals anomalies.
Option B → Not its objective.
Option C → Past performance is analyzed, not ignored.

🎯 Strategy

Used: Contextual/Tonal Matching

Application: Connect trend analysis with forecasting.

Final Logic: Historical trends assist future projections.

🧠 Memory Trick

Past Trends → Future Plans

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Trend Analysis – Page X

17 Ratios are described as 'means to an end rather than the end in themselves'. What does this imply about their role as an analytical tool?

A Their role is essentially indicative and of whistle blowing, pointing out areas requiring investigation.

B They provide the final, unquestionable solution to all business problems.

C They are irrelevant for future planning.

D They replace the need for human judgment entirely.

💡 Short Explanation

Ratios identify issues. They guide investigation. They do not solve problems directly.

✅ Correct Answer Explanation

Ratio analysis serves as an indicator of strengths, weaknesses, and potential problem areas. It helps direct management attention but does not provide final solutions. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Ratios do not provide absolute solutions.
Option C → Ratios support planning.
Option D → Interpretation still requires judgment.

🎯 Strategy

Used: Conceptual Analysis

Application: Understand the true role of ratios.

Final Logic: Ratios indicate problems rather than solve them.

🧠 Memory Trick

Ratios Signal, Not Solve

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Importance of Ratios – Page X

18 By simplifying complex accounting figures, ratio analysis primarily assists decision-makers in evaluating:

A The exact physical count of inventory.

B The personal preferences of customers.

C Managerial efficiency, creditworthiness, and earning capacity.

D The design layout of the factory floor.

💡 Short Explanation

Ratios summarize financial information. Facilitate performance evaluation. Support lending and investment decisions.

✅ Correct Answer Explanation

Ratio analysis converts complex financial data into meaningful relationships. This helps users assess managerial efficiency, creditworthiness, profitability, and earning capacity. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Inventory count is not ratio analysis.
Option B → Customer preferences are qualitative.
Option D → Factory layout is unrelated.

🎯 Strategy

Used: Elimination

Application: Focus on the key benefits of ratio analysis.

Final Logic: Ratios aid performance and financial evaluation.

🧠 Memory Trick

Efficiency + Credit + Earnings

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Decision Support – Page X

📄 Passage

This chapter covers the technique of accounting ratios for analysing the information contained in financial statements for assessing the solvency, efficiency and profitability of the enterprises. Liquidity ratios are calculated to measure the short-term solvency of the business, i.e. the firm's ability to meet its current obligations. Profitability Ratios refer to the analysis of profits in relation to revenue from operations or funds (or assets) employed in the business.

According to the passage, which type of ratios are specifically calculated to measure short-term solvency?

A Profitability Ratios.

B Liquidity Ratios.

C Trend Ratios.

D Solvency Ratios (Long-term).

💡 Short Explanation

Liquidity measures short-term solvency. Evaluates current obligations. Indicates payment capacity.

✅ Correct Answer Explanation

The passage explicitly states that Liquidity Ratios are calculated to measure short-term solvency, meaning the firm's ability to meet current obligations. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Measures profitability.
Option C → Studies trends.
Option D → Focuses on long-term solvency.

🎯 Strategy

Used: Contextual/Tonal Matching

Application: Select the statement directly supported by the passage.

Final Logic: Liquidity Ratios evaluate short-term obligations.

🧠 Memory Trick

Liquidity = Short-Term Solvency

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Liquidity Ratios – Page X

📄 Passage

Based on the passage, Profitability Ratios are concerned with analyzing profits in relation to what?

A Short-term debts.

B Non-monetary assets only.

C Future forecasting models.

D Revenue from operations or funds employed.

💡 Short Explanation

Profitability relates profit to sales or investment. Measures earning capacity. Important for performance evaluation.

✅ Correct Answer Explanation

The passage clearly states that Profitability Ratios analyze profits in relation to revenue from operations or funds/assets employed in the business. These ratios help evaluate earning efficiency. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Related to liquidity concerns.
Option B → Not the basis of profitability ratios.
Option C → Not mentioned in the passage.

🎯 Strategy

Used: Contextual/Tonal Matching

Application: Identify the exact definition provided in the passage.

Final Logic: Profitability compares profits with sales or funds employed.

🧠 Memory Trick

Profit vs Sales/Funds

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Profitability Ratios – Page X

CUET UG Accountancy Booster Test 1 Fundamentals of Accounting Ratios

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