CUET UG Accountancy Booster Test 2 Classification of Ratios -

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CUET UG Accountancy Booster Test 1 Classification of Ratios

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 1 Classification of Ratios

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QUESTION 1 OF 20

Consider these statements regarding Profit and Loss Ratios:
I. They compare one item from the balance sheet with one from the P&L statement.
II. Gross Profit Ratio is a key example of this category.
III. They are calculated using two figures exclusively from the Statement of Profit and Loss.

Answer Review

1 Consider these statements regarding Profit and Loss Ratios:
I. They compare one item from the balance sheet with one from the P&L statement.
II. Gross Profit Ratio is a key example of this category.
III. They are calculated using two figures exclusively from the Statement of Profit and Loss.

A I and II

B II and III

C I and III

D Only II

💡 Short Explanation

Profit and Loss Ratios use figures from the Statement of Profit and Loss. Gross Profit Ratio is a classic example. Balance Sheet items are not involved.

✅ Correct Answer Explanation

Profit and Loss Ratios are calculated using two figures taken exclusively from the Statement of Profit and Loss. Gross Profit Ratio is one of the most common examples. Statement I is incorrect because it describes a Composite Ratio. Therefore, Statements II and III are correct.

❓ Why Other Options Are Incorrect

Option A → Statement I is incorrect.
Option C → Statement I is incorrect.
Option D → Statement III is also correct.

🎯 Strategy

Used: Statement Verification

Application: Check each statement against the definition of Profit and Loss Ratios.

Final Logic: Profit and Loss Ratios use only P&L figures.

🧠 Memory Trick

P&L + P&L = P&L Ratio

📚 Topic: Traditional Classification – Profit and Loss Ratios

2 If a company's Total Assets are ₹3,00,000, Non-current Liabilities are ₹80,000, and Shareholders' Funds are ₹2,00,000, calculate the Current Liabilities.

A ₹80,000

B ₹40,000

C ₹20,000

D ₹1,00,000

💡 Short Explanation

Total Assets = Shareholders' Funds + Liabilities. Total Liabilities = ₹3,00,000 − ₹2,00,000. Current Liabilities = Total Liabilities − Non-current Liabilities.

✅ Correct Answer Explanation

Total Liabilities = ₹3,00,000 − ₹2,00,000 = ₹1,00,000 Current Liabilities = ₹1,00,000 − ₹80,000 = ₹20,000 Therefore, the correct answer is ₹20,000.

❓ Why Other Options Are Incorrect

Option A → Represents Non-current Liabilities.
Option B → Calculation error.
Option D → Represents Total Liabilities.

🎯 Strategy

Used: Substitution

Application: Apply the accounting equation.

Final Logic: Current Liabilities = ₹20,000.

🧠 Memory Trick

Assets − Equity = Total Liabilities

📚 Topic: Balance Sheet Ratios

3 Assertion (A):
Trade Receivables Turnover Ratio is classified functionally but originates as a Composite Ratio under traditional classification.
Reason (R):
It is computed using one variable from the Statement of Profit and Loss and another from the Balance Sheet.

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

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

C A is true, but R is false.

D A is false, but R is true.

💡 Short Explanation

Trade Receivables Turnover is an Activity Ratio. It combines sales and receivables. One figure comes from each statement.

✅ Correct Answer Explanation

Trade Receivables Turnover Ratio is functionally classified as an Activity Ratio. Under traditional classification, it is a Composite Ratio because it uses Net Credit Revenue (P&L) and Average Trade Receivables (Balance Sheet). Thus, the Reason correctly explains the Assertion.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Verify classification and formula source.

Final Logic: Mixed data creates a Composite Ratio.

🧠 Memory Trick

Sales + Receivables = Composite Ratio

📚 Topic: Composite Ratios

4 Match the specific ratios to their Traditional Classification categories.

List 1	List 2
1. Current Ratio	a. Statement of Profit and Loss Ratio
2. Gross Profit Ratio	b. Balance Sheet Ratio
3. Trade Receivables Turnover Ratio	c. Composite Ratio based on sales and receivables
4. Working Capital Turnover Ratio	d. Composite Ratio based on sales and net assets

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

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

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

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

💡 Short Explanation

Current Ratio → Balance Sheet Ratio. Gross Profit Ratio → P&L Ratio. Receivables Turnover → Composite Ratio. Working Capital Turnover → Composite Ratio.

✅ Correct Answer Explanation

The correct matching is: Current Ratio → Balance Sheet Ratio. Gross Profit Ratio → P&L Ratio. Trade Receivables Turnover Ratio → Composite Ratio. Working Capital Turnover Ratio → Composite Ratio. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Options A, B, C → Incorrect classification of one or more ratios.

🎯 Strategy

Used: Match the Following

Application: Classify ratios according to traditional classification.

Final Logic: Ratios are classified by the source of data used.

🧠 Memory Trick

Balance–Profit–Composite–Composite

📚 Topic: Traditional Classification

5 Which group of functionally classified ratios is primarily focused on evaluating the speed at which various assets are converted into cash or revenue?

A Solvency Ratios

B Liquidity Ratios

C Activity (Turnover) Ratios

D Profitability Ratios

💡 Short Explanation

Measure efficiency of asset utilization. Evaluate turnover speed. Reflect operational performance.

✅ Correct Answer Explanation

Activity Ratios, also known as Turnover Ratios, measure how efficiently assets are used to generate sales or cash. They indicate the speed at which business resources are converted into revenue. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Measures long-term solvency.
Option B → Measures short-term liquidity.
Option D → Measures earning capacity.

🎯 Strategy

Used: Concept Identification

Application: Match the ratio group with its purpose.

Final Logic: Efficiency measurement belongs to Activity Ratios.

🧠 Memory Trick

Activity = Speed

📚 Topic: Activity Ratios

6 Why is the functional classification of ratios overwhelmingly preferred in practical usage over traditional classification?

A It strictly separates P&L and Balance Sheet items.

B It eliminates mathematical calculations.

C It categorizes ratios directly based on objectives like profitability, liquidity, and solvency.

D It automatically ignores non-monetary aspects.

💡 Short Explanation

Focuses on purpose. Easier for analysis. More useful in decision-making.

✅ Correct Answer Explanation

Functional classification groups ratios according to their objectives, such as liquidity, solvency, profitability, and efficiency. This makes interpretation easier and more useful for practical decision-making. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Traditional classification does this.
Option B → Calculations are still required.
Option D → Non-monetary aspects remain a limitation.

🎯 Strategy

Used: Conceptual Analysis

Application: Compare traditional and functional classifications.

Final Logic: Purpose-based grouping improves usability.

🧠 Memory Trick

Function = Purpose

📚 Topic: Functional Classification

7 A firm has Current Liabilities of ₹50,000 and Liquid Assets of ₹50,000. It also holds Inventory worth ₹20,000. What is the firm's Current Ratio?

A 1.4 : 1

B 1 : 1

C 0.7 : 1

D 2.4 : 1

💡 Short Explanation

Current Assets = Liquid Assets + Inventory. Current Assets = ₹70,000. Current Ratio = ₹70,000 ÷ ₹50,000.

✅ Correct Answer Explanation

Current Assets = ₹50,000 + ₹20,000 = ₹70,000 Current Ratio = ₹70,000 ÷ ₹50,000 = 1.4: 1 Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Represents Quick Ratio.
Option C → Incorrect calculation.
Option D → Overstated ratio.

🎯 Strategy

Used: Numerical Substitution

Application: Use Current Ratio formula.

Final Logic: Current Assets ÷ Current Liabilities = 1.4: 1.

🧠 Memory Trick

Current Assets Include Inventory

📚 Topic: Liquidity Ratios

8 The correct formula for measuring the Acid-Test Ratio is:

A Current Assets / Current Liabilities

B Quick Assets / Current Liabilities

C (Current Assets − Current Liabilities) / Total Assets

D Liquid Assets / Total Debts

💡 Short Explanation

Measures immediate liquidity. Excludes inventory. Uses Quick Assets.

✅ Correct Answer Explanation

The Acid-Test Ratio (Quick Ratio) measures a firm's ability to meet current obligations using its most liquid assets. Quick Ratio = Quick Assets ÷ Current Liabilities Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Current Ratio formula.
Option C → Not a recognized liquidity formula.
Option D → Uses total debts incorrectly.

🎯 Strategy

Used: Formula Recognition

Application: Recall Quick Ratio formula.

Final Logic: Quick Assets are the key component.

🧠 Memory Trick

Quick Ratio = Quick Assets ÷ Current Liabilities

📚 Topic: Acid-Test Ratio

9 Arrange the necessary steps to calculate the Debt-Equity Ratio:
1. Compute Equity (Shareholders' Funds)
2. Divide Long-Term Debts by Equity
3. Determine Long-Term Debts

A 1, 2, 3

B 2, 1, 3

C 3, 2, 1

D 3, 1, 2

💡 Short Explanation

Identify debt first. Calculate equity. Divide debt by equity.

✅ Correct Answer Explanation

Debt-Equity Ratio is calculated as: Debt-Equity Ratio = Long-Term Debt ÷ Shareholders' Funds Therefore, the logical sequence is: 3 → Determine Long-Term Debts 1 → Compute Equity 2 → Divide Debt by Equity Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Options A, B, C → Do not follow the correct calculation sequence.

🎯 Strategy

Used: Sequencing

Application: Arrange calculation steps logically.

Final Logic: Determine components before division.

🧠 Memory Trick

Debt → Equity → Divide

📚 Topic: Debt-Equity Ratio

10 Which specific components are directly compared in the Interest Coverage Ratio?

A Net Profit before Interest & Tax and Interest on Long-term Debt

B Net Profit after Tax and Total Debts

C Gross Profit and Short-term Borrowings

D Capital Employed and Equity Share Capital

💡 Short Explanation

Measures debt servicing ability. Compares earnings with interest obligation. Important solvency indicator.

✅ Correct Answer Explanation

Interest Coverage Ratio measures how many times profit before interest and tax can cover interest expenses. Interest Coverage Ratio = PBIT ÷ Interest on Long-term Debt Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Does not measure interest coverage.
Option C → Unrelated components.
Option D → Measures capital structure, not debt servicing.

🎯 Strategy

Used: Formula Recognition

Application: Recall Interest Coverage Ratio formula.

Final Logic: PBIT is compared with interest expense.

🧠 Memory Trick

PBIT Covers Interest

📚 Topic: Interest Coverage Ratio

11 Match the Activity Ratios used for efficiency measurement with their formulas.

List 1	List 2
1. Inventory Turnover Ratio	a. Net Credit Revenue ÷ Average Receivables
2. Trade Receivables Turnover Ratio	b. Cost of Revenue from Operations ÷ Average Inventory
3. Trade Payables Turnover Ratio	c. Net Revenue from Operations ÷ Working Capital
4. Working Capital Turnover Ratio	d. Net Credit Purchases ÷ Average Payables

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

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

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

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

💡 Short Explanation

Inventory Turnover uses Cost of Revenue and Inventory. Receivables Turnover uses Credit Revenue and Receivables. Payables Turnover uses Credit Purchases and Payables.

✅ Correct Answer Explanation

The correct matching is: Inventory Turnover Ratio → Cost of Revenue ÷ Average Inventory. Trade Receivables Turnover Ratio → Net Credit Revenue ÷ Average Receivables. Trade Payables Turnover Ratio → Net Credit Purchases ÷ Average Payables. Working Capital Turnover Ratio → Net Revenue ÷ Working Capital. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Options A, B, and C contain incorrect formula pairings.

🎯 Strategy

Used: Formula Matching

Application: Match each turnover ratio with its standard formula.

Final Logic: Each activity ratio measures efficiency using a specific relationship.

🧠 Memory Trick

Inventory–Receivables–Payables–Working Capital

📚 Topic: Activity Ratios – Efficiency Measurement

12 Assertion (A):
A very high Inventory Turnover Ratio is always an absolute and perfectly positive sign of efficient resource utilisation.
Reason (R):
High turnover might actually be due to buying in excessively small lots or selling quickly at very low margins.

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

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

C A is true, but R is false.

D A is false, but R is true.

💡 Short Explanation

High turnover is not always ideal. It may indicate understocking. It may result from low-profit sales.

✅ Correct Answer Explanation

The Assertion is false because a very high Inventory Turnover Ratio does not always indicate efficiency. It may arise from excessively low inventory levels or low-margin sales. The Reason is true because such situations can artificially increase the turnover ratio. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Evaluate both statements independently.

Final Logic: High turnover requires interpretation, not blind acceptance.

🧠 Memory Trick

High Turnover ≠ Always Good

📚 Topic: Activity Ratios – Resource Utilisation

13 How is the Operating Ratio formulated for accurate profit analysis?

A (Operating Profit ÷ Revenue from Operations) × 100

B (Cost of Revenue from Operations + Operating Expenses) ÷ Net Revenue from Operations × 100

C (Gross Profit − Operating Expenses) ÷ Net Revenue from Operations

D (Net Profit + Taxes) ÷ Capital Employed

💡 Short Explanation

Measures operating cost efficiency. Includes operating expenses. Expressed as a percentage of revenue.

✅ Correct Answer Explanation

Operating Ratio measures the proportion of operating costs to revenue. Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) ÷ Net Revenue from Operations × 100 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Formula for Operating Profit Ratio.
Option C → Incorrect formula.
Option D → Related to return measurement.

🎯 Strategy

Used: Formula Recognition

Application: Recall the standard Operating Ratio formula.

Final Logic: Operating costs are compared with revenue.

🧠 Memory Trick

Operating Cost ÷ Revenue × 100

📚 Topic: Profitability Ratios – Operating Ratio

14 If a company's Return on Investment (ROI) is 22.14% and Capital Employed is ₹10,84,000, calculate the approximate Profit Before Interest and Tax (PBIT).

A ₹1,50,000

B ₹4,00,000

C ₹2,40,000

D ₹3,50,000

💡 Short Explanation

ROI = PBIT ÷ Capital Employed × 100. Rearrange formula to find PBIT. Multiply ROI by Capital Employed.

✅ Correct Answer Explanation

PBIT = ROI × Capital Employed ÷ 100 = 22.14 × ₹10,84,000 ÷ 100 ≈ ₹2,39,998 ≈ ₹2,40,000 Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Options A, B, D → Do not satisfy the ROI formula.

🎯 Strategy

Used: Numerical Substitution

Application: Rearrange ROI formula.

Final Logic: PBIT ≈ ₹2,40,000.

🧠 Memory Trick

ROI × Capital = PBIT

📚 Topic: Return Measurement

15 Arrange the following current asset components in the general sequence of liquidity (most liquid to least liquid):
1. Cash and Cash Equivalents
2. Trade Receivables
3. Inventories

A 3, 2, 1

B 1, 2, 3

C 2, 3, 1

D 3, 1, 2

💡 Short Explanation

Cash is immediately available. Receivables require collection. Inventory must be sold first.

✅ Correct Answer Explanation

Liquidity decreases in the following order: Cash and Cash Equivalents → Trade Receivables → Inventories Therefore, the correct sequence is 1, 2, 3.

❓ Why Other Options Are Incorrect

Options A, C, D → Do not follow the accepted liquidity order.

🎯 Strategy

Used: Sequencing

Application: Rank assets by ease of conversion into cash.

Final Logic: Cash is most liquid, inventory least liquid.

🧠 Memory Trick

Cash → Receivables → Inventory

📚 Topic: Liquidity Components

16 Which outcome describes the impact on the Current Ratio if a current liability is paid off, assuming the initial Current Ratio was 2:1?

A It will improve (increase).

B It will reduce (decrease).

C It will remain unchanged.

D It will become negative.

💡 Short Explanation

Both current assets and liabilities decrease. Liability decreases proportionately more. Current Ratio improves when initial ratio exceeds 1:1.

✅ Correct Answer Explanation

When a current liability is paid, current assets and current liabilities both decrease by the same amount. If the Current Ratio is initially 2:1, the reduction improves the ratio because liabilities decrease proportionately faster than assets. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Opposite effect.
Option C → Ratio changes.
Option D → Impossible under normal circumstances.

🎯 Strategy

Used: Ratio Impact Analysis

Application: Examine the effect of paying current liabilities.

Final Logic: For ratios above 1:1, payment improves liquidity ratio.

🧠 Memory Trick

Pay Liability → Better Current Ratio

📚 Topic: Liquidity Components

17 Which of the following statements about Profitability Ratios evaluating financial performance are correct?
I. They measure the overall operational efficiency of the business.
II. Operating Profit Ratio is calculated as 100 minus the Operating Ratio.
III. They intrinsically ignore all non-monetary qualitative factors.

A I and II

B II and III

C I and III

D I, II and III

💡 Short Explanation

Profitability Ratios assess efficiency. Operating Profit Ratio = 100 − Operating Ratio. Ratios ignore qualitative factors.

✅ Correct Answer Explanation

All three statements are correct: Profitability Ratios evaluate operational performance. Operating Profit Ratio equals 100 minus Operating Ratio. Ratio analysis focuses on monetary information and ignores qualitative aspects. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Options A, B, C → Exclude one or more correct statements.

🎯 Strategy

Used: Multiple Statement Evaluation

Application: Verify each statement independently.

Final Logic: All three statements are valid.

🧠 Memory Trick

Efficiency + Formula + Limitation

📚 Topic: Financial Performance

18 A firm uses debt financing extensively. It realizes that while higher debt increases bankruptcy risk, it can also lead to higher returns for equity owners when the earning rate exceeds the interest rate. This concept is called:

A SWOT Analysis

B Cross-sectional Analysis

C Trading on Equity

D Trend Analysis

💡 Short Explanation

Uses debt to enhance shareholder returns. ROI must exceed borrowing cost. Increases financial leverage.

✅ Correct Answer Explanation

Trading on Equity refers to using borrowed funds when the return earned exceeds the interest payable on debt. This increases returns available to equity shareholders. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Strategic analysis tool.
Option B → Comparison technique.
Option D → Time-series analysis method.

🎯 Strategy

Used: Concept Identification

Application: Recognize the financial leverage concept.

Final Logic: Higher returns through debt financing = Trading on Equity.

🧠 Memory Trick

Borrow to Earn More

📚 Topic: Financial Position

📄 Passage

"Since the ratios are derived from the financial statements, any weakness in the original financial statements will also creep in the derived analysis in the form of ratio analysis. Accounting data give an unwarranted impression of precision and finality. In fact, accounting data reflect a combination of recorded facts, accounting conventions and personal judgements which affect them materially. A change in the price-level makes analysis of financial statement of different accounting years meaningless because accounting records ignore changes in value of money."

Based on the passage, why does ratio analysis sometimes fundamentally lack analytical clarity over multiple accounting years?

A Because standard accounting records intrinsically ignore changes in the value of money.

B Because subjective personal judgements are strictly prohibited in accounting data.

C Because qualitative aspects are overly emphasised in financial records.

D Because historical ratios provide precise and absolute final figures.

💡 Short Explanation

Inflation affects purchasing power. Accounting records use historical values. Multi-year comparisons become distorted.

✅ Correct Answer Explanation

The passage states that changes in price levels make analysis across years less meaningful because accounting records ignore changes in the value of money. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Personal judgments are included, not prohibited.
Option C → Qualitative aspects are generally ignored.
Option D → Passage says precision may be misleading.

🎯 Strategy

Used: Passage-Based Analysis

Application: Identify the specific limitation mentioned.

Final Logic: Inflation reduces analytical clarity.

🧠 Memory Trick

Inflation Distorts Comparison

📚 Topic: Analytical Clarity

📄 Passage

"Accounting data give an unwarranted impression of precision and finality. In fact, accounting data reflect a combination of recorded facts, accounting conventions and personal judgements which affect them materially."

What inherent weakness in the base accounting data directly impacts the decision relevance of ratios?

A It strictly relies on subjective non-monetary aspects.

B It gives an unwarranted impression of precision and finality despite being based on conventions and judgements.

C It implicitly assumes a hyperinflationary market economy.

D It requires completely standardized legal definitions across all firms.

💡 Short Explanation

Accounting figures appear exact. They include estimates and judgments. Ratios inherit these limitations.

✅ Correct Answer Explanation

The passage emphasizes that accounting data appear precise and final but are influenced by accounting conventions and personal judgments. Since ratios are derived from accounting data, they inherit this weakness. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Accounting data are mainly monetary.
Option C → Hyperinflation is not mentioned.
Option D → Not the limitation discussed.

🎯 Strategy

Used: Passage-Based Interpretation

Application: Identify the weakness highlighted in the passage.

Final Logic: Apparently precise figures may still contain judgment-based limitations.

🧠 Memory Trick

Exact Numbers, Estimated Reality

📚 Topic: Decision Relevance and Limitations

CUET UG Accountancy Booster Test 1 Classification of Ratios

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