CUET UG Accountancy Booster Test 2 Objectives and Advantages -

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CUET UG Accountancy Booster Test 1 Objectives and Advantages

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 1 Objectives and Advantages

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QUESTION 1 OF 20

📄 Passage

"Ratio analysis if properly done improves the user's understanding of the efficiency with which the business is being conducted. The numerical relationships throw light on many latent aspects of the business. If properly analysed, the ratios make us understand various problem areas as well as the bright spots of the business. The knowledge of problem areas help management take care of them in future. It must be emphasised that ratios are means to an end rather than the end in themselves. Their role is essentially indicative and that of a whistle blower."

According to the passage, ratios should be considered as:

Answer Review

📄 Passage

According to the passage, ratios should be considered as:

A The final end goal of all accounting practices.

B Means to an end rather than the end in themselves.

C The exact solution to management problems.

D Qualitative indicators of business health.

💡 Short Explanation

Ratios assist decision-making. They are analytical tools. They are not final objectives.

✅ Correct Answer Explanation

The passage explicitly states that ratios are "means to an end rather than the end in themselves." Ratio analysis helps management understand the financial position, identify strengths and weaknesses, and support decision-making. However, ratios themselves do not provide final solutions or objectives. They are analytical tools that assist in evaluating business performance. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Ratios are tools for analysis, not the ultimate objective of accounting.
Option C → Ratios indicate problems but do not directly solve them.
Option D → Ratios are based on quantitative financial data, not qualitative indicators.

🎯 Strategy

Used: Passage-Based Direct Identification

Application: Identify the exact phrase stated in the passage.

Final Logic: Ratios are means, not ends.

🧠 Memory Trick

"Ratio = Tool, Not Goal."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Objectives of Ratio Analysis

📄 Passage

"Ratio analysis if properly done improves the user's understanding of the efficiency with which the business is being conducted..."

The interpretation role of ratios in the passage implies their function is:

A Prescriptive and decisive.

B Solely for calculating taxes.

C To provide a standardized definition of liquid liabilities.

D Essentially indicative and that of a whistle blower.

💡 Short Explanation

Ratios highlight important areas. They signal issues needing attention. They act as indicators.

✅ Correct Answer Explanation

The passage clearly states that the role of ratios is "essentially indicative and that of a whistle blower." Ratio analysis helps identify strengths and weaknesses and alerts management to areas requiring attention. However, it does not prescribe solutions or make decisions on behalf of management. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Ratios support decisions but do not make them.
Option B → Ratio analysis has a much wider scope than taxation.
Option C → This is unrelated to the interpretative role of ratios.

🎯 Strategy

Used: Passage Keyword Identification

Application: Identify the exact wording used in the passage.

Final Logic: Ratios serve as indicators and warning signals.

🧠 Memory Trick

"Ratios Blow the Whistle."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Interpretation of Ratios

3 If a firm has an unusually low Inventory Turnover Ratio, identifying this problem area suggests management should investigate for:

A Bad buying practices or obsolete inventory.

B Exceptionally high sales volumes.

C Over-efficiency in converting inventory to cash.

D Excessive shortage of raw materials.

💡 Short Explanation

Low turnover means slow inventory movement. Inventory may be obsolete. Purchasing may be inefficient.

✅ Correct Answer Explanation

A low Inventory Turnover Ratio indicates that inventory is moving slowly. This may result from poor purchasing decisions, excessive stock accumulation, or obsolete inventory. Such conditions reduce inventory efficiency and may increase storage costs. Therefore, management should investigate these possible causes. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → High sales generally increase inventory turnover.
Option C → Low turnover indicates poor, not high, efficiency.
Option D → Raw material shortages usually reduce inventory levels rather than causing low turnover.

🎯 Strategy

Used: Concept Application

Application: Interpret the meaning of a low Inventory Turnover Ratio.

Final Logic: Slow inventory movement signals inventory management problems.

🧠 Memory Trick

"Low Turnover = Slow Stock."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Inventory Turnover Ratio

4 Knowledge of areas which are working better helps management to:

A Eliminate those areas completely.

B Maintain them at a stagnant level without further investment.

C Improve the situation further by polishing the bright spots.

D Focus only on the external threats.

💡 Short Explanation

Strong areas should be strengthened. Success can be expanded. Continuous improvement is desirable.

✅ Correct Answer Explanation

Ratio analysis identifies not only weaknesses but also bright spots within the business. Management can use this information to strengthen these successful areas further, improve efficiency, and enhance overall performance. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Successful areas should be developed, not eliminated.
Option B → Continuous improvement is preferable to maintaining the status quo.
Option D → The question relates to improving internal strengths, not external threats.

🎯 Strategy

Used: Contextual Interpretation

Application: Understand the purpose of identifying business strengths.

Final Logic: Strong areas should be further strengthened.

🧠 Memory Trick

"Bright Spots → Brighter Results."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Uses of Ratio Analysis

5 Calculate the Gross Profit Ratio:
Revenue from Operations = ₹4,00,000
Average Inventory = ₹55,000
Inventory Turnover Ratio = 6.545 times

A 10%

B 15%

C 20%

D 25%

💡 Short Explanation

Calculate Cost of Revenue. Determine Gross Profit. Apply the Gross Profit Ratio formula.

✅ Correct Answer Explanation

Using the Inventory Turnover Ratio: Cost of Revenue = Inventory Turnover Ratio × Average Inventory = 6.545 × ₹55,000 ≈ ₹3,59,975 Gross Profit = Revenue − Cost of Revenue = ₹4,00,000 − ₹3,59,975 ≈ ₹40,025 Gross Profit Ratio = (Gross Profit ÷ Revenue) × 100 = (₹40,025 ÷ ₹4,00,000) × 100 ≈ 10% Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Not supported by the calculation.
Option C → Gross Profit is much lower than 20%.
Option D → Overestimates the Gross Profit Ratio.

🎯 Strategy

Used: Formula Substitution

Application: Use Inventory Turnover Ratio to derive Cost of Revenue and Gross Profit.

Final Logic: Gross Profit Ratio ≈ 10%.

🧠 Memory Trick

"Gross Profit Ratio = Gross Profit ÷ Revenue × 100."

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

6 Which ratio is computed to assess the efficiency of operations of business based on effective utilisation of resources?

A Solvency Ratio

B Liquidity Ratio

C Profitability Ratio

D Activity (Turnover) Ratio

💡 Short Explanation

Measures efficiency of asset utilisation. Evaluates operational performance. Indicates how effectively resources generate revenue.

✅ Correct Answer Explanation

Activity Ratios, also known as Turnover Ratios, measure how efficiently a business utilizes its assets and other resources to generate sales and income. These ratios assess operational efficiency by evaluating the speed at which inventory is sold, receivables are collected, and assets are used. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Solvency Ratios measure long-term financial stability and debt-paying ability.
Option B → Liquidity Ratios assess the firm's ability to meet short-term obligations.
Option C → Profitability Ratios measure the firm's earning capacity rather than operational efficiency.

🎯 Strategy

Used: Concept Identification

Application: Match the purpose of measuring operational efficiency with the appropriate category of accounting ratios.

Final Logic: Operational efficiency is measured through Activity (Turnover) Ratios.

🧠 Memory Trick

"Activity = Asset Efficiency."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Activity (Turnover) Ratios

7 Arrange the components in decreasing order of liquidity:
(i) Inventories
(ii) Cash and Cash Equivalents
(iii) Trade Receivables

A (i), (ii), (iii)

B (ii), (iii), (i)

C (iii), (i), (ii)

D (ii), (i), (iii)

💡 Short Explanation

Cash is the most liquid asset. Receivables are converted into cash next. Inventory takes the longest time to convert into cash.

✅ Correct Answer Explanation

Liquidity refers to the ease with which an asset can be converted into cash. The correct decreasing order is: 1. Cash and Cash Equivalents – immediately available. 2. Trade Receivables – converted into cash after collection. 3. Inventories – require sale before conversion into cash. Hence, the correct sequence is (ii), (iii), (i), making Option B correct.

❓ Why Other Options Are Incorrect

Option A → Places inventory ahead of cash, which is incorrect.
Option C → Trade receivables cannot be more liquid than cash.
Option D → Inventory is less liquid than trade receivables.

🎯 Strategy

Used: Liquidity Ranking

Application: Arrange current assets according to their ease of conversion into cash.

Final Logic: Cash → Receivables → Inventory.

🧠 Memory Trick

"Cash First, Customers Next, Stock Last."

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

8 Statements:
1. Solvency ratios are essentially short-term in nature.
2. Interest Coverage Ratio is a solvency ratio measuring security of interest payable.

A Both statements are true.

B Statement (1) is true, Statement (2) is false.

C Statement (1) is false, Statement (2) is true.

D Both statements are false.

💡 Short Explanation

Solvency ratios evaluate long-term financial stability. Interest Coverage Ratio measures the ability to pay interest. Only the second statement is correct.

✅ Correct Answer Explanation

Statement 1 is false because Solvency Ratios assess a firm's long-term financial position and its ability to meet long-term obligations. Statement 2 is true because the Interest Coverage Ratio measures how comfortably a business can pay interest on its borrowings from its operating profits. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Statement 1 is incorrect.
Option B → Statement 2 is actually correct.
Option D → Statement 2 is not false.

🎯 Strategy

Used: Statement Evaluation

Application: Evaluate each statement independently before selecting the correct option.

Final Logic: Long-term = Solvency; Interest Coverage is a Solvency Ratio.

🧠 Memory Trick

"Liquidity = Short-Term, Solvency = Long-Term."

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

9 Intra-firm comparison or Time Series Analysis is most severely affected by which limitation of ratio analysis?

A Lack of standardized definitions.

B Ratios based on unrelated figures.

C Ratios being a means and not the end.

D Ignoring price-level changes (inflation).

💡 Short Explanation

Time-series analysis compares different accounting periods. Inflation changes the purchasing power of money. Financial figures become less comparable over time.

✅ Correct Answer Explanation

Time Series (Intra-firm) Analysis compares the performance of the same business across different accounting periods. If price-level changes (inflation) are ignored, financial figures from different years become distorted because the purchasing power of money changes. This reduces the reliability of comparisons. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Standardization mainly affects comparisons between different firms.
Option B → Ratio analysis generally uses related financial figures.
Option C → This describes the nature of ratios, not a limitation affecting time-series analysis.

🎯 Strategy

Used: Concept Application

Application: Identify the limitation that specifically affects comparisons over time.

Final Logic: Inflation distorts year-to-year comparisons.

🧠 Memory Trick

"Inflation Distorts Trends."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Limitations of Ratio Analysis

10 Assertion (A): Variations in accounting practices limit the validity of inter-firm comparison.
Reason (R): Ratios reflect only the monetary aspects of business.

A Both A and R are true, and R explains A.

B Both A and R are true, but R does not explain A.

C A is true, R is false.

D A is false, R is true.

💡 Short Explanation

Different accounting policies reduce comparability. Ratios measure only monetary information. Both statements are true but independent.

✅ Correct Answer Explanation

The Assertion is correct because firms may follow different accounting methods (such as depreciation or inventory valuation), making direct comparison of ratios less reliable. The Reason is also correct because accounting ratios consider only quantitative (monetary) information and ignore qualitative factors. However, the reason does not explain why differences in accounting practices reduce inter-firm comparability. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → The reason does not explain the assertion.
Option C → The reason is true.
Option D → The assertion is also true.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Check whether both statements are true and whether the reason logically explains the assertion.

Final Logic: Both statements are true, but they address different limitations.

🧠 Memory Trick

"Different Policies = Different Results."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Limitations of Ratio Analysis

11 Match the following analysis techniques:

List I	List II
1. Trend Analysis	a. Over many accounting periods
2. Benchmarking	b. Compared to standard expectation
3. SWOT	c. Strength and weakness
4. Historical Analysis	d. Limitation for forecasting

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

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

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

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

💡 Short Explanation

Trend Analysis studies performance over multiple accounting periods. Benchmarking compares performance with standards. SWOT identifies strengths and weaknesses. Historical analysis has limitations in forecasting future performance.

✅ Correct Answer Explanation

Each analytical technique serves a specific purpose: List I — List II Trend Analysis — Over many accounting periods Benchmarking — Compared to standard expectation SWOT — Strength and weakness Historical Analysis — Limitation for forecasting Trend Analysis evaluates performance over time, Benchmarking compares performance with predefined standards or competitors, SWOT identifies internal strengths and weaknesses, and Historical Analysis relies on past data, making it limited for predicting future outcomes. Therefore, the correct matching is 1-a, 2-b, 3-c, 4-d, making Option A correct.

❓ Why Other Options Are Incorrect

Option B → Incorrectly matches Trend Analysis and Benchmarking.
Option C → SWOT and Trend Analysis are mismatched.
Option D → Multiple analytical techniques are incorrectly paired.

🎯 Strategy

Used: Match the Following

Application: Match each analytical technique with its primary purpose.

Final Logic: Each analysis method has a unique objective.

🧠 Memory Trick

"Trend–Time, Benchmark–Standard, SWOT–Strength, History–Past."

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

12 Estimates for the future derived from financial statements using ratios require consideration of:

A Only quantitative financial data.

B Unrelated figures like purchases and furniture.

C Non-financial factors as well, since pure historical forecasting is not feasible.

D Only the stable money measurement principle.

💡 Short Explanation

Historical data alone cannot predict the future. External and qualitative factors influence business performance. Forecasting requires both financial and non-financial information.

✅ Correct Answer Explanation

Ratio analysis helps identify historical trends, but future performance cannot be predicted solely from past financial data. Forecasting must also consider non-financial factors such as economic conditions, government policies, technological developments, competition, consumer preferences, and market trends. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Financial data alone is insufficient for reliable forecasting.
Option B → Uses unrelated figures that have no forecasting significance.
Option D → The money measurement principle alone cannot predict future performance.

🎯 Strategy

Used: Concept Application

Application: Identify the additional factors required for forecasting.

Final Logic: Forecast = Financial Information + Non-financial Information.

🧠 Memory Trick

"Future = Finance + Environment."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Uses and Limitations of Ratio Analysis

13 Statements:
1. Operating Ratio includes non-operating expenses like interest paid.
2. Lower Operating Ratio is a very healthy sign for the business.

A Both statements are correct.

B Only (1) is correct.

C Neither is correct.

D Only (2) is correct.

💡 Short Explanation

Operating Ratio excludes non-operating expenses. Interest expense is non-operating. Lower Operating Ratio indicates better operational efficiency.

✅ Correct Answer Explanation

Statement 1 is incorrect because the Operating Ratio considers only operating expenses and cost of revenue from operations. It excludes non-operating items such as interest expense, losses on sale of fixed assets, and other non-operating charges. Statement 2 is correct because a lower Operating Ratio means that a smaller proportion of revenue is consumed by operating costs, leaving a higher operating profit. This reflects better operational efficiency. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Statement 1 is false.
Option B → Statement 2 is true.
Option C → Statement 2 is not false.

🎯 Strategy

Used: Statement Evaluation

Application: Evaluate each statement independently.

Final Logic: Operating Ratio excludes non-operating items, and lower values indicate efficiency.

🧠 Memory Trick

"Lower Operating Ratio = Higher Efficiency."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Operating Ratio

14 From the owners' perspective, trading on equity (greater use of debt) in financing decisions may:

A Guarantee zero risk of bankruptcy.

B Help ensure higher returns for them if ROI is higher than the interest rate.

C Drastically increase the firm's liquidity ratio.

D Reduce the Gross Profit Ratio automatically.

💡 Short Explanation

Borrowed funds can increase shareholders' returns. Return on Investment must exceed borrowing cost. This principle is known as trading on equity.

✅ Correct Answer Explanation

Trading on Equity refers to using borrowed funds in the capital structure to increase the return available to equity shareholders. This strategy is beneficial only when the Return on Investment (ROI) exceeds the interest rate on borrowed funds. Under such circumstances, shareholders earn a higher return on their own investment. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Debt increases financial risk and does not eliminate bankruptcy risk.
Option C → Liquidity ratios are not directly increased by higher debt.
Option D → Gross Profit Ratio depends on sales and cost of goods sold, not financing decisions.

🎯 Strategy

Used: Concept Application

Application: Apply the principle of trading on equity.

Final Logic: ROI > Interest Rate = Higher Shareholder Return.

🧠 Memory Trick

"Borrow Smart, Earn More."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Trading on Equity

15 Ratios simplify complex accounting figures by expressing them as:

A Fractions, proportions, percentages, and number of times.

B Only raw nominal values.

C Detailed textual descriptions.

D Standardized universal levels.

💡 Short Explanation

Ratios summarize financial information. They make comparisons easier. They can be expressed in different mathematical forms.

✅ Correct Answer Explanation

Accounting ratios simplify large and complex financial data by expressing relationships between financial statement items in the form of fractions, proportions, percentages, or number of times. These forms make interpretation, comparison, and decision-making easier for users of financial statements. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Ratios are relationships, not raw figures.
Option C → Ratios are numerical expressions, not textual descriptions.
Option D → Ratios do not establish universal standards; they facilitate comparison.

🎯 Strategy

Used: Concept Identification

Application: Identify the standard forms in which accounting ratios are expressed.

Final Logic: Ratios convert complex data into simple numerical relationships.

🧠 Memory Trick

"Ratios = Fraction, Percentage, Proportion, Times."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Meaning and Forms of Accounting Ratios

16 Establishing a relationship between Credit Revenue from Operations and Trade Receivables yields which composite ratio?

A Inventory Turnover Ratio

B Current Ratio

C Trade Receivables Turnover Ratio

D Debt-Equity Ratio

💡 Short Explanation

Measures the efficiency of collecting receivables. Relates credit sales to average trade receivables. Indicates how quickly debtors are converted into cash.

✅ Correct Answer Explanation

The Trade Receivables Turnover Ratio is calculated by dividing Net Credit Revenue from Operations by Average Trade Receivables. It measures how efficiently a business collects amounts due from customers. A higher ratio indicates faster collection and better credit management. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Inventory Turnover Ratio relates cost of revenue to average inventory.
Option B → Current Ratio compares current assets with current liabilities.
Option D → Debt-Equity Ratio measures long-term financial leverage.

🎯 Strategy

Used: Formula Identification

Application: Identify the ratio based on the financial items mentioned.

Final Logic: Credit Sales ÷ Average Trade Receivables = Trade Receivables Turnover Ratio.

🧠 Memory Trick

"Credit Sales ÷ Receivables = Collection Efficiency."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Trade Receivables Turnover Ratio

17 If a firm has a Current Ratio of 2:1 and Quick Ratio of 1:1, this indicates:

A A weakness due to severe lack of liquidity.

B A strength indicating a safe margin against uncertainty in realizing current assets.

C A threat of imminent bankruptcy.

D An over-utilization of fixed assets.

💡 Short Explanation

Current Ratio equals the ideal benchmark. Quick Ratio also meets the accepted standard. Indicates a sound short-term financial position.

✅ Correct Answer Explanation

A Current Ratio of 2:1 and a Quick Ratio of 1:1 are generally regarded as satisfactory liquidity standards. These ratios indicate that the business possesses sufficient current and quick assets to meet its short-term obligations, providing a reasonable margin of safety against uncertainty in realizing current assets. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → The ratios indicate adequate liquidity, not a shortage.
Option C → These ratios do not suggest financial distress.
Option D → Liquidity ratios do not measure utilization of fixed assets.

🎯 Strategy

Used: Standard Ratio Interpretation

Application: Compare the given ratios with generally accepted liquidity benchmarks.

Final Logic: 2:1 and 1:1 represent healthy liquidity.

🧠 Memory Trick

"2:1 Current, 1:1 Quick = Financially Sound."

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

18 A very high Current Ratio (e.g., 5:1) might be a threat/problem because:

A It puts the firm at risk of not paying short-term debts.

B It indicates low profitability margins.

C It means the firm is trading on equity.

D It reflects under-utilization or improper deployment of resources in current assets.

💡 Short Explanation

Excessive liquidity may indicate idle current assets. Funds may be locked in inventory, cash, or receivables. Inefficient resource utilization can reduce profitability.

✅ Correct Answer Explanation

Although maintaining adequate liquidity is important, an excessively high Current Ratio, such as 5:1, may indicate that too much money is tied up in inventories, receivables, or idle cash. This reflects under-utilization or improper deployment of current assets, which may reduce the firm's overall profitability and operational efficiency. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → A high Current Ratio improves the firm's ability to pay short-term liabilities.
Option B → A high Current Ratio does not automatically imply low profitability.
Option C → Trading on equity relates to financing decisions involving debt, not liquidity.

🎯 Strategy

Used: Ratio Interpretation

Application: Evaluate the implications of an unusually high Current Ratio.

Final Logic: Too much liquidity may signal idle resources.

🧠 Memory Trick

"Too Much Liquidity = Idle Money."

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

19 Assertion (A): Comparing a firm's ratios with industry averages helps evaluate its competitive position.
Reason (R): India has a robust, universally accepted standard list of ideal ratios for all industries.

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, R is false.

D A is false, R is true.

💡 Short Explanation

Industry comparisons help evaluate performance. Universal ratio standards do not exist. Standards differ across industries.

✅ Correct Answer Explanation

The Assertion is true because comparing a firm's accounting ratios with industry averages helps assess its relative performance and competitive position. The Reason is false because there is no universally accepted standard ratio that applies to every industry. Ideal ratios vary according to the nature of the industry, business size, and operating conditions. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → The reason is false.
Option B → The reason itself is incorrect.
Option D → The assertion is true.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Evaluate the truthfulness of both statements independently.

Final Logic: Industry comparison is useful, but universal standards do not exist.

🧠 Memory Trick

"Compare with Industry, Not with One Universal Standard."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Inter-firm Comparison

20 The standard benchmark for Debt-Equity Ratio is normally considered safe at 2:1. If Long-term Debts = ₹1,50,000 and Shareholders' Funds = ₹5,00,000, what is the Debt-Equity Ratio and is it within the safe standard?

A 0.3:1; Yes, it is well within the safe standard.

B 3.3:1; No, it exceeds the safe standard.

C 0.3:1; No, it exceeds the safe standard.

D 3.3:1; Yes, it is within the safe standard.

💡 Short Explanation

Debt-Equity Ratio = Long-term Debt ÷ Shareholders' Funds. ��1,50,000 ÷ ₹5,00,000 = 0.3. The ratio is well below the benchmark of 2:1.

✅ Correct Answer Explanation

The Debt-Equity Ratio is calculated as: Debt-Equity Ratio = Long-term Debt ÷ Shareholders' Funds = ₹1,50,000 ÷ ₹5,00,000 = 0.3 : 1 Since 0.3:1 is significantly lower than the generally accepted benchmark of 2:1, the business has a conservative capital structure and is comfortably within the safe limit. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → The calculated ratio is incorrect.
Option C → Although the ratio is correct, the conclusion is incorrect because 0.3:1 is below the benchmark.
Option D → Both the calculated ratio and the conclusion are incorrect.

🎯 Strategy

Used: Formula Application

Application: Apply the Debt-Equity Ratio formula and compare the result with the benchmark.

Final Logic: 0.3:1 < 2:1, therefore the firm is financially safe.

🧠 Memory Trick

"Debt ÷ Equity = Financial Leverage."

📚 Class XII – Accountancy Part II – Chapter: Accounting Ratios – Topic: Debt-Equity Ratio

CUET UG Accountancy Booster Test 1 Objectives and Advantages

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