CUET UG Accountancy Booster Test 2 Types of Ratios and Calculations
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QUESTION 1 OF 20
Assertion (A):
The current ratio formula definition evaluates the relationship between total assets and total liabilities.
Reason (R):
Current ratio is strictly the proportion of current assets to current liabilities.
QUESTION 2 OF 20
A company pays off ₹10,000 of its current liabilities. Its initial Current Ratio was 2:1 (Current Assets ₹50,000; Current Liabilities ₹25,000). What will be the effect on the Current Ratio?
QUESTION 3 OF 20
Match the specific transactions with their effect on components included in current assets.
| List 1 | List 2 |
|---|---|
| 1. Sale of fixed asset for cash | a. Current assets decrease |
| 2. Purchase of goods on credit | b. Current assets increase by the cash received |
| 3. Payment of current liability in cash | c. Current assets increase by the inventory value |
| 4. Collection from debtors | d. No net change in total current assets |
QUESTION 4 OF 20
Category: Current Assets
Subtopic: Cash Equivalents
Consider the following assets:
I. Cash in hand
II. Cash at bank
III. Short-term highly liquid investments
IV. 5-year fixed deposits
Which of these are strictly classified as cash equivalents?
QUESTION 5 OF 20
How are bank overdrafts representing short-term borrowings classified while preparing financial statements for computing liquidity ratios?
QUESTION 6 OF 20
If Total Assets are ₹3,00,000, Non-current Liabilities are ₹80,000, Shareholders' Funds are ₹2,00,000, calculate Current Liabilities.
QUESTION 7 OF 20
How is the liquid assets concept algebraically derived from Current Assets?
QUESTION 8 OF 20
Why is the Acid-Test Ratio considered a better measure of short-term liquidity than the Current Ratio?
QUESTION 9 OF 20
Arrange the assets in descending order of liquidity:
1. Inventories
2. Cash and Cash Equivalents
3. Trade Receivables
QUESTION 10 OF 20
A company has a Current Ratio of 4.5:1 and a Quick Ratio of 3:1. If Inventory is ₹36,000, what are the Current Liabilities and what is the risk evaluation?
QUESTION 11 OF 20
A high capital structure Debt-Equity Ratio is generally considered risky for lenders, but why might owners prefer greater use of debt (trading on equity)?
QUESTION 12 OF 20
If a company redeems ₹1,00,000 worth of debentures, what will be the effect on its Debt-Equity Ratio?
QUESTION 13 OF 20
From the following, calculate Equity Funds (Shareholders' Funds):
Non-current Assets = ₹18,00,000
Working Capital = ₹2,00,000
Non-current Liabilities = ₹5,00,000
QUESTION 14 OF 20
Assertion (A):
Capital Employed can also be calculated as Total Assets minus Current Liabilities.
Reason (R):
Net Assets represent the long-term funds employed in the business, which equals Long-term Debt + Shareholders' Funds.
QUESTION 15 OF 20
Consider the following statements:
I. Proprietary Ratio = Shareholders' Funds / Net Assets.
II. Debt to Capital Employed Ratio + Proprietary Ratio = 1.
III. It evaluates the short-term liquidity of a firm.
QUESTION 16 OF 20
If 25% of the asset financing is funded by debts, what percentage is funded by owners' funds, and what does it indicate for the Proprietary Ratio?
QUESTION 17 OF 20
Which of the following is the exact formula to calculate Interest Coverage Ratio?
QUESTION 18 OF 20
Match the given values.
| List 1 | List 2 |
|---|---|
| 1. Net Profit Before Tax | a. ₹1,50,000 |
| 2. Net Profit Before Interest and Tax (PBIT) | b. ₹1,00,000 |
| 3. Interest Coverage Ratio | c. 1.67 times |
| 4. Interest Amount | d. ₹2,50,000 |
QUESTION 19 OF 20
Read the passage to answer Q19 and Q20: "Inventory Turnover Ratio determines the number of times inventory is converted into revenue from operations during the accounting period under consideration. It expresses the relationship between the cost of revenue from operations and average inventory. Average inventory refers to arithmetic average of opening and closing inventory, and the cost of revenue from operations means revenue from operations less gross profit. It studies the frequency of conversion of inventory of finished goods into revenue from operations. It is also a measure of liquidity."
According to the passage, how is the "Cost of Revenue from Operations" derived when calculating the Inventory Turnover Ratio?
QUESTION 20 OF 20
Read the passage to answer Q20: "Inventory Turnover Ratio determines the number of times inventory is converted into revenue from operations during the accounting period under consideration. It expresses the relationship between the cost of revenue from operations and average inventory. Average inventory refers to arithmetic average of opening and closing inventory, and the cost of revenue from operations means revenue from operations less gross profit. It studies the frequency of conversion of inventory of finished goods into revenue from operations. It is also a measure of liquidity."
Based on the passage, Inventory Turnover Ratio evaluates how quickly inventory turns into cash or receivables. Because of this, it is also considered a measure of:
Test Complete!
Answer Review
1 Assertion (A):
The current ratio formula definition evaluates the relationship between total assets and total liabilities.
Reason (R):
Current ratio is strictly the proportion of current assets to current liabilities.
Current Ratio compares Current Assets and Current Liabilities. It does not compare Total Assets and Total Liabilities. The reason correctly defines the ratio.
The Assertion is false because Current Ratio is not calculated using Total Assets and Total Liabilities. It is calculated as: Current Ratio = Current Assets ÷ Current Liabilities The Reason is true because the Current Ratio strictly measures the relationship between Current Assets and Current Liabilities. Therefore, Option C is correct.
- Option A → Assertion is false.
- Option B → Reason is true.
- Option D → Reason correctly states the formula.
Used: Assertion–Reason Analysis
Application: Verify the definition of Current Ratio.
Final Logic: Current Ratio focuses only on current items.
CA ÷ CL = Current Ratio
2 A company pays off ₹10,000 of its current liabilities. Its initial Current Ratio was 2:1 (Current Assets ₹50,000; Current Liabilities ₹25,000). What will be the effect on the Current Ratio?
Paying current liabilities reduces both current assets and current liabilities. New CA = ₹40,000. New CL = ₹15,000.
After paying ₹10,000: Current Assets = ₹50,000 − ₹10,000 = ₹40,000 Current Liabilities = ₹25,000 − ₹10,000 = ₹15,000 New Current Ratio: Current Ratio = 40000 ÷ 15000 = 2.67: 1 Therefore, Option A is correct.
- Option B → Incorrect calculation.
- Option C → Ratio changes.
- Option D → Ratio does not become 1:1.
Used: Numerical Substitution
Application: Adjust current assets and liabilities.
Final Logic: Ratio improves when liabilities are paid and initial ratio exceeds 1.
Pay Liability → Better Current Ratio
3 Match the specific transactions with their effect on components included in current assets.
| List 1 | List 2 |
|---|---|
| 1. Sale of fixed asset for cash | a. Current assets decrease |
| 2. Purchase of goods on credit | b. Current assets increase by the cash received |
| 3. Payment of current liability in cash | c. Current assets increase by the inventory value |
| 4. Collection from debtors | d. No net change in total current assets |
Sale of fixed asset increases cash. Credit purchase increases inventory. Cash payment decreases current assets. Collection only changes asset composition.
Correct matching: Sale of fixed asset → Cash increases. Credit purchase → Inventory increases. Payment of liability → Cash decreases. Collection from debtors → Cash increases while receivables decrease; total current assets remain unchanged. Therefore, Option D is correct.
- Other options contain incorrect transaction effects.
Used: Match the Following
Application: Analyze the impact of each transaction.
Final Logic: Consider total current asset effect.
Cash–Inventory–Cash Out–Conversion
4 Category: Current Assets
Subtopic: Cash Equivalents
Consider the following assets:
I. Cash in hand
II. Cash at bank
III. Short-term highly liquid investments
IV. 5-year fixed deposits
Which of these are strictly classified as cash equivalents?
Cash equivalents are highly liquid. Long-term deposits are excluded. 5-year deposits are non-current investments.
Cash equivalents include: Cash in hand Cash at bank Short-term highly liquid investments A 5-year fixed deposit is not a cash equivalent because it is not readily convertible into cash. Therefore, Option B is correct.
- Option A → Includes long-term deposit.
- Option C → Excludes cash in hand.
- Option D → Includes ineligible deposit.
Used: Classification Analysis
Application: Identify liquid assets.
Final Logic: Only short-term highly liquid assets qualify.
Cash + Bank + Short-Term Investments
5 How are bank overdrafts representing short-term borrowings classified while preparing financial statements for computing liquidity ratios?
Bank overdraft is repayable on demand. It is a short-term obligation. Included in Current Liabilities.
Bank overdrafts are classified as short-term borrowings and form part of Current Liabilities while calculating liquidity ratios. Therefore, Option C is correct.
- Options A and B → Not long-term.
- Option D → Not contingent.
Used: Classification Recognition
Application: Identify liability type.
Final Logic: Short-term borrowing belongs to current liabilities.
Bank OD = Current Liability
6 If Total Assets are ₹3,00,000, Non-current Liabilities are ₹80,000, Shareholders' Funds are ₹2,00,000, calculate Current Liabilities.
Total Liabilities = Assets − Shareholders' Funds. Current Liabilities = Total Liabilities − Non-current Liabilities.
Total Liabilities: = ₹3,00,000 − ₹2,00,000 = ₹1,00,000 Current Liabilities: = ₹1,00,000 − ₹80,000 = ₹20,000 Therefore, Option A is correct.
- Other options do not satisfy the accounting equation.
Used: Numerical Substitution
Application: Apply Assets = Liabilities + Equity.
Final Logic: Current Liabilities = ₹20,000.
Assets − Equity = Liabilities
7 How is the liquid assets concept algebraically derived from Current Assets?
Quick Assets exclude less liquid items. Inventory, prepaid expenses, and advance tax are deducted.
Liquid Assets (Quick Assets) are calculated as: Liquid Assets = Current Assets − (Inventories + Prepaid Expenses + Advance Tax) Therefore, Option D is correct.
- Other formulas are not used for Quick Assets.
Used: Formula Recognition
Application: Recall the Liquid Assets formula.
Final Logic: Exclude non-liquid current assets.
CA − Inventory − Prepaid − Advance Tax
8 Why is the Acid-Test Ratio considered a better measure of short-term liquidity than the Current Ratio?
Quick Ratio focuses on immediately available assets. Inventory may take time to convert into cash.
The Acid-Test Ratio excludes inventories and prepaid expenses, making it a stricter and more reliable measure of immediate liquidity than the Current Ratio. Therefore, Option B is correct.
- Other statements are factually incorrect.
Used: Conceptual Understanding
Application: Compare Current Ratio and Quick Ratio.
Final Logic: Quick Ratio focuses on readily available assets.
Quick Ratio = No Inventory
9 Arrange the assets in descending order of liquidity:
1. Inventories
2. Cash and Cash Equivalents
3. Trade Receivables
Cash is most liquid. Receivables come next. Inventory is least liquid.
Liquidity order: Cash and Cash Equivalents → Trade Receivables → Inventories Therefore, the correct sequence is 2, 3, 1.
- They do not follow the accepted liquidity order.
Used: Sequencing
Application: Rank assets according to convertibility into cash.
Final Logic: Cash is most liquid; inventory is least.
Cash → Receivables → Inventory
10 A company has a Current Ratio of 4.5:1 and a Quick Ratio of 3:1. If Inventory is ₹36,000, what are the Current Liabilities and what is the risk evaluation?
Difference between Current Ratio and Quick Ratio represents Inventory. Inventory = (4.5 − 3) × Current Liabilities.
Inventory: = (4.5 − 3) × Current Liabilities = 1.5 × Current Liabilities ₹36,000 = 1.5 × Current Liabilities Current Liabilities = ₹24,000 The ratios indicate strong liquidity and adequate safety. Therefore, Option C is correct.
- Other liability values are incorrect.
- High-risk interpretation is not justified.
Used: Numerical Substitution
Application: Use Current Ratio and Quick Ratio relationship.
Final Logic: Current Liabilities = ₹24,000 and liquidity is strong.
CR − QR = Inventory Effect
11 A high capital structure Debt-Equity Ratio is generally considered risky for lenders, but why might owners prefer greater use of debt (trading on equity)?
Debt carries fixed interest. If business earnings exceed interest cost, shareholders benefit. This is called trading on equity.
Owners may prefer debt financing when the return earned on business investments exceeds the fixed interest payable on debt. In such situations, shareholders enjoy enhanced returns without increasing their own investment. This concept is known as trading on equity. Therefore, Option D is correct.
- Option A → Debt does not reduce capital employed.
- Option B → Debenture holders generally do not receive voting rights.
- Option C → Debt financing does not directly reduce gross profit.
Used: Conceptual Analysis
Application: Understand the purpose of trading on equity.
Final Logic: Higher earnings than interest benefit shareholders.
Earn More Than Interest = Trading on Equity
12 If a company redeems ₹1,00,000 worth of debentures, what will be the effect on its Debt-Equity Ratio?
Redemption reduces long-term debt. Shareholders' funds remain unchanged. Debt-Equity Ratio falls.
Debt-Equity Ratio is: Debt-Equity Ratio = Long-term Debt ÷ Shareholders' Funds When long-term debt is redeemed, the numerator decreases while shareholders' funds remain unchanged. Hence, the Debt-Equity Ratio decreases. Therefore, Option B is correct.
- Option A → Debt is reduced, not increased.
- Option C → Ratio changes.
- Option D → Current assets are not the determining factor.
Used: Formula Application
Application: Observe the impact of debt reduction.
Final Logic: Lower debt means lower Debt-Equity Ratio.
Less Debt = Lower Debt-Equity Ratio
13 From the following, calculate Equity Funds (Shareholders' Funds):
Non-current Assets = ₹18,00,000
Working Capital = ₹2,00,000
Non-current Liabilities = ₹5,00,000
Capital Employed = Non-current Assets + Working Capital. Equity Funds = Capital Employed − Non-current Liabilities.
Capital Employed: = ₹18,00,000 + ₹2,00,000 = ₹20,00,000 Shareholders' Funds: = ₹20,00,000 − ₹5,00,000 = ₹15,00,000 Therefore, Option A is correct.
- Options B, C, D do not satisfy the calculation.
Used: Numerical Substitution
Application: Calculate Capital Employed first.
Final Logic: Equity Funds = ₹15,00,000.
Capital Employed − Long-Term Debt = Equity Funds
14 Assertion (A):
Capital Employed can also be calculated as Total Assets minus Current Liabilities.
Reason (R):
Net Assets represent the long-term funds employed in the business, which equals Long-term Debt + Shareholders' Funds.
Capital Employed equals Net Assets. Net Assets represent long-term funds. Long-term Debt + Shareholders' Funds = Capital Employed.
Capital Employed may be calculated as: Capital\ Employed=Total\ Assets-Current\ Liabilities Net Assets represent the long-term funds employed in the business and are financed by Long-term Debt and Shareholders' Funds. Hence both statements are true and the Reason correctly explains the Assertion. Therefore, Option D is correct.
- Options A, B, C incorrectly evaluate either the Assertion or the Reason.
Used: Assertion–Reason Analysis
Application: Verify both statements and their relationship.
Final Logic: Net Assets and Capital Employed are equivalent measures.
Net Assets = Capital Employed
15 Consider the following statements:
I. Proprietary Ratio = Shareholders' Funds / Net Assets.
II. Debt to Capital Employed Ratio + Proprietary Ratio = 1.
III. It evaluates the short-term liquidity of a firm.
Proprietary Ratio measures ownership financing. Debt to Capital Employed Ratio and Proprietary Ratio complement each other. It does not measure liquidity.
Statements I and II are correct. Proprietary Ratio measures the proportion of assets financed by owners. Statement III is incorrect because liquidity is measured by Current Ratio and Quick Ratio, not Proprietary Ratio. Therefore, Option C is correct.
- Options A and B include Statement III.
- Option D incorrectly treats Statement III as true.
Used: Statement Evaluation
Application: Assess each statement separately.
Ownership, Not Liquidity
16 If 25% of the asset financing is funded by debts, what percentage is funded by owners' funds, and what does it indicate for the Proprietary Ratio?
Total financing = 100%. Debt financing = 25%. Owners' financing = 75%.
If debt finances 25% of assets, the remaining 75% must be financed by shareholders' funds. Proprietary Ratio: Proprietary Ratio = 75 ÷ 100 = 0.75: 1 Therefore, Option B is correct.
- Other percentages do not satisfy the financing structure.
Used: Percentage Analysis
Application: Determine owners' share of financing.
100% − Debt % = Owners' %
17 Which of the following is the exact formula to calculate Interest Coverage Ratio?
Measures ability to pay interest. Uses profit before interest and tax. Compares earnings with interest burden.
The Interest Coverage Ratio is: Interest Coverage Ratio = Net Profit Before Interest and Tax ÷ Interest on Long-term Debts Therefore, Option C is correct.
- Other formulas do not represent Interest Coverage Ratio.
Used: Formula Recognition
Application: Recall the standard formula.
PBIT ÷ Interest
18 Match the given values.
| List 1 | List 2 |
|---|---|
| 1. Net Profit Before Tax | a. ₹1,50,000 |
| 2. Net Profit Before Interest and Tax (PBIT) | b. ₹1,00,000 |
| 3. Interest Coverage Ratio | c. 1.67 times |
| 4. Interest Amount | d. ₹2,50,000 |
PBT = ₹1,00,000. PBIT = ₹2,50,000. Interest = ₹1,50,000. Coverage = 1.67 times.
Given: NPAT = ₹60,000 Tax Rate = 40% Interest = ₹1,50,000 PBT = ₹60,000 ÷ 0.60 = ₹1,00,000 PBIT = ₹1,00,000 + ₹1,50,000 = ₹2,50,000 Interest Coverage Ratio = ₹2,50,000 ÷ ₹1,50,000 = 1.67 times Correct matching: 1-b, 2-d, 3-c, 4-a Therefore, Option A is correct.
- Other combinations do not match the calculated values.
Used: Match the Following + Numerical Analysis
Application: Compute each value before matching.
PBT → PBIT → Coverage
19 Read the passage to answer Q19 and Q20: "Inventory Turnover Ratio determines the number of times inventory is converted into revenue from operations during the accounting period under consideration. It expresses the relationship between the cost of revenue from operations and average inventory. Average inventory refers to arithmetic average of opening and closing inventory, and the cost of revenue from operations means revenue from operations less gross profit. It studies the frequency of conversion of inventory of finished goods into revenue from operations. It is also a measure of liquidity."
According to the passage, how is the "Cost of Revenue from Operations" derived when calculating the Inventory Turnover Ratio?
Cost of Revenue excludes gross profit. Revenue − Gross Profit = Cost of Revenue.
The passage clearly states that Cost of Revenue from Operations is calculated by deducting Gross Profit from Revenue from Operations. Therefore, Option D is correct.
- They do not follow the definition provided in the passage.
Used: Passage-Based Interpretation
Application: Extract the formula directly from the passage.
Revenue − Gross Profit = Cost
20 Read the passage to answer Q20: "Inventory Turnover Ratio determines the number of times inventory is converted into revenue from operations during the accounting period under consideration. It expresses the relationship between the cost of revenue from operations and average inventory. Average inventory refers to arithmetic average of opening and closing inventory, and the cost of revenue from operations means revenue from operations less gross profit. It studies the frequency of conversion of inventory of finished goods into revenue from operations. It is also a measure of liquidity."
Based on the passage, Inventory Turnover Ratio evaluates how quickly inventory turns into cash or receivables. Because of this, it is also considered a measure of:
Faster inventory conversion improves liquidity. Inventory Turnover indicates movement of stock. It reflects short-term financial strength.
The passage specifically states that Inventory Turnover Ratio is also a measure of liquidity because it indicates how rapidly inventory is converted into sales, cash, or receivables. Therefore, Option B is correct.
- Option A → Concerns long-term obligations.
- Option C → Relates to interest or debt servicing.
- Option D → Relates to ownership financing.
Used: Passage-Based Conclusion
Application: Identify the broader significance of Inventory Turnover.
Fast Inventory = Better Liquidity