CUET UG Accountancy Booster Test 2 Types of Ratios and Calculations -

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CUET UG Accountancy Booster Test 1 Types of Ratios and Calculations

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 1 Types of Ratios and Calculations

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QUESTION 1 OF 20

Category: Current Ratio
Total Assets are Rs. 3,00,000, Non-current liabilities are Rs. 80,000, Shareholders' Funds are Rs. 2,00,000, and Non-Current Assets are Rs. 2,60,000. Applying the formula definition, calculate the current ratio.

Answer Review

1 Category: Current Ratio
Total Assets are Rs. 3,00,000, Non-current liabilities are Rs. 80,000, Shareholders' Funds are Rs. 2,00,000, and Non-Current Assets are Rs. 2,60,000. Applying the formula definition, calculate the current ratio.

A 1:1

B 2:1

C 1.5:1

D 3:1

💡 Short Explanation

Current Assets = Total Assets − Non-Current Assets. Current Liabilities = Total Assets − Shareholders' Funds − Non-Current Liabilities. Current Ratio = Current Assets ÷ Current Liabilities.

✅ Correct Answer Explanation

Current Assets = ₹3,00,000 − ₹2,60,000 = ₹40,000 Total Liabilities = ₹3,00,000 − ₹2,00,000 = ₹1,00,000 Current Liabilities = ₹1,00,000 − ₹80,000 = ₹20,000 Current Ratio = ₹40,000 ÷ ₹20,000 = 2:1 Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect calculation.
Option C → Does not match computed ratio.
Option D → Overstated ratio.

🎯 Strategy

Used: Numerical Substitution

Application: Calculate Current Assets and Current Liabilities before applying the ratio formula.

Final Logic: Current Ratio = 40,000 ÷ 20,000 = 2:1.

🧠 Memory Trick

Current Ratio = Current Assets ÷ Current Liabilities

📚 Topic: Current Ratio – Formula Definition

2 Category: Current Ratio
Assertion (A):
A very low current ratio interpretation range is ideal as it indicates high profitability.
Reason (R):
A low ratio endangers the business and puts it at risk of not being able to pay short-term debt on time.

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

B A is true, but R is false

C Both A and R are false

D A is false, but R is true

💡 Short Explanation

Low Current Ratio indicates liquidity problems. It increases repayment risk. Profitability is not guaranteed.

✅ Correct Answer Explanation

The Assertion is false because a very low Current Ratio is not considered ideal. It may indicate difficulty in meeting short-term obligations. The Reason is true because insufficient current assets can endanger the firm's ability to pay current debts. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Assertion is false.
Option B → Reason is true.
Option C → Reason is not false.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Evaluate each statement separately.

Final Logic: Liquidity risk rises when Current Ratio is very low.

🧠 Memory Trick

Low Current Ratio = High Liquidity Risk

📚 Topic: Current Ratio – Interpretation Range

3 Category: Current Assets
Match the components included with their correct classification in the balance sheet for ratio analysis.

List 1	List 2
1. Bills Receivable	a. Long-term asset
2. Prepaid Expenses	b. Cash equivalent
3. Non-current Investments	c. Excluded from quick assets
4. Cash	d. Trade Receivable

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

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

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

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

💡 Short Explanation

Bills Receivable are Trade Receivables. Prepaid Expenses are excluded from Quick Assets. Non-current Investments are long-term assets. Cash is a cash equivalent.

✅ Correct Answer Explanation

Bills Receivable represent Trade Receivables. Prepaid Expenses are excluded while computing Quick Assets. Non-current Investments are long-term assets, and Cash is classified as a cash equivalent. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Options A, B, D → Incorrect classification of one or more items.

🎯 Strategy

Used: Match the Following

Application: Match each asset with its correct classification.

Final Logic: Asset classification determines ratio calculations.

🧠 Memory Trick

Receivable–Prepaid–Investment–Cash

📚 Topic: Current Assets – Components Included

4 Category: Current Assets
Which of the following statements best describes cash equivalents in the context of liquidity analysis?

A They are highly liquid short-term investments quickly convertible into cash

B They consist solely of long-term deposits

C They refer exclusively to physical cash in the business

D They are synonymous with tangible fixed assets

💡 Short Explanation

Easily convertible into cash. Highly liquid in nature. Used in liquidity assessment.

✅ Correct Answer Explanation

Cash equivalents are short-term, highly liquid investments that can be readily converted into known amounts of cash with insignificant risk. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Long-term deposits are not cash equivalents.
Option C → Includes more than physical cash.
Option D → Fixed assets are non-current assets.

🎯 Strategy

Used: Concept Recognition

Application: Recall the definition of cash equivalents.

Final Logic: Liquidity requires quick convertibility into cash.

🧠 Memory Trick

Cash Equivalent = Almost Cash

📚 Topic: Current Assets – Cash Equivalents

5 Category: Current Liabilities
If a firm issues short-term borrowings that are due for redemption within 11 months, how will they be classified while calculating the current ratio?

A As part of non-current liabilities

B As part of current liabilities

C As cash equivalents

D As trade receivables

💡 Short Explanation

Repayable within one year. Classified as current obligation. Included in Current Liabilities.

✅ Correct Answer Explanation

Short-term borrowings due within 12 months are classified as Current Liabilities because they must be settled within the operating cycle or one year. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Non-current liabilities mature after one year.
Option C → Borrowings are liabilities, not assets.
Option D → Trade Receivables are assets.

🎯 Strategy

Used: Classification Analysis

Application: Identify the maturity period.

Final Logic: Due within one year = Current Liability.

🧠 Memory Trick

< 12 Months = Current Liability

📚 Topic: Current Liabilities – Short-Term Borrowings

6 Category: Current Liabilities
Consider the following statements about trade payables:
I. Trade payables include creditors and bills payables.
II. Trade payables are part of current liabilities.
III. Trade payables arise out of long-term borrowing.

A I and III

B II and III

C I, II, and III

D I and II

💡 Short Explanation

Trade Payables include creditors and bills payable. They are current liabilities. They do not arise from long-term borrowing.

✅ Correct Answer Explanation

Statements I and II are correct because Trade Payables include creditors and bills payable and are classified as Current Liabilities. Statement III is incorrect because Trade Payables arise from credit purchases, not long-term borrowing. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Statement III is incorrect.
Option B → Statement III is incorrect.
Option C → Includes incorrect statement III.

🎯 Strategy

Used: Statement Evaluation

Application: Verify each statement independently.

Final Logic: Trade Payables arise from trading transactions.

🧠 Memory Trick

Trade Payables = Credit Purchases

📚 Topic: Current Liabilities – Trade Payables

7 Category: Quick Ratio
Current Assets are Rs. 80,000, Inventories are Rs. 20,000, Advance Tax is Rs. 5,000, and Prepaid Expenses are Rs. 5,000. Calculate Liquid Assets based on the concept.

A Rs. 40,000

B Rs. 60,000

C Rs. 50,000

D Rs. 80,000

💡 Short Explanation

Liquid Assets exclude Inventory. Advance Tax and Prepaid Expenses are excluded. Subtract these from Current Assets.

✅ Correct Answer Explanation

Liquid Assets = Current Assets − Inventories − Advance Tax − Prepaid Expenses = ₹80,000 − ₹20,000 − ₹5,000 − ₹5,000 = ₹50,000 Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Options A, B, D → Do not follow the Liquid Assets formula.

🎯 Strategy

Used: Numerical Substitution

Application: Apply the Liquid Assets formula.

Final Logic: ₹80,000 − ₹30,000 = ₹50,000.

🧠 Memory Trick

Liquid Assets = Current Assets − Non-Quick Items

📚 Topic: Quick Ratio – Liquid Assets Concept

8 Category: Quick Ratio
The Acid-test ratio is calculated using which of the following formulas?

A Quick Assets divided by Current Liabilities

B Current Assets divided by Quick Liabilities

C Quick Assets minus Current Liabilities

D Current Assets divided by Current Liabilities

💡 Short Explanation

Measures immediate liquidity. Uses Quick Assets. Compared with Current Liabilities.

✅ Correct Answer Explanation

The Acid-Test Ratio (Quick Ratio) is calculated as: Quick Assets ÷ Current Liabilities It measures the firm's ability to meet current obligations using the most liquid assets. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Incorrect formula.
Option C → Difference, not a ratio.
Option D → Formula for Current Ratio.

🎯 Strategy

Used: Formula Recognition

Application: Recall the Quick Ratio formula.

Final Logic: Quick Assets are used instead of Current Assets.

🧠 Memory Trick

Quick Ratio = Quick Assets ÷ Current Liabilities

📚 Topic: Quick Ratio – Acid-Test Ratio

9 Category: Liquidity Analysis
Arrange the steps to assess a firm's short-term capacity using the liquid ratio.
1. Determine Current Liabilities.
2. Calculate Liquid Assets by subtracting inventory and prepaid expenses from current assets.
3. Divide Liquid Assets by Current Liabilities.

A 2, 3, 1

B 1, 3, 2

C 1, 2, 3

D 3, 1, 2

💡 Short Explanation

Identify liabilities. Compute Liquid Assets. Calculate Quick Ratio.

✅ Correct Answer Explanation

The logical process is: 1. Determine Current Liabilities. 2. Calculate Liquid Assets. 3. Divide Liquid Assets by Current Liabilities. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Options A, B, D → Do not follow the logical calculation sequence.

🎯 Strategy

Used: Sequencing

Application: Arrange calculation steps in order.

Final Logic: Components must be identified before ratio calculation.

🧠 Memory Trick

Liabilities → Liquid Assets → Ratio

📚 Topic: Liquidity Analysis – Short-Term Capacity

10 Category: Liquidity Analysis
During risk evaluation, what does a Quick Ratio of 1:1 generally indicate?

A High risk of bankruptcy

B Safe capacity to meet short-term obligations

C Under-utilization of resources

D Excessive long-term debts

💡 Short Explanation

Standard benchmark is 1:1. Indicates adequate liquid assets. Suggests satisfactory liquidity.

✅ Correct Answer Explanation

A Quick Ratio of 1:1 is generally considered satisfactory because it indicates that the firm possesses enough liquid assets to meet current liabilities without relying on inventory sales. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Indicates the opposite.
Option C → Not directly inferred.
Option D → Quick Ratio does not measure long-term debt.

🎯 Strategy

Used: Interpretation Analysis

Application: Apply the standard Quick Ratio benchmark.

Final Logic: 1:1 indicates adequate short-term solvency.

🧠 Memory Trick

Quick Ratio 1:1 = Quick Safety

📚 Topic: Liquidity Analysis – Risk Evaluation

11 Category: Debt-Equity Ratio
If the capital structure shows Equity is Rs. 11,00,000 and Long-term Borrowings are Rs. 1,50,000. What is the Debt-Equity Ratio?

A 1.5 : 1

B 7.33 : 1

C 1 : 1

D 0.136 : 1

💡 Short Explanation

Debt-Equity Ratio = Long-term Debt ÷ Shareholders' Funds. Debt = ₹1,50,000. Equity = ₹11,00,000.

✅ Correct Answer Explanation

Debt-Equity Ratio = ₹1,50,000 ÷ ₹11,00,000 = 0.136: 1 (approximately) Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect calculation.
Option B → Reverse ratio.
Option C → Debt and equity are not equal.

🎯 Strategy

Used: Numerical Substitution

Application: Apply Debt-Equity Ratio formula directly.

Final Logic: Debt ÷ Equity = 1,50,000 ÷ 11,00,000 = 0.136: 1.

🧠 Memory Trick

Debt First, Equity Second

📚 Topic: Debt-Equity Ratio – Long-Term Debt Relation

12 Category: Debt-Equity Ratio
Which of the following long-term debt relation components are included in Long-Term Debt?
I. Long-term borrowings
II. Other long-term liabilities
III. Long-term provisions
IV. Short-term borrowings

A I, II, III

B I and III only

C II, III, IV

D I, II, IV

💡 Short Explanation

Long-term Debt includes long-term obligations. Provisions and liabilities of long duration are included. Short-term borrowings are excluded.

✅ Correct Answer Explanation

Long-Term Debt consists of: Long-term Borrowings Other Long-term Liabilities Long-term Provisions Short-term borrowings are current liabilities and therefore excluded. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Omits Other Long-term Liabilities.
Option C → Includes Short-term Borrowings.
Option D → Includes Short-term Borrowings.

🎯 Strategy

Used: Statement Verification

Application: Identify components qualifying as long-term debt.

Final Logic: Only obligations exceeding one year qualify.

🧠 Memory Trick

Long-Term Means Beyond One Year

📚 Topic: Debt-Equity Ratio – Long-Term Debt Components

13 Category: Capital Employed
In the formula for Debt-Equity Ratio, Equity funds ("Shareholders' Funds") include which of the following?

A Debentures

B Trade Payables

C Share Capital, Reserves and Surplus

D Short-term Provisions

💡 Short Explanation

Shareholders' Funds represent owners' capital. Includes reserves and accumulated profits. Excludes liabilities.

✅ Correct Answer Explanation

Shareholders' Funds consist primarily of Share Capital and Reserves & Surplus. These represent the owners' claim on the business and are used in the denominator of the Debt-Equity Ratio. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Debentures are borrowed funds.
Option B → Trade Payables are liabilities.
Option D → Current liabilities/provisions.

🎯 Strategy

Used: Concept Identification

Application: Identify components of equity funds.

Final Logic: Equity represents ownership funds.

🧠 Memory Trick

Capital + Reserves = Equity

📚 Topic: Capital Employed – Equity Funds

14 Category: Capital Employed
Total Assets are Rs. 25,00,000 and Current Liabilities are Rs. 5,00,000. What is the value of Net Assets?

A Rs. 30,00,000

B Rs. 20,00,000

C Rs. 15,00,000

D Rs. 5,00,000

💡 Short Explanation

Net Assets = Total Assets − Current Liabilities. Deduct current obligations. Represents Capital Employed.

✅ Correct Answer Explanation

Net Assets = ₹25,00,000 − ₹5,00,000 = ₹20,00,000 Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Assets and liabilities added incorrectly.
Option C → Incorrect deduction.
Option D → Only Current Liabilities value.

🎯 Strategy

Used: Numerical Substitution

Application: Apply Net Assets formula.

Final Logic: Total Assets minus Current Liabilities.

🧠 Memory Trick

Net Assets = Assets − Current Liabilities

📚 Topic: Capital Employed – Net Assets

15 Category: Proprietary Ratio
Assertion (A):
The proprietary ratio shows the ownership proportion between shareholders' funds and net assets.
Reason (R):
It helps determine the proportion of total assets financed by the owners' funds.

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 false, but R is true

D A is true, but R is false

💡 Short Explanation

Proprietary Ratio measures ownership stake. Indicates owner's contribution in financing assets. Reason explains the purpose of the ratio.

✅ Correct Answer Explanation

The Proprietary Ratio compares Shareholders' Funds with Net Assets (or Capital Employed). It indicates the proportion of assets financed by owners rather than creditors. Thus, the Reason correctly explains the Assertion. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Verify truth and explanatory relationship.

Final Logic: Owner-financed assets are measured by Proprietary Ratio.

🧠 Memory Trick

Proprietary = Owners' Share

📚 Topic: Proprietary Ratio – Ownership Proportion

16 Category: Proprietary Ratio
Which of the following represents the correct formula for evaluating asset financing through the Proprietary Ratio?

A Net Assets / Shareholders' Funds

B Long-term Debt / Total Assets

C Current Assets / Shareholders' Funds

D Shareholders' Funds / Capital Employed (or Net Assets)

💡 Short Explanation

Measures owner's contribution. Compares equity with total net assets. Indicates financing pattern.

✅ Correct Answer Explanation

Proprietary Ratio is calculated as: Shareholders' Funds ÷ Capital Employed (or Net Assets) It measures the extent to which assets are financed by owners' funds. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Options A, B, C → Incorrect formulas.

🎯 Strategy

Used: Formula Recognition

Application: Recall Proprietary Ratio formula.

Final Logic: Equity is compared with Net Assets.

🧠 Memory Trick

Owners' Funds ÷ Net Assets

📚 Topic: Proprietary Ratio – Asset Financing

17 Category: Interest Coverage
Match the following related to Interest Safety and Coverage Ratio.

List 1	List 2
1. PBIT	a. Profit before Interest and Tax
2. Interest on Long-term Debt	b. Ensures safety of interest on debts
3. Higher Interest Coverage Ratio	c. Risky position for lenders
4. Lower Interest Coverage Ratio	d. The denominator in the formula

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

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

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

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

💡 Short Explanation

PBIT is Profit before Interest and Tax. Interest is the denominator. High ratio is safer for lenders.

✅ Correct Answer Explanation

Correct matching: PBIT → Profit before Interest and Tax. Interest on Long-term Debt → Denominator. Higher Interest Coverage Ratio → Safety. Lower Interest Coverage Ratio → Risk. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Options A, C, D → Incorrect matching.

🎯 Strategy

Used: Match the Following

Application: Relate formula components with interpretations.

Final Logic: Higher coverage means better debt servicing capacity.

🧠 Memory Trick

PBIT Covers Interest

📚 Topic: Interest Coverage – Interest Safety

18 Category: Interest Coverage
Arrange the steps to calculate the profit coverage via Interest Coverage Ratio.
1. Determine Interest on long-term debts.
2. Determine Net Profit before Interest and Tax.
3. Divide Net Profit before Interest and Tax by Interest on long-term debts.

A 1, 2, 3

B 3, 2, 1

C 2, 3, 1

D 2, 1, 3

💡 Short Explanation

Identify interest amount. Determine PBIT. Apply ratio formula.

✅ Correct Answer Explanation

The process begins by identifying interest obligations and profit before interest and tax. Then the Interest Coverage Ratio is calculated: PBIT ÷ Interest on Long-term Debt Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Options B, C, D → Do not follow the intended sequence.

🎯 Strategy

Used: Sequencing

Application: Arrange the steps required for calculation.

Final Logic: Determine inputs before division.

🧠 Memory Trick

Interest → PBIT → Divide

📚 Topic: Interest Coverage – Profit Coverage

📄 Passage

"It 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. The formula for its calculation is Cost of Revenue from Operations / Average Inventory. Where average inventory refers to arithmetic average of opening and closing inventory..."

Category: Activity Ratios
According to the passage on inventory turnover, how is the average inventory calculated?

A Opening Inventory minus Closing Inventory

B Closing Inventory divided by 2

C Only the Opening Inventory is considered

D Arithmetic average of opening and closing inventory

💡 Short Explanation

Uses both opening and closing inventory. Calculates average stock held. Gives representative inventory value.

✅ Correct Answer Explanation

The passage clearly states that Average Inventory refers to the arithmetic average of opening and closing inventory. Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2 Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Difference, not average.
Option B → Ignores opening inventory.
Option C → Uses only one inventory figure.

🎯 Strategy

Used: Passage-Based Identification

Application: Extract the formula directly from the passage.

Final Logic: Average requires both opening and closing balances.

🧠 Memory Trick

(Opening + Closing) ÷ 2

📚 Topic: Activity Ratios – Inventory Turnover

📄 Passage

"High turnover is good but it must be carefully interpreted as it may be due to buying in small lots or selling quickly at low margin to realise cash."

Category: Activity Ratios
Based on the passage, why must a high efficiency measurement in inventory turnover ratio be carefully interpreted?

A It means the firm has too much debt.

B It indicates the company is not selling its goods.

C It could be due to selling quickly at a low margin or buying in small lots.

D It implies that the company has a massive stock of obsolete inventory.

💡 Short Explanation

High turnover is not always positive. May result from low-margin sales. Could indicate inadequate inventory levels.

✅ Correct Answer Explanation

The passage specifically states that a high Inventory Turnover Ratio may occur because the business buys in small lots or sells goods quickly at a low profit margin to generate cash. Therefore, interpretation should be cautious. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Debt is unrelated to inventory turnover.
Option B → High turnover indicates goods are being sold.
Option D → Obsolete inventory usually lowers turnover.

🎯 Strategy

Used: Passage-Based Interpretation

Application: Interpret the caution highlighted in the passage.

Final Logic: High turnover requires deeper analysis before concluding efficiency.

🧠 Memory Trick

High Turnover Needs Careful Interpretation

📚 Topic: Activity Ratios – Efficiency Measurement

CUET UG Accountancy Booster Test 1 Types of Ratios and Calculations

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