CUET UG Accountancy Booster Test 3 Classification of Ratios -

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CUET UG Accountancy Booster Test 2 Classification of Ratios

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 2 Classification of Ratios

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QUESTION 1 OF 20

Assertion (A):
Gross Profit Ratio and Net Profit Ratio are both Traditional Statement of Profit and Loss Ratios.
Reason (R):
Both of these ratios incorporate at least one variable from the balance sheet.

Answer Review

1 Assertion (A):
Gross Profit Ratio and Net Profit Ratio are both Traditional Statement of Profit and Loss Ratios.
Reason (R):
Both of these ratios incorporate at least one variable 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

Gross Profit Ratio and Net Profit Ratio are Profit and Loss Ratios. They are derived entirely from Statement of Profit and Loss figures. Balance sheet variables are not required.

✅ Correct Answer Explanation

Gross Profit Ratio and Net Profit Ratio belong to the traditional classification of Statement of Profit and Loss Ratios because they use revenue and profit figures from the Statement of Profit and Loss. The Reason is false because these ratios do not necessarily include any balance sheet variables. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Verify the truth of both statements independently.

Final Logic: Profit and Loss Ratios use income statement figures only.

🧠 Memory Trick

GP Ratio & NP Ratio = Income Statement Ratios

📚 Topic: Traditional Classification – Profit and Loss Ratios

2 Match the mathematical elements to form the correct Balance Sheet Ratios.

List 1	List 2
1. Current Ratio	a. Total Assets / Long-term Debts
2. Debt-Equity Ratio	b. Shareholders' Funds / Net Assets
3. Proprietary Ratio	c. Long-term Debts / Shareholders' Funds
4. Total Assets to Debt Ratio	d. Current Assets / Current Liabilities

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

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

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

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

💡 Short Explanation

Current Ratio = Current Assets / Current Liabilities. Debt-Equity Ratio = Long-term Debts / Shareholders' Funds. Proprietary Ratio = Shareholders' Funds / Net Assets. Total Assets to Debt Ratio = Total Assets / Long-term Debts.

✅ Correct Answer Explanation

The correct matching is: 1 → d 2 → c 3 → b 4 → a Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Options B, C, D contain incorrect formula pairings.

🎯 Strategy

Used: Match the Following

Application: Match each ratio with its standard formula.

Final Logic: Each balance sheet ratio uses balance sheet figures.

🧠 Memory Trick

Current–Debt–Proprietary–Assets/Debt

📚 Topic: Balance Sheet Ratios

3 If Revenue from Operations is ₹30,00,000, Working Capital is ₹2,00,000, and Non-current Assets are ₹16,00,000, find the Net Assets Turnover Ratio.
(Assume Capital Employed = Non-current Assets + Working Capital)

A 1.88 times

B 1.67 times

C 15.0 times

D 2.50 times

💡 Short Explanation

Capital Employed = ₹16,00,000 + ₹2,00,000. Net Assets Turnover Ratio = Revenue ÷ Capital Employed. Ratio = 30,00,000 ÷ 18,00,000.

✅ Correct Answer Explanation

Capital Employed = ₹16,00,000 + ₹2,00,000 = ₹18,00,000 Net Assets Turnover Ratio = ₹30,00,000 ÷ ₹18,00,000 = 1.67 times Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Options A, C, D are not obtained from the formula.

🎯 Strategy

Used: Numerical Substitution

Application: Compute Capital Employed before applying the ratio.

Final Logic: Revenue ÷ Capital Employed = 1.67 times.

🧠 Memory Trick

Revenue ÷ Capital Employed

📚 Topic: Mixed Data Ratios

4 Arrange the systematic steps to calculate the Trade Payables Turnover Ratio correctly:
1. Divide Net Credit Purchases by Average Trade Payables
2. Ascertain the Net Credit Purchases
3. Calculate Average Trade Payables

A 1, 2, 3

B 3, 2, 1

C 1, 3, 2

D 2, 3, 1

💡 Short Explanation

Determine purchases first. Calculate average payables. Apply the formula.

✅ Correct Answer Explanation

The correct sequence is: 1. Ascertain Net Credit Purchases. 2. Calculate Average Trade Payables. 3. Divide Net Credit Purchases by Average Trade Payables. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Options A, B, C do not follow the logical computation sequence.

🎯 Strategy

Used: Sequencing

Application: Arrange calculation steps logically.

Final Logic: Inputs must be determined before division.

🧠 Memory Trick

Purchases → Payables → Divide

📚 Topic: Combined Statements

5 An external analyst wants to check if a business can satisfy short-term obligations and simultaneously wants to measure the speed at which inventory converts to sales. Which functional groupings must they deploy?

A Solvency and Profitability Ratios

B Liquidity and Solvency Ratios

C Liquidity and Activity Ratios

D Activity and Profitability Ratios

💡 Short Explanation

Liquidity Ratios assess short-term obligations. Activity Ratios measure inventory efficiency. Both objectives require different ratio groups.

✅ Correct Answer Explanation

Short-term solvency is evaluated through Liquidity Ratios, while inventory conversion efficiency is measured through Activity Ratios such as Inventory Turnover Ratio. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Options A, B, D do not address both objectives simultaneously.

🎯 Strategy

Used: Functional Classification Analysis

Application: Match objectives with ratio categories.

Final Logic: Liquidity + Efficiency = Liquidity Ratios + Activity Ratios.

🧠 Memory Trick

Obligations = Liquidity, Inventory = Activity

📚 Topic: Purpose-Based Grouping

6 Consider the following statements:
I. Intra-firm comparison is comparing performance directly with best industry standards.
II. Time Series Analysis involves comparing a firm's performance over a number of accounting periods.
III. Cross-sectional Analysis represents Inter-firm comparison.

A I and II

B II and III

C I and III

D I, II, and III

💡 Short Explanation

Time Series compares different years. Cross-sectional means inter-firm comparison. Intra-firm comparison is within the same firm.

✅ Correct Answer Explanation

Statement I is incorrect because Intra-firm comparison compares the same firm's performance across periods. Statements II and III are correct. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Statement I is incorrect.
Option C → Statement I is incorrect.
Option D → Includes incorrect Statement I.

🎯 Strategy

Used: Statement Evaluation

Application: Verify each statement independently.

Final Logic: Time Series = Same Firm Over Time; Cross-sectional = Different Firms.

🧠 Memory Trick

Time Series = Time, Cross Section = Firms

📚 Topic: Practical Usage

7 If a firm specifically wants to compute a supplementary, more stringent check on liquidity (Acid-Test Ratio), the appropriate formula is:

A Quick Assets / Current Liabilities

B Current Assets / Quick Liabilities

C (Current Assets − Inventory) / Total Assets

D Liquid Assets / Current Assets

💡 Short Explanation

Acid-Test Ratio = Quick Ratio. Uses Quick Assets. Measures immediate liquidity.

✅ Correct Answer Explanation

The Acid-Test Ratio (Quick Ratio) is: Quick Assets ÷ Current Liabilities It provides a stricter liquidity measure than the Current Ratio. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Options B, C, D are incorrect formulas.

🎯 Strategy

Used: Formula Recognition

Application: Recall the Quick Ratio formula.

Final Logic: Immediate liquidity is measured using Quick Assets.

🧠 Memory Trick

Quick Assets ÷ Current Liabilities

📚 Topic: Short-Term Solvency

8 Why is the Quick Ratio generally considered superior to the Current Ratio as a measure of the immediate liquidity position against obligations?

A It includes all current assets universally without any exception.

B It firmly relates to long-term debt servicing obligations.

C It completely eliminates the need to measure current liabilities.

D It accurately excludes non-liquid current assets like inventories and prepaid expenses.

💡 Short Explanation

Inventory is less liquid. Prepaid expenses cannot pay liabilities. Quick Ratio focuses on immediately available assets.

✅ Correct Answer Explanation

Quick Ratio excludes inventories and prepaid expenses because they cannot be quickly converted into cash. This makes it a more accurate measure of immediate liquidity. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Quick Ratio excludes some current assets.
Option B → Concerns short-term, not long-term obligations.
Option C → Current liabilities remain necessary.

🎯 Strategy

Used: Conceptual Understanding

Application: Compare Current Ratio and Quick Ratio.

Final Logic: Excluding less-liquid assets improves accuracy.

🧠 Memory Trick

Quick Ratio = Current Ratio Without Inventory

📚 Topic: Current Obligations

9 Match the Solvency Ratios with their primary analytical significance.

List 1	List 2
1. Debt-Equity Ratio	a. Measures safety margin of interest payable
2. Proprietary Ratio	b. Measures overall degree of indebtedness
3. Total Assets to Debt Ratio	c. Shows proportion of shareholders' funds financing assets
4. Interest Coverage Ratio	d. Indicates the rate of external funds in financing total assets

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

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

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

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

💡 Short Explanation

Debt-Equity Ratio measures indebtedness. Proprietary Ratio measures owners' contribution. Interest Coverage measures interest safety.

✅ Correct Answer Explanation

Correct matching: Debt-Equity Ratio → Degree of indebtedness. Proprietary Ratio → Shareholders' financing proportion. Total Assets to Debt Ratio → External fund financing rate. Interest Coverage Ratio → Interest safety margin. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Options A, C, D contain incorrect matching.

🎯 Strategy

Used: Match the Following

Application: Link each solvency ratio with its purpose.

Final Logic: Each ratio measures a specific aspect of solvency.

🧠 Memory Trick

Debt–Owners–Assets–Interest

📚 Topic: Long-Term Stability

10 If Net Profit after Tax is ₹60,000, the Tax Rate is 40%, and 15% Long-Term Debt is ₹10,00,000, calculate the Interest Coverage Ratio.

A 1.00 times

B 2.67 times

C 1.67 times

D 3.00 times

💡 Short Explanation

Interest = ₹1,50,000. PBIT = ₹2,50,000. Interest Coverage Ratio = 2,50,000 ÷ 1,50,000.

✅ Correct Answer Explanation

Interest = 15% × ₹10,00,000 = ₹1,50,000 PBT = ₹60,000 ÷ (1 − 0.40) = ₹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 Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Options A, B, D are based on incorrect calculations.

🎯 Strategy

Used: Numerical Substitution

Application: Calculate PBIT and divide by interest.

Final Logic: PBIT must cover interest 1.67 times.

🧠 Memory Trick

PBIT ÷ Interest = Interest Coverage Ratio

📚 Topic: Debt Servicing Ability

11 Assertion (A):
Average Collection Period is derived mathematically by dividing the Trade Receivables Turnover Ratio by 365.
Reason (R):
A higher Trade Receivables Turnover Ratio reliably indicates speedy collection from debtors.

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

Average Collection Period = 365 ÷ Trade Receivables Turnover Ratio. A higher turnover ratio indicates faster collection. Assertion reverses the formula.

✅ Correct Answer Explanation

The Assertion is false because the Average Collection Period is calculated as: 365 ÷ Trade Receivables Turnover Ratio and not the other way around. The Reason is true because a higher Trade Receivables Turnover Ratio reflects quicker recovery of receivables. 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: Verify formula accuracy and interpretation separately.

Final Logic: Formula is incorrect, interpretation is correct.

🧠 Memory Trick

365 ÷ Turnover = Collection Period

📚 Topic: Efficiency Measurement

12 Arrange the following sequential steps for accurately computing the Inventory Turnover Ratio:
1. Calculate Cost of Revenue from Operations
2. Calculate Average Inventory
3. Divide Cost of Revenue by Average Inventory

A 1, 2, 3

B 2, 1, 3

C 3, 2, 1

D 1, 3, 2

💡 Short Explanation

Determine Cost of Revenue. Calculate Average Inventory. Apply the ratio formula.

✅ Correct Answer Explanation

Inventory Turnover Ratio is calculated as: Cost of Revenue from Operations ÷ Average Inventory Hence, the correct sequence is: 1. Calculate Cost of Revenue. 2. Calculate Average Inventory. 3. Divide Cost by Average Inventory. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Options B, C, D do not follow the logical order of calculation.

🎯 Strategy

Used: Sequencing

Application: Arrange the calculation process correctly.

Final Logic: Formula inputs must be determined before division.

🧠 Memory Trick

Cost → Inventory → Divide

📚 Topic: Resource Utilisation

13 Which of the following statements about Earnings per Share (EPS) and P/E Ratio are analytically correct?
I. EPS equals Profit available for Equity Shareholders divided by Number of Equity Shares.
II. P/E Ratio accurately reflects investors' expectations about growth in a firm's earnings.
III. Profit available for EPS is strictly Profit after Tax minus Preference Dividend.

A I and II

B II and III

C I and III

D I, II, and III

💡 Short Explanation

EPS measures earnings per equity share. P/E reflects market expectations. Preference dividend is deducted before EPS calculation.

✅ Correct Answer Explanation

All three statements are correct: EPS = Profit available to Equity Shareholders ÷ Number of Equity Shares. P/E Ratio reflects investors' expectations. Profit available for equity share holders equals Profit after Tax minus Preference Dividend. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Options A, B, C omit one or more correct statements.

🎯 Strategy

Used: Multiple Statement Evaluation

Application: Verify each statement independently.

Final Logic: All three statements are valid.

🧠 Memory Trick

PAT − Preference Dividend = Equity Earnings

📚 Topic: Profit Analysis

14 A corporate firm calculates its Return on Shareholders' Fund and observes that it is substantially lower than the Return on Investment. What does this situation generally imply regarding return measurement?

A The company is extremely profitable and undervalued.

B The company currently has zero external debt.

C The company's funds have not been employed profitably from the perspective of the owners.

D The firm is heavily and successfully relying on trading on equity.

💡 Short Explanation

Return on Shareholders' Funds focuses on owners. Lower return indicates weaker owner benefit. Capital may not be generating adequate returns.

✅ Correct Answer Explanation

A significantly lower Return on Shareholders' Funds compared to Return on Investment indicates that owners are not receiving proportionately satisfactory returns from their invested funds. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Not necessarily implied.
Option B → Cannot be concluded.
Option D → Not supported by the information.

🎯 Strategy

Used: Interpretation Analysis

Application: Compare owner returns with overall returns.

Final Logic: Lower shareholder return signals weaker owner profitability.

🧠 Memory Trick

Lower RONW = Lower Owner Benefit

📚 Topic: Return Measurement

15 Assuming no prepaid expenses or advance taxes are present, which formula accurately identifies the relationship to extract the value of Inventory?

A Inventory = Current Assets − Quick Assets

B Inventory = Current Assets + Quick Assets

C Inventory = Quick Assets ÷ Current Assets

D Inventory = Current Assets − Current Liabilities

💡 Short Explanation

Quick Assets exclude inventory. Inventory is the difference. Assumes no prepaid expenses or advance taxes.

✅ Correct Answer Explanation

Since: Quick Assets = Current Assets − Inventory Therefore: Inventory = Current Assets − Quick Assets Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Incorrect relationship.
Option C → Not a formula for inventory.
Option D → Gives working capital component.

🎯 Strategy

Used: Formula Rearrangement

Application: Rearrange the Quick Assets formula.

Final Logic: Inventory is excluded from Quick Assets.

🧠 Memory Trick

CA − QA = Inventory

📚 Topic: Current Assets

16 If "Liquid Liabilities" are arbitrarily defined as "Current Liabilities minus Bank Overdraft" by an analyst, this highlights a specific intrinsic limitation of ratio analysis. Which one?

A Extreme forecasting difficulties

B Lack of standardised definitions

C Total ignorance of qualitative factors

D Ignorance of price-level changes

💡 Short Explanation

Definitions may vary. Ratios become less comparable. Standardization is lacking.

✅ Correct Answer Explanation

Different analysts may define certain terms differently, such as Liquid Liabilities. This demonstrates the limitation arising from the lack of universally standardized definitions. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Forecasting is unrelated.
Option C → Concerns qualitative factors.
Option D → Concerns inflation.

🎯 Strategy

Used: Limitation Identification

Application: Identify the issue created by differing definitions.

Final Logic: Different definitions reduce comparability.

🧠 Memory Trick

Different Definitions = Different Results

📚 Topic: Current Liabilities

17 Arrange the required sequence to compute Return on Net Worth (RONW):
1. Divide Profit after Tax by Shareholders' Funds
2. Calculate Profit after Tax
3. Determine total Shareholders' Funds

A 1, 2, 3

B 2, 3, 1

C 3, 1, 2

D 2, 1, 3

💡 Short Explanation

Determine PAT first. Identify Shareholders' Funds. Compute the ratio.

✅ Correct Answer Explanation

RONW is calculated as: Profit after Tax ÷ Shareholders' Funds × 100 Thus, the sequence is: 2 → Calculate PAT 3 → Determine Shareholders' Funds 1 → Divide PAT by Shareholders' Funds Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Options A, C, D do not follow the correct sequence.

🎯 Strategy

Used: Sequencing

Application: Arrange the calculation process logically.

Final Logic: Inputs must be identified before calculation.

🧠 Memory Trick

PAT → Net Worth → Divide

📚 Topic: Financial Performance

18 While analyzing the long-term financial position, what does a Proprietary Ratio of precisely 0.75: 1 mathematically signify?

A 75% of current assets are currently funded by short-term debts.

B Creditors face an incredibly high risk of bankruptcy.

C The firm has precisely 75 times more debt than equity.

D 75% of the total capital employed is safely funded by owners' funds.

💡 Short Explanation

Proprietary Ratio measures owners' contribution. 0.75 means 75% owner financing. Indicates strong financial position.

✅ Correct Answer Explanation

A Proprietary Ratio of 0.75: 1 means that 75% of the firm's capital employed or net assets are financed by shareholders' funds. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Proprietary Ratio is not based on current assets.
Option B → Cannot be concluded.
Option C → Misinterprets the ratio.

🎯 Strategy

Used: Ratio Interpretation

Application: Interpret the meaning of Proprietary Ratio.

Final Logic: Higher proprietary ratio reflects stronger owner financing.

🧠 Memory Trick

0.75 = 75% Owners' Funds

📚 Topic: Financial Position

📄 Passage

"There are differing accounting policies for valuation of inventory, calculation of depreciation, treatment of intangible assets, definition of certain financial variables, etc. These variations leave a big question mark on the cross-sectional analysis."

According to the passage, why is cross-sectional analysis between different business enterprises sometimes analytically questionable?

A Due to critical variations in accounting practices like inventory valuation and depreciation policies.

B Because all market firms strictly use the exact same policies making it redundant.

C Because qualitative corporate aspects cannot be quantified effectively.

D Due to continuous changes in the value of money over extended periods of time.

💡 Short Explanation

Different accounting methods create different figures. Ratios become less comparable. Cross-sectional analysis becomes difficult.

✅ Correct Answer Explanation

The passage directly attributes the problem to differences in accounting policies such as inventory valuation and depreciation methods. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Opposite of the passage.
Option C → Not the primary issue discussed.
Option D → Refers to inflation, not cross-sectional comparison.

🎯 Strategy

Used: Passage-Based Interpretation

Application: Identify the factor causing analytical difficulty.

Final Logic: Different accounting policies reduce comparability.

🧠 Memory Trick

Different Policies = Difficult Comparison

📚 Topic: Analytical Clarity

📄 Passage

"Furthermore, there is no universal yardstick which specifies the level of ideal ratios."

Based on the provided text, what heavily limits the evaluation of ideal performance levels for critical decision making?

A The severe lack of standard definitions for liquid liabilities.

B The practice of completely ignoring historical trends.

C The absolute absence of a universally accepted standard level or yardstick for ideal ratios.

D Forecasting future trends strictly on non-financial metrics.

💡 Short Explanation

No universal benchmark exists. Ideal levels vary across firms. Interpretation requires judgment.

✅ Correct Answer Explanation

The passage clearly states that there is no universally accepted yardstick for determining ideal ratio levels. This limits performance evaluation and decision-making. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → More specific than the passage.
Option B → Not mentioned.
Option D → Not discussed.

🎯 Strategy

Used: Passage-Based Conclusion

Application: Identify the limitation highlighted in the passage.

Final Logic: Lack of universal standards limits decision relevance.

🧠 Memory Trick

No Universal Standard = No Universal Ideal

📚 Topic: Decision Relevance

CUET UG Accountancy Booster Test 2 Classification of Ratios

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