# 2nd Puc Accountancy Chapter 10 Accounting Ratios Part – 2 Notes | ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಅಧ್ಯಾಯ – 10 ನೋಟ್ಸ್

ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಅಧ್ಯಾಯ – 10 ನೋಟ್ಸ್ 2nd Puc Accountancy Chapter 10 Accounting Ratios Part – 2 Notes Question Answer Pdf Download Karnataka Kannada 2nd Puc Accountancy Chapter 10 Notes Pdf Accounting Ratios Formulas Class 12 Accounting Ratios Class 12 Solutions 2022 Accounting Ratios Class 12 Notes Kseeb Solution for Acccountancy Class 12 Chapter 12 Notes

Contents

## Short Questions

Q1. The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. What are the ratios used for this purpose?

A: A firm’s liquidity is measured by its capability to pay long-term dues. These dues include principal amount payment on the due date and interest payment on a regular basis. Long term solvency of a firm can be determined by the following ratios:

a. Debt-Equity Ratio: This ratio shows the relationship between owner funds (equity) and borrowed funds (debt). A lower debt-equity ratio provides more security to the people who are lending to the business. It also shows that a company is able to meet long-term dues or responsibilities.

b. Total Assets to Debt Ratio- It is based on the relationship between total assets and long-term loans. It shows what percentage of the company’s total assets are financed by creditors. A higher total asset-to-debt ratio makes the firm able to meet long-term requirements and provides more security to lenders.

c. Interest Coverage Ratio: This ratio is used to determine the easiness with which a company is able to pay interest on outstanding debts. It is calculated by dividing earnings before interest and taxes with interest payments. Having a higher interest coverage ratio means that company is able to meet its obligations skilfully.

Q2. The average age of inventory is viewed as the average length of time inventory is held by the firm which explains with reasons.

A: Inventory Turnover Ratio: This ratio is a relationship between the cost of goods sold and the average inventory maintained during a particular time period. It determines the efficiency with which a firm is able to manage its inventory.

It shows the average length for which the firm holds the inventory.

Q3. What do you mean by Ratio Analysis?

A: It is a quantitative analysis of data present in a financial statement. It shows the relationship between items present in the Balance sheet and the Income Statement. It helps in calculating operational efficiency, and solvency and determining the profitability of a firm. The ratio is a statistical measure that helps in comparing relationships between two or more figures. Analyzing ratios presents vital pieces of information to accounting users about the firm’s financial position, performance, and viability. It also helps in setting up new policies and frameworks by the management.

Q4. What are the various types of ratios?

A: Ratios can be classified into two types:

2. Functional Classification

Traditional Classification: Traditional classification is based on financial statements such as Balance Sheet and P & L Accounts. The ratios are divided on the basis of accounts of financial statements and are as follows:

i. Income Statement Ratios such as Gross Profit Ratios

ii. Balance Sheet Ratios such as Debt Equity Ratio, Current Ratio

iii. Composite Ratio: Ratios that contain elements from both Trading and P & L Account.

Functional Classification: These ratios are based on the functional need of calculating ratios. This ratio help calculate the solvency, liquidity, profitability, and financial performance of a business. Such ratios are:

i. Liquidity Ratio: Ratios used to determine the solvency of short term

ii. Solvency Ratio: Ratios used to determine the solvency of long term

iii. Activity Ratio: Ratios used for determining the operating efficiency of the business. These ratios are related to sales and cost of goods sold.

iv. Probability Ratio: Ratios used to determine the financial performance and viability of the firm.

Q5. What relationships will be established to study:

a. Inventory Turnover

d. Working Capital Turnover

A: aInventory Turnover Ratio: This ratio is a relationship between cost of goods sold and the average inventory maintained during a particular time period. It determines the efficiency with which a firm is able to manage its inventory.

bTrade Receivables Turnover Ratio: Debtors turnover ratio is also known as Receivables Turnover Ratio is a measure used to check how quickly a credit sale is converted into cash. It shows efficiency of a business firm in collecting debts from customers.

c.Trade Payables Turnover Ratio: It is also known as Creditor’s turnover ratio or account payable turnover ratio and is a liquidity ratio that measures the average number of times a firm pays its creditors in the course of an accounting period. It is used to measure the short-term liquidity of the firm.

d. Working Capital Turnover Ratio: The working capital turnover ratio is used to measure the efficiency of a company in using its working capital to support sales. It is a ratio where firm’s operations are funded and the corresponding revenue generated from the business is calculated.

## Long Questions And Practical Problems with solutions

Q1. What are important profitability ratios? How are these worked out?

A: Profitability ratios are calculated on the basis of profit earned by a business. This ratio gives a percentage that is used to assess the financial condition of a business

1. Return on Assets: This ratio measures the earnings per rupee from assets that are invested in the company. A higher profit ratio is good for the company.

Return on Assets = Net Profit ÷ Total Assets

2. Return on Equity: This ratio deals with measuring the profitability of the equity fund that is invested by the company. It also measures how the owner’s funds are utilized profitably to generate company revenues. A high ratio represents the better position of a company.

Return on Equity = Profit after Tax ÷ Net worth

Where Net worth = Equity share capital, and Reserve and Surplus

3. Earnings per share: This ratio helps in measuring profitability from an ordinary shareholder’s viewpoint. A high ratio represents a well-off company.

Earnings per share = Net Profit ÷ Total no of shares outstanding

4. Dividend per share: This ratio measures the amount of dividend that is distributed by the company to its shareholders at the end of an accounting period. A high ratio represents that the company is having surplus cash.

Dividend per share= Amount Distributed to Shareholders ÷ No of Shares outstanding

5. Price Earnings Ratio: A profitability ratio that is used by an investor to check for the share price of the company which can be undervalued or overvalued. It also indicates an expectation about the company’s earnings and payback period for the investors.

Price Earnings Ratio = Market Price of Share ÷ Earnings per share

6. Return on capital employed: This ratio is all about the returns earned by the company from the funds invested in the business by its owners. A high ratio is indicative of a better position for the company.

Return on capital employed = Net Operating Profit ÷ Capital Employed × 100

7. Gross Profit: Gross profit ratio or GP ratio is a profitability ratio that deals with the relationship between gross profit and the total net sales revenue. This ratio is used to evaluate the operational performance of the business.

8. Net Profit: This is a profitability ratio that deals with the relationship between net profit after tax and net sales. It is calculated by dividing the net profit (after tax) by net sales.

Q2. The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If an inventory is liquid, the quick ratio is a preferred measure of overall liquidity. Explain.

A: Current Ratio: This ratio deals with the relationship between current assets and liabilities. It is calculated as:

Current assets are those assets that can be easily converted into cash whereas Current liabilities are liabilities that need to pay within that accounting period

Importance of Current Ratio

The current ratio helps in determining a firm’s ability to pay off the current liabilities on time. If there are more current assets as compared to current liabilities, it provides a source of security to the creditors. The ideal ratio is 2:1 (Current Assets: Current Liabilities)

2. Liquid Ratio– It deals with the relationship between liquid assets and current liabilities. This ratio determines if the firm has sufficient funds for paying off the current liabilities on an immediate basis. It can be calculated as:

Importance of Liquid Ratio

It is helpful in determining if a firm has funds that can be sufficient to pay off liabilities. It does not include stock or prepaid expenses as both these are not easily converted to cash. A ratio of 1:1 is ideal for maintaining the liquid ratio.

The current ratio is best suited for businesses where the available stock or inventories cannot be converted to cash easily. Examples of such industries can be locomotive companies, heavy machinery manufacturing companies, etc. as heavy machinery, tools cannot be sold easily. Similarly, businesses that can easily convert or get sold off prefer the liquid ratio as a measure to determine their liquidity. A service company is more likely to use a liquid ratio as no stock is maintained.

There will be some instances when companies tend to change the ratio method being used and chose accordingly. If a company is not maintaining any stock or inventory, the liquid ratio is the best option, while if stock forms the majority of the company’s assets then the current ratio is the best choice as the liquid ratio of such a firm will be very low and that can create a negative impact on creditors. In such case, the current ratio is a better choice to determine the overall liquidity.

Q3. What are liquidity ratios? Discuss the importance of the current and liquid ratios.

A: For determining the short-term solvency of a business liquidity ratios are essential. There are two types of liquidity ratios:

1. Current Ratio

2. Liquid Ratio/ Quick Ratio

1. Current Ratio: This ratio deals with the relationship between current assets and liabilities. It is calculated as:

Current assets are those assets that can be easily converted into cash whereas Current liabilities are liabilities that need to pay within that accounting period

Importance of Current Ratio

The current ratio helps in determining a firm’s ability to pay off the current liabilities on time. If there are more current assets as compared to current liabilities, it provides a source of security to the creditors. The ideal ratio is 2:1 (Current Assets: Current Liabilities)

2. Liquid Ratio– It deals with the relationship between liquid assets and current liabilities. This ratio determines if the firm has sufficient funds for paying off the current liabilities on an immediate basis. It can be calculated as:

Liquid Ratio =  Liquid Asset

Current Liabilities

Liquid Asset = Current Assets – Stock – Prepaid Expenses

Importance of Liquid Ratio

It is helpful in determining if a firm has funds that can be sufficient to pay off liabilities. It does not include stock or prepaid expenses as both these are not easily converted to cash. A ratio of 1:1 is ideal for maintaining the liquid ratio.

Q4. How would you study the solvency position of the firm?

A: A firm’s solvency position can be best studied with the help of a group of ratios called Solvency Ratios. These ratios measure the financial position of the firm by measuring its ability to pay long-term liabilities, these long-term liabilities include principal amount payments on the due date and interest payments on a regular basis. The following ratios are used to determine the long-term solvency of a business.

1. Debt-Equity Ratio: This ratio shows the relationship between owner funds (equity) and borrowed funds (debt). A lower debt-equity ratio provides more security to the people who are lending to the business. It also shows that a company is able to meet long-term dues or responsibilities.

2. Total Assets to Debt Ratio: It is based on the relationship between total assets and long-term loans. It shows what percentage of the company’s total assets are financed by creditors. A higher total asset-to-debt ratio makes the firm able to meet long-term requirements and provides more security to lenders.

3. Interest Coverage Ratio: This ratio is used to determine the easiness with which a company is able to pay interest on outstanding debts. It is calculated by dividing earnings before interest and taxes with interest payments. Having a higher interest coverage ratio means that company is able to meet its obligations skilfully. .

d. Proprietary Ratio– This ratio shows the relationship between Total Assets and the Shareholder’s funds. It is helpful in revealing the financial position of a business. A higher ratio ensures a greater degree of security for creditors. It is shown as:

Q5. Following is the Balance Sheet of Raj Oil Mills Limited as of March 31, 2017. Calculate the Current Ratio.

Current Assets = Inventories +Trade Receivables + Cash

= 55,800 + 28,800 + 59,400

= ₹ 1, 44,000

Current Liabilities = Trade Payables = ₹ 72,000

Q6. Following is the Balance Sheet of Title Machine Ltd. as of March 31, 2017.

Calculate the Current Ratio and Liquid Ratio.

1. Current Ratio

Current Assets = Inventories +Trade Receivables + Cash + Short-term Loans and Advances

= 12, 00,000 + 9, 00,000 + 2, 28,000 + 72,000

= ₹ 24, 00,000

Current Liabilities = Trade Payables + Short-term Borrowings + Short-term Provisions

= 23, 40,000 + 6, 00,000 + 60,000

= ₹ 30, 00,000

2. Quick Ratio

Quick Assets = Trade Receivables + Cash + Short-term Loans and Advances

= 9, 00,000 + 2, 28,000 + 72,000

= ₹ 12, 00,000

Q7. Current Ratio is 3.5:1. Working Capital is ₹ 90,000. Calculate the Amount of Current Assets and Current Liabilities.

or, Current Assets = 3.5 Current Liabilities (1)

Working Capital = Current Assets − Current Liabilities

Working Capital = 90,000

or, Current Assets − Current Liabilities = 90,000

or, 3.5 Current Liabilities − Current Liabilities = 90,000 (from 1)

or, 2.5 Current Liabilities = 90,000

Q8. Shine Limited has a current ratio of 4.5:1 and a quick ratio of 3:1; if the inventory is 36,000, calculate current liabilities and current assets.

or, or, 4.5 Current Liabilities = Current Assets

or, or, 3 Current Liabilities = Quick Assets

Quick Assets = Current Assets − Inventory = Current Assets − 36,000Quick Assets = Current Assets – Inventory = Current Assets – 36,000

Current Assets − Quick Assets = 36,000

or, 4.5 Current Liabilities − 3 Current Liabilities = 36,000

or, 1.5 Current Liabilities = 36,000

or, Current Liabilities = 24,000

Current Assets = 4.5 Current Liabilities

Q9. The current liabilities of a company are ₹ 75,000. If the current ratio is 4:1 and the liquid ratio is 1:1, calculate the value of current assets, liquid assets, and inventory.

Liquid Assets = 75,000

Inventory = Current Assets − Liquid Assets

= 3, 00,000 − 75,000

= 2, 25,000

Q10. Handa Ltd. has an inventory of ₹ 20,000. Total liquid assets are ₹ 1, 00,000 and the quick ratio is 2:1. Calculate the current ratio.

Current Assets = Liquid Assets + Inventory

= 1, 00,000 + 20,000

= 1, 20,000

Q11. Calculate debt equity ratio from the following information:

Long-Term Debts = Total Debts − Current Liabilities

Q12. Calculate the Current Ratio if:

Inventory is ₹ 6, 00,000; Liquid Assets ₹ 24, 00,000; Quick Ratio 2:1.

Q13. Compute Stock Turnover Ratio from the following information:

Q14. Calculate the following ratios from the following information:

(i) Current ratio (ii) Acid test ratio (iii) Operating Ratio (iv) Gross Profit Ratio

Q15. From the following information calculate:

(i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current Ratio (iv) Liquid Ratio (v) Net Profit Ratio (vi) Working capital Ratio:

(i)

Q16. Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio, and Proprietary Ratio from the following information:

Q17. Calculate Inventory Turnover Ratio if:

Inventory, in the beginning, is ₹. 76,250, Inventory at the end is 98,500, Gross Revenue from Operations is ₹. 5, 20,000, Sales Return is ₹. 20,000, and Purchases is ₹. 3, 22,250.

Q18. Calculate the Inventory Turnover Ratio from the data given below:

Q19. A trading firm’s average inventory is ₹ 20,000 (cost). If the inventory turnover ratio is 8 times and the firm sells goods at a profit of 20% on sale, ascertain the profit of the firm.

Let the Sale Price be ₹ 100

Then the Profit is ₹ 20

Hence, the Cost of Revenue from Operations = ₹ 100 − ₹ 20 = ₹ 80

If the Cost of Revenue from Operations is ₹ 80, then Revenue from Operations = 100

Q20. You are able to collect the following information about a company for two years:

Calculate the Inventory Turnover Ratio and Trade Receivables Turnover Ratio.

Q21. From the following Balance Sheet and other information, calculate the following ratios:

(i) Debt-Equity Ratio (ii) Working Capital Turnover Ratio (iii) Trade Receivables Turnover Ratio

Balance Sheet as of March 31, 2017

Additional Information: Revenue from Operations ₹. 18, 00,000

1. Debt-Equity Ratio

Debt = Long Term Borrowings = ₹ 12,00,0000

Equity = Share Capital + Reserve and Surplus

= 10, 00,000 + 9, 00,000

= ₹ 19, 00,000

2. Working Capital Turnover Ratio

Revenue from Operations = ₹ 18, 00,000

Working Capital = Current Assets – Current Liabilities

= 18, 00,000 – 5, 00,000

= ₹ 13, 00,000

Net Credit Sales = ₹ 18, 00,000

Average Trade Receivables = ₹ 9, 00,000

Q22. From the following information, calculate the following ratios:

i) Quick Ratio

ii) Inventory Turnover Ratio

iii) Return on Investment

(Balance in the Statement of Profit & Loss A/c)

Q23. From the following, calculate (a) Debt Equity Ratio (b) Total Assets to Debt Ratio (c) Proprietary Ratio.

Q24. The cost of Revenue from Operations is ₹ 1, 50,000. Operating expenses are ₹ 60,000. Revenue from Operations is ₹ 2, 50,000. Calculate Operating Ratio.

Q25. Calculate the following ratio on the basis of the following information:
(i) Gross Profit Ratio (ii) Current Ratio (iii) Acid Test Ratio (iv) Inventory Turnover Ratio (v) Fixed Assets Turnover Ratio

Average Inventory = 15,000*

Note: As the values for inventory in the beginning and inventory at the end is not given, the amount of inventory is taken as average.

Q26. From the following information calculate Gross Profit Ratio, Inventory Turnover Ratio, and Trade Receivables Turnover Ratio.

Note: In this solution, the Trade Receivables are assumed to be the Average Trade Receivables

## FAQ:

1. What is the Inventory Turnover Ratio

This ratio is a relationship between the cost of goods sold and the average inventory maintained during a particular time period. It determines the efficiency with which a firm is able to manage its inventory.

2. What is the Debt-Equity Ratio

This ratio shows the relationship between owner funds (equity) and borrowed funds (debt). A lower debt-equity ratio provides more security to the people who are lending to the business. It also shows that a company is able to meet long-term dues or responsibilities

3. What is Trade Receivables Turnover Ratio

Debtors turnover ratio also known as the Receivables Turnover Ratio is a measure used to check how quickly a credit sale is converted into cash. It shows the efficiency of a business firm in collecting debts from customers.

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