## Rajasthan Board RBSE Class 12 Accountancy Chapter 11 Ratio Analysis

### RBSE Class 12 Accountancy Chapter 11 Textbook Questions

#### RBSE Class 12 Accountancy Chapter 11 Multiple Choice Questions

**RBSE Solutions For Class 12 Accountancy Chapter 11 Ratio Analysis Question 1.**

Stock turnover ratio of a concern is 6 times. This expression of the ratio is :

(a) Pure ratio

(b) Rate ratio

(c) In the form of the percentage

(d) None of these

Answer:

(b) Rate ratio

**RBSE Solutions For Class 12 Accountancy Ratio Analysis Chapter 11 Question 2.**

The objective of ratio analysis is :

(a) Knowledge of liquidity position

(b) Knowledge of profitability

(c) Knowledge of solvency position

(d) All of the above

Answer:

(d) All of the above

**Ratio Analysis Class 12 RBSE Solutions Chapter 11 Question 3.**

At the time of calculating ratio, one item is taken from balance sheet and other item is taken from statement of profit and loss, then the ratio is called :

(a) Balance Sheet Ratio

(b) Statement of Profit and Loss Ratio

(c) Joint Ratio

(d) None of these

Answer:

(c) Joint Ratio

**RBSE Solutions Class 12 Accountancy Ratio Analysis Chapter 11 Question 4.**

Another name of working capital ratio is :

(a) Liquid ratio

(b) Current ratio

(c) Absolute liquid ratio

(d) Working capital turnover ratio

Answer:

(b) Current ratio

**RBSE Solution Class 12 Accountancy Ratio Analysis Chapter 11 Question 5.**

Ideal current ratio is assumed :

(a) 3 : 1

(b) 1 : 1

(c) 2 : 1

(d) 1 : 2

Answer:

(c) 2 : 1

**RBSE Accounts Solutions Class 12 Ratio Analysis Chapter 11 Question 6.**

Which of the following assets is not taken into consideration to calculate liquid ratio :

(a) Inventory

(b) Debtors

(c) Cash

(d) Bills Receivables

Answer:

(a) Inventory

**Ratio Analysis Questions And Answers Chapter 11 Question 7.**

Credit period to customer of a company is 30 days. Its credit collection would be poor if its average collection period is :

(a) 36 Days

(b) 28 Days

(c) 20 Days

(d) 15 Days

Answer:

(a) 36 Days

**Accounts Class 12 RBSE Solutions Ratio Analysis Chapter 11 Question 8.**

If the trade payable turnover ratio is divided by 365 days, it become a ratio of :

(a) Average age of inventory

(b) Average collection period

(c) Average payment period

(d) Cheque collection period

Answer:

(c) Average payment period

**RBSE Solutions For Class 12 Accounts Ratio Analysis Chapter 11 Question 9.**

If operating ratio of a company is 78%, then operating profit ratio will be :

(a) 100%

(b) 22%

(c) 28%

(d) 24%

Answer:

(b) 22%

**RBSE Solutions 12th Accounts Chapter 11 Question 10.**

The inventory turnover ratio of a company is 4 and its cost of revenue from operations is 2,40,000 then average inventory will be :

(a) 9,60,000

(b) 1,80,000

(c) 1,20,000

(d) 60,000

Answer:

(d) 60,000

**RBSE Solutions Accountancy Class 12 Chapter 11 Question 11.**

The relationship between shareholder’s funds and total assets of a concern is expressed by :

(a) Debt equity ratio

(b) Solvency ratio

(c) Proprietary ratio

(d) Return of proprietor’s funds

Answer:

(c) Proprietary ratio

**RBSE Solutions For Class 12th Accountancy Chapter 11 Question 12.**

If earning per share of a company is 6 and dividend per share is 4 then dividend payout ratio would be :

(a) 50%

(b) 25%

(c) 40%

(d) 66.67%

Answer:

(d) 66.67%

#### RBSE Class 12 Accountancy Chapter 11 Very Short Answer Questions

**12th Accountancy RBSE Solutions Chapter 11 Question 1.**

What is meant by ratio?

Answer.

Ratio is an arithmetical expression of relationship between two interrelated or related items.

**RBSE Solution Class 12th Accountancy Chapter 11 Question 2.**

What is ratio analysis?

Answer.

Ratio analysis is an arithmetical expression of relationship between item and group of items.

**RBSE Class 12 Accountancy Solutions Chapter 11 Question 3.**

Given two limitations of ratio analysis.

Answer.

- False accounting data gives false ratio.
- Lake of proper standards.

**Class 12 Accountancy RBSE Solutions Chapter 11 Question 4.**

Given two objectives of ratio analysis.

Answer.

- Helpful in comparative study.
- Helpful in forecasting.

**RBSE Solution Class 12th Commerce Accountancy Chapter 11 Question 5.**

What do you mean by liquid ratio?

Answer.

Liquid ratio or quick ratio or acid test ratio is a liquidity ratio which measures the ability of the enterprise to meet its short term financial obligations or liabilities. It is the relationship of liquid assets with current liabilities.

**RBSE Solutions Of Class 12 Accountancy Chapter 11 Question 6.**

What is meant by solvency ratio?

Answer.

Solvency ratio show long term financial position of the enterprise. These include debts to equity ratio. Total assets of debts ratio, proprietor ratio and interest coverage ratio.

These ratio are calculated to assets the ability of the firm to meet its long term liabilities as and when they become due.

**RBSE Solutions For Class 12 Maths Chapter 11 Question 7.**

What is financial ratio?

Answer.

Which ratio is calculate between two item or a group of items shown in balance sheet called financial ratio, its other name is balance sheet ratio.

Question 8.

What is meant by inventory turnover ratio?

Answer.

Which ratio show the relationship between the cost of goods sold and average stock called inventory turnover ratio.

Question 9.

What is average collection period?

Answer.

It provides an approximation of the average time that it takes to collect debtors. It is computed by dividing 365 or 12 by the trade receivables turnover ratio.

Question 10.

What do activity ratio indicate?

Answer.

These ratio measure how will the facilities as the disposal of the concern are being utilized. These ratio are known as “Turnover Ratio” as they indicate the rapidity with which the resources available to the concern are being used to produce sales.

Question 11.

What is meant by average trade receivables?

Answer.

Average trade receivables means how many average receivable debtors and bills receivable are during the year. It is calculated as under:

Average Receivable = \(\frac { Opening\quad Debtors\quad and\quad B/R+Closing\quad Debtors+B/R }{ 2 } \)

Question 12.

What is meant by operating ratio?

Answer.

Which ratio indicate relationship between the proportion of an enterprise cost of sales and operating expenses in comparison to its net sales. It is calculate as under:

Operating Ratio = \(\frac { Cost\quad of\quad goods\quad sold+Operating\quad expenses }{ Net\quad Sales } \times 100\)

Question 13.

Name any two profitability ratios based on sales.

Answer.

- Gross Profit Ratio
- Net Profit Ratio.

Question 14.

What is the difference between current ratio and liquid ratio?

Answer.

Difference between Current Ratio and Liquid/Quick Ratio

Basis |
Current Ratio |
Liquid/Quick Ratio |

Relationship | It established relationship between current assets and current liabilities. | It established relationship between liquid assets and current liabilities. |

Assessment | It assesses the ability to meet current liabilities within 12 months from the date of balance sheet or within the period of operating cycle. | It assesses the ability to meet current liabilities immediately. |

Ideal ratio | 2 : 1 is considered to be an ideal ratio. | 1 : 1 is considered to be an ideal ratio. |

Measure | It is not considered to be better than liquid/quick ratio to measure short term financial position. | It is considered to be better than current ratio to measure short term financial position. |

Question 15.

Write formula of earning per share?

Answer.

Earning Per Share = \(\frac { Net\quad Profit\quad after\quad Interest\& Tax-Preference\quad Dividend }{ No.of\quad Equality\quad Shares } \)

Question 16.

What is ideal liquid ratio?

Answer.

Ideal Liquid Ratio is 1:1.

Question 17.

The debt equity ratio of a company is 0.75 : 1. If company obtains long term loan, what effect will be on this ratio?

Answer.

Generally, debt equity ratio of 1 : 1 is considered safe. Here debt equity ratio is 0.75 : 1, which is lower than 1:1. So, company should be consider to take long term loan or loaner should think to give loan because of repayment of the loan should take time or late.

Question 18.

What does interest coverage ratio indicate?

Answer.

This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges. The higher ratio more secure the lender is in respect of payment of interest regularly.

#### RBSE Class 12 Accountancy Chapter 11 Short Answer Questions

Question 1.

Write difference between current ratio and liquid ratio.

Answer.

Difference between Current Ratio and Liquid/Quick Ratio

Question 2.

Explain importance of ratio analysis.

Answer.

Importance of Ratio Analysis: Ratio analysis is very much important for business because it can be known only by ratio analysis that there is any progress in business or not. We can get the knowledge of various sides relate to the ratio analysis as : creditors, investors, buyer-seller etc. progress of business, economical condition and profit and loss in business. So, with the help of these analysis any business can make end to end progress.

Question 3.

Write names of ratios depicting capacity of payment of long term loans.

Answer.

- Debt Equity Ratio
- Solvency Ratio
- Proprietor Ratio
- Fixed Assets Ratio
- Interest Coverage Ratio.

Question 4.

Write the four limitations of ratio analysis.

Answer.

- Limited use of a Single Ratio
- Lack of Proper Standards
- Ignores Qualitative Factors
- False accounting data gives false ratio.

Question 5.

Which items are included in the shareholders funds?

Answer.

Shareholders fund = Equity share capital + Preference share capital + Reserve and Surplus – Fictitious Assets

Question 6.

Explain gross profit ratio and net profit Ratio.

Answer.

(1) Gross Profit Ratio : This ratio shows the relationship between gross profit and sales. The formula for computing this ratio is :

Gross Profit Ratio = \(\frac { Gross\quad Profit }{ Net\quad Sales } \times 100\)

Net Sales = Sales – Sales Return

(2) Net Profit Ratio: Net profit ratio establishes the relationship between net profit and revenue from operation (net sales). It shows the percentage of net profit earned on revenue from operation.

Net Profit after Tax = \(\frac { Net\quad Profit\quad Tax }{ Revenue\quad from\quad Operation(NetSales) } \times 100\)

Net Profit = Revenue from Operation – Cost of Revenue from Operation – Operating Expenses + Non-operating Income – Tax

Question 7.

What are the implications of high and low trade receivables turnover ratio?

Answer.

Here, it is known by relating total debtors and pure borrow sale that what part of sale remain in collected in form of debtors.

It is known by calculating average collection period that in what period an organisation recover the amount of borrow sale from debtors. This period should not be more than generally (1+1/3 of that). If average collection period is more than 4/3, than it is consider that there is more kindness in borrow conditions, carelessness and non-efficiency in managing credit collection. If recover period is less than 4/3, management efficiency, activeness and borrow conditions of business are satisfactory. Delay in recovery of credit is a sign of possibilities of debt accounts.

Question 8.

How the cost of goods sold is calculated?

Answer.

Cost of goods sold is calculated as under:

Cost of goods sold = Opening stock + Purchase + Direct Expenses – Closing Stock

Or

Cost of goods sold = Sales – Gross Profit

Question 9.

Explain the meaning of capital employed, and how is it calculated ?

Answer.

The term “Investment” here refers to long term funds deployed in the enterprise. As defined earlier long term funds are also known as Capital Employed which means total of shareholders funds and long term loans.

The ratio is computed as under :

Returns on Investment = \(\frac { Profit\quad before\quad Interest\quad Tax\quad and\quad Dividends }{ Capital \quad Employed } \times 100\)

Since the capital employed includes shareholders funds and long term loans, interest paid on long term loans will not be deducted from profits while calculating this ratio.

Capital employed can be computed by any of the following two methods :

First Method (Liabilities Side Approach)

Capital Employed = Equity Share Capital + Preference Share Capital+All Reserves + P&L Balance + Long Term Loans – Fictitious Assets (such as Preliminary Expenses etc.) – Non- Operating Assets like Investments made outside the business

Second Method (Assets Side Approach)

Capital Employed = Fixed Assets + Working Capital or Fixed Assets + Current Assets – Current Liabilities

Question 10.

Write the meaning and importance of operating profit ratio.

Answer.

Operating Profit Ratio : Operating profit ratio measures the relationship between operating profit and revenue from operations i.e., net sales. Operating profit ratio is computed by dividing operating profit by revenue operations (net sales) and is expressed as percentage. In the form of a formula this ratio is expressed as follows:

Operating Profit Ratio = \(\frac { Operating\quad Ratio }{ Revenue\quad from\quad Operations (Net Sales) } \times 100\)

Operating Profit = Gross Profit + Other Operating Income – Other Operating Expenses Or Net Profit (Before Tax) + Non-operating Expenses/Losses – Non-Operating Incomes Or Revenue from Operations – Operating Cost

Objective and Significance : The objective of computing the ratio is to determine operational efficiency of the business. An increase in the ratio over the previous period shows improvement in the operational efficiency of the business enterprise.

Question 11.

Inventory turnover ratio of a trading concern is 15 times and value of average inventory is 20,000. Goods are sold at 25% profit on sales. State the amount of profit.

Solution.

Question 12.

Working capital of a company is 90,000. If its current ratio is 2.5 : 1, then calculate current assets.

Solution.

Current Assets = Working Capital + Liabilities

Suppose Liabilities is x assets = 2.5x

2.5 x = 90,000 + x

2.5 x – x = 90,000

1.5 x = 90,000

90,000 ÷ 1.5 x = 60,000 liabilities

Assets are 2.5 time.

So, 60,000 x 2.5 = 1,50,000

Question 13.

Opening inventory of a concern is 20,000, closing inventory is 1.6 times of opening inventory. Inventory turnover ratio is 3.5 times and sales is 1,40,000. Calculate the gross profit.

Solution.

Cost of Good Sold = Rs 91,000

Sales = Rs 1,40,000

Gross Profit = Sales – Cost of Goods Sold

Gross Profit = 1,40,000 – 91,000 = Rs 49,000.

Question 14.

Total assets, non-current liabilities and current liabilities of a company are 8,00,000, 2,00,000 and 1,00,000 respectively, then calculate

(i) Debt-Equity Ratio and .

(ii) Proprietor Ratio.

Solution.

#### RBSE Class 12 Accountancy Chapter 11 Essay Type Questions

Question 1.

What is ratio analysis? Explain its importance.

Answer.

Meaning of Ratio Analysis

“Ratio analysis is a study of relationship among various financial factors in a business.”

—Myers

Ratio analysis is a process of determining and interpreting relationship between the items of financial statements to provide a meaningful understanding of the performance and financial position of a enterprise. Thus, it is a technique of analysing the financial statements by computing ratio.

Importance of Ratio Analysis

Ratio analysis serves the purpose of various users who or interested in the financial statements. It simplifies, summaries and systematizes the figures in the financial statements. The objectives of ratio analysis can be better understood from the following importance of ratio analysis:

1. Useful in Analysis of Financial Statements : Ratio analysis is an extremely useful device for analyzing the financial statements. It help the bankers, creditors, investors, shareholders etc. in acquiring enough knowledge about the profitability and financial health of the business. In the light of the knowledge so acquired by them, they can take necessary decisions about their relationships with the concern.

2. Simplification of Accounting Data: Accounting ratio simplifies and summaries a long array of accounting data and makes them understandable. It discloses the relationship between two such figures which have a cause and effect relationship with each other.

3. Helpful in Comparative Study: With the help of ratio analysis comparison of profitability and financial soundness can be made between one firm and another in the same industry. Similarly, comparison of current year figures can also be made with those of previous years with the help of ratio analysis.

4. Helpful in Locating the Weak Spots of the Business: Current year’s ratios are compared with those of the previous years and if some weak spots are thus located remedial measures are taken to correct them.

5. Helpful in Forecasting: Accounting ratios are very helpful in forecasting and preparing the plans for the future. For example, if sales of a firm during this year are Rs 10 lakhs and average amount of stock kept during the year was Rs 2 lakhs i.e., 20% of sales and if the firm wishes to increase sales next year to Rs 15 lakhs it must be ready to keep a stock of Rs 3,00,000 i.e., 20% of 15 lakhs. Similar other estimates for future can be worked out by establishing a relationship between capital and sales debtors and sales expenses and sales etc.

6. Estimate About the Trend of the Business: If accounting ratios are prepared for a number of years they will reveal the trend of costs, sales, profits and other important facts.

7. Fixation of Ideal Standards : Ratio helps us in establishing ideal standards of the different items of the business. By comparing the actual ratios calculated at the end of the year with the ideal ratios, the efficiency of the business can be easily measured.

8. Effective Control : Ratio analysis discloses the liquidity, solvency and profitability of the business enterprise. Such information enables management to assess the changes that have taken place over a period of time in the financial activities of the business. It helps them in discharging their managerial functions e.g., planning, organizing, directing, communicating and controlling more effectively.

Question 2.

Write down limitations of ratio analysis.

Answer.

Limitations of Accounting Ratios

Accounting ratios are very important tool of financial analysis. But despite its being indispensable the ratios suffer from a number of limitations. These limitations should be kept in mind while making use of accounting ratio:

1. False Accounting Data Gives False Ratio: Accounting ratios are calculated on the basis of data given in profit and loss account and balance sheet. Therefore, they will be only as correct as the accounting data on which they are based. For example, if the closing stock is over valued not only the profitability will be overstated but also the financial position will appear to be better. Therefore, unless the profit and loss account and balance sheet are reliable the ratios based on them will not be reliable. There are certain limitations of financial statements as such the ratios calculated on the basis of such financial statements will also have the same limitations.

2. Comparison Not Possible if Different Firms Adopt Different Accounting Policies: There may be different accounting policies adopted by different firms with regard to providing depreciation, creation of provision for doubtful debts, methods of valuation of closing stock etc. For instance, one firm may adopt the policy of charging depreciation on straight line basis while other may charge on written down value method. Such differences make the accounting ratios incomparable.

3. Ratio Analysis Becomes Less Effective Due to Price Level Changes: Price level over the years goes on changing therefore, the ratios of various years cannot be compared. For example, one firm sells 1,000 machines for Rs 10 lakhs during 2017, it again sells 1,000 machines of the same type in 2018 but owing to rising prices the sales price was Rs 15 lakhs. On the basis of ratios it will be concluded that the sales have increased by 50% whereas in actual, sales have not increased at all. Hence, the figures of the past years must be adjusted in the light of price level changes before the ratios for these years are compared.

4. Limited Use of a Single Ratio: The analyst should not merely rely on a single ratio. He should study several connected ratios before reading a conclusion. For example, the current ratio of a firm may be quite satisfactory whereas the quick ratio may be unsatisfactory.

5. Lack of Proper Standards: Circumstances differ from firm to firm hence, no single standard ratio can be fixed for all the firms against which the actual ratio may be compared. For example, the current ratio of 2 : 1 is generally accepted as an ideal ratio which means that the current assets should be atleast twice in comparison to the current liabilities. But if a firm has such type of arrangement with its bankers that the bankers will provide necessary credit to the firm in case of need the ideal current ratio for such a firm may be less than 2:1.

6. Ignores Qualitative Factors: Ratio analysis is a quantitative measurement of the performance of the business. It ignores qualitative factors which are also essential for interpretation. For example, credit may be granted to a customer on the basis of certain ratios of his business but the character and managerial ability of the customer must also be taken into consideration.

7. Ratio Alone are Not Adequate for Proper Conclusions : Ratio derived from analysis of statements are not sure indicators of good or bad financial position and profitability of a firm. They merely indicate the probability of favorable or unfavorable position. The analyst has to carry out further investigations and exercise his judgement in arriving at a correct diagnosis. This is for financial analysis in addition to the total of ratio analysis.

8. Effect of Personal Ability and Bias of the Analyst: Another important point to keep in mind is that different persons draw different meaning of different terms. One analyst may calculate ratios on the basis of profit after interest and tax, whereas, another analyst may consider profits before interest and tax, a third may consider profits after interest but before tax. Therefore, before making comparisons one must be sure that the ratios have been calculated on the same basis.

Although, ratio analysis suffers from a number of limitations as enumerated above, yet it is a very useful and widely used tool of analyzing the financial statements. Useful conclusions may be arrived at by ratio analysis provided the above mentioned limitations are kept in mind while using the results obtained from ratio analysis.

Question 3.

What is meant by activity ratios? Explain in details three activity ratios.

Answer.

Activity Ratio : These ratios are calculated on the basis of cost of sales or sales therefore, these ratios are also called as Turnover Ratios. Turnover indicates the speed or number of times the capital employed has been rotated in the process of doing business. In other words, these ratios indicate how efficiently the working capital and stock is being used to obtain sales. Higher turnover ratios indicate the better use of capital or resources and in turn lead to higher profitability. Three important turnover ratios are follows :

(i) Inventory Turnover Ratio or Stock Turnover Ratio: This ratio indicates the relationship

between the cost of goods sold during the year and average stock kept during that year.

Inventory Turnover Ratio = \(\frac { Cost\quad of\quad Goods\quad Sold }{ Average\quad Stock } \)

(a) Cost of goods sold can be calculated by two ways :

Cost of Goods Sold = Opening Stock + Purchase + Carriage + Wages + Other Direct Charges – Closing Stock

Or

Cost of Goods Sold = Net Sales – Gross Profit

(ii) Debtors Turnover Ratio or Receivables Turnover Ratio: Trade receivables is the amount receivable against goods sold or services rendered in the normal course of business by the enterprise. In other words, amount remaining outstanding against sales of goods or services rendered are trade receivables. Trade receivables include debtors and bills receivable. Trade receivables turnover ratio establishes the relationship between credit revenue from operations i.e., net credit sales and average trade receivables i.e., average of debtors and bills receivable of the year. Average trade receivables are calculated by dividing the sum of trade receivables in the beginning and at the end by 2.

Trade Receivable Turnover Ratio

When trade receivables turnover ratio is compared it should be kept in mind that provision for doubtful debts is not deducted from trade receivables. Since the purpose is to calculate the number of days for which sales are tied receivables and not to ascertain realizable value of the debtors.

Objective and Significance: This ratio indicates the number of times trade receivables are turned over in a year in relation to credit sales. It shows how quickly trade receivables are converted into cash and cash equivalents and thus, shows the efficiency in collection of amounts due against trade receivables. A high ratio is better since it shows that debts are collected more promptly.

A lower ratio shows inefficiency in collection and more investment in debtors than required.

Debt Collection Period or Average Collection Period: It provides an approximation of the average time that it takes to collect debtors. It is computed by dividing 365 or 12 by the trade receivables turnover ratio. It is calculated as follows:

Debtors Collection Period = \(\frac { 365 }{ Trade\quad Recivables\quad Turnover \quad Ratio } \)

= Number of Days

(iii) Trade Payables Turnover Ratio : This ratio indicates the relationship between credit purchase and average creditors during the year.

\(\frac { Net\quad Credit\quad Purchases }{ Average\quad Creditors+Average\quad B/P } \)

If the amount of credit purchase is not given in the question the ratio may be calculated on the basis of total purchase.

Significance : This ratio indicates the speed with which the amount is being paid to creditors. The higher ratio the better it is since it will indicate that the creditors are being paid more quickly which increases the credit worthiness of the firm.

Question 4.

What is meant by return on investment? Give its importance and explain procedure to calculate with the help of an illustration.

Answer.

Return on Investment or ROI

This ratio reflects the overall profitability of the business. It is calculated by comparing the profit earned and the capital employed to earn it. This ratio is usually in percentage and is also known as “Rate of Return” or “Return on Capital Employed” or “Yield on Capital”.

The term “Investment” here refers to long term funds deployed in the enterprise. As defined earlier long term funds are also known as Capital Employed which means total of shareholders funds and long term loans.

The ratio is computed as under:

Returns on Investment = \(\frac { Profit\quad before\quad Interest\quad Tax\quad and\quad Dividends }{ Capital\quad Employed } \times 100\)

Since the capital employed includes shareholders’ funds and long term loans, interest paid on long term loans will not be deducted from profits while calculating this ratio.

Capital employed can be computed by any of the following two methods:

First Method (Liabilities Side Approach)

Capital Employed = Equity Share Capital + Preference Share Capital+All Reserves + P&L Balance + Long Term Loans – Fictitious Assets (such as Preliminary Expenses etc.) – Non-Operating Assets like Investments made outside the business

Second Method (Assets Side Approach)

Capital Employed = Fixed Assets + Working Capital or Fixed Assets + Current Assets – Current Liabilities

Significance: Since profit is the overall objective of a business enterprise this ratio is a barometer of the overall performance of the enterprise. It measures how efficiently the capital employed in the business is being used. In other words, it is also a measure of the earning power of the net assets of the business. Even the performance of two dissimilar firms may be compared with the help of this ratio.

Furthermore, the ratio can be used to judge the borrowing policy of the enterprise. If an enterprise having the ratio of return on investment of 15% borrows at 16%, it would indicate that it is borrowing at a rate higher than its earning rate.

Illustration:

Calculate Return on Investment from the following details of Madhu Ltd.: Rs

Net Profit after Tax – 6,50,000

Rate of Income Tax – 50%

12.5% Debentures – 8,00,000

Fixed Assets at Cost – 24,60,000

Provision for Depreciation – 4,60,000

Current Assets – 15,00,000

Current Liabilities – 7,00,000

Solution:

(1) Calculation of Profit before Interest and Tax (Operating Profit)

Net Profit after Tax 6,50,000

Add: Provision for Tax @ 50%

Question 5.

Explain :

(i) EPS,

(ii) DPS and

(iii) Dividend Payout Ratios, reflecting investment analysis.

Answer.

(i) Earning Per Share : Earning per share (EPS) ratio measures the earning capacity of the

concern from the owner’s point of view and it is helpful in determining the price of the equity

share in the market place. Earning per share ratio can be calculated as:

Advantages:

(a) This ratio helps to measure the price of stock in the market price.

(b) This ratio highlights the capacity of the concern to pay dividend to its shareholders.

(c) This ratio used as a year stock to measure the overall performance of the concern.

(ii) Dividend Per Share : Dividend per share (DPS) is the dollar amount of cash dividends paid

during a period per share of common stock.

(iii) Dividend Payout Ratio: This ratio highlights the relationship between payment of dividend on equity share capital and earning per share. This ratio indicates the dividend policy adopted by the top management about utilization of divisible profit to pay dividend or to retain or both. The ratio thus, can be calculated as:

#### RBSE Class 12 Accountancy Chapter 11 Numerical Questions

Question 1.

Calculate Current Ratios and Liquid Ratios in following conditions :

(a) Current liabilities 48,000; Inventory 78,000; Working capital 96,000.

(b) Working capital 40,000; Liquid assets 10,000.

(c) Current assets 2,00,000; Creditors 10,000; Current liabilities 80,000 and Inventory 60,000.

Solution:

Question 2.

Solve the following :

(a) Current liabilities of a company are 4,00,000. Its current ratio is 2.5 : 1 and liquid ratio is 1.5 : 1. Calculate the value of Current Assets, Liquid Assets and Inventories.

(b) If the current ratio is 2.5, liquidity ratio is 1.6 and working capital 90,000. Find the value of Current Assets, Current Liabilities and Stock.

Solution:

Question 3.

From the following informations of Garg Ltd,, calculate :

(i) Debt Equity Ratio,

(ii) Proprietor Ratio,

(iii) Solvency Ratio.

Tangible assets Rs 3,00,000, Non-current investments Rs 2,40,000, Trade receivables Rs 90,000, Other current assets Rs 70,000, Long term borrowings Rs 2,00,000, Long term provisions Rs 1,00,000, Short term borrowings Rs 20,000, Other current liabilities Rs 60,000.

Solution:

Question 4.

From the following details, calculate :

(i) Opening Inventory,

(ii) Closing Inventory,

(iii) Trade Receivables Turnover Ratio.

Cost of revenue from operations 4,00,000, Gross profit 20% on sales, Stock turnover ratio 5 times, Closing inventory is 32,000 in excess of opening inventory, Opening Trade receivables is 50,000, Closing Trade receivables are 1.5 times from Opening Trade receivables.

Solution:

Question 5.

Calculate Trade Receivables Turnover Ratio and Average Collection Period from the following :

Total revenue from operations for the year 8,23,000; Cash revenue from operations being 50% of total revenue; Opening trade receivables 50,000; Cash received from trade receivables 3,76,500; Discount allowed to debtors 15,000; Revenue from operations return, out of credit revenue from operations

Solution:

Question 6.

Calculate Gross Profit Ratio from the following information :

Cash Revenue from operations 40% of total revenue; Total purchase 13,50,000; Credit revenue from operations 9,00,000; Excess of closing stock over opening stock 75,000.

Solution:

Cash Sales 40% of Total Sales

Credit Sales = 9,00,000

Cash Sales = \(\frac { 40 }{ 60 }\) x 9,00,000 = 6,00,000

Total Sales = 15,00,000

Closing Stock = (75,000 + x)

Opening Stock = x

Gross Profit = (Total Sales + x + 75,000) – (x + 13,50,000)

Gross Profit =(15,00,000 + 75,000 + x) – (x + 13,50,000)

Gross Profit = 15,75,000 + x – x + 13,50,000 = 2,25,000

Question 7.

From the following information of Tanvi Ltd., calculate :

(i) Working Capital Ratio,

(ii) Quick Ratio,

(iii) Inventory Turnover Ratio,

(iv) Gross Profit Ratio,

(v) Solvency Ratio,

(vi) Operating Ratio,

(vii) Operating Profit Ratio,

(viii) Net Profit . Ratio.

Information : Revenue from operations 2,00,000; Purchase 1,20,000; Opening inventory 12,000; Closing inventory 18,000; Wages 8,000; Selling expenses 2,000; Tangible fixed assets 2,12,000; Other Current assets 50,000, Current liabilities 30,000; Equity share capital 1,00,000; 7% Preference share capital 80,000; Reserves 10,000; 8% Debentures 60,000

Solution:

Question 8.

From the following information of Rishabh Ltd. find out:

(i) Gross Profit Ratio,

(ii) Operating Ratio,

(iii) Operating Profit Ratio,

(iv) Net Profit Ratio,

(v) Return on Investment Ratio,

(vi) Interest Coverage Ratio.

Information : Revenue from operations 4,00,000, Cost of revenue from operations 2,25,000, Interest on Short Term Loans 5,000, Office Expenses 25,000, Selling Expenses 50,000, Rent Received 4,000, Loss by Fire 10,000, Interest on Long Term Loans 10,000, Commission Received 5,000, Capital Employed 6,00,000, Income Tax rate may assume 30%.

Solution.

(i) Gross Profit Ratio

Gross Profit = Revenue Operation – Cost of Revenue

= 4,00,000 – 2,25,000 = 1,75,000 G.P. (Gross profit)

Question 9.

From the following information, calculate :

(i) Earning Per Share EPS,

(ii) Dividend Per Share – DPS, &

(iii) Dividend Payout Ratio, Profit Before Interest & Tax – 5,00,000,

Interest on Long Term Loans – 2,00,000, Provision for Tax – 30%, Retained Earnings – 60,000, Equity Share Capital-divided into shares of Rs 10 each.

Solution:

Question 10.

Following information are given to you:

On the basis of the information given above, calculate :

(i) Current Ratio,

(ii) Liquid Ratio,

(iii) Proprietor Ratio,

(iv) Debt-Equity Ratio,

(v) Inventory Turnover Ratio,

(vi) Trade Receivables Turnover Ratio,

(vii) Trade Payables Turnover Ratio,

(viii) Gross Profit Ratio.

Solution: