NCERT Solutions for Class 12 Accountancy (Part 2) Chapter 5 Accounting Ratios

NCERT
SOLUTIONS
CLASS - 12th

aglase .co

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

Class : 12th
Subject : Accountancy
Chapter : 5
Chapter Name : Accounting Ratios

Q1 What do you mean by Ratio Analysis?

Answer. Ratio Analysis is a technique of financial analysis. It describes the relationship between
various items of Balance Sheet and Income Statements. It helps us in ascertaining profitability,
operational efficiency, solvency, etc. of a firm. It may be expressed as a fraction, proportion,
percentage and in times. It enables budgetary controls by assessing qualitative relationship
among different financial variables. Ratio Analysis provides vital information to various
accounting users regarding the financial position and viability and performance of a firm. It also
lays down the basic framework for decision making and policy designing by management.

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Q2 What are the various types of ratios?

Answer. Accounting ratios are classified in the following two ways.
⮚ Traditional Classification
⮚ Functional Classification
I. Traditional Classification: This classification is based on the financial statements, i.e. Profit
and Loss Account and Balance Sheet. The Traditional Classification further bifurcates
accounting ratios on the basis of the accounts to which the elements of a ratio belong. On the
basis of accounts of financial statements, the Traditional Classification bifurcate accounting
ratios as:
⮚ Income Statement Ratios: These are those ratios whose all the elements belong only to
the Trading and Profit and Loss Account, like Gross Profit Ratio, etc.
⮚ Balance Sheet Ratios: These are those ratios whose all the elements belong only to the
Balance Sheet, like Current Ratio, Debt Equity Ratio, etc.
⮚ Composite Ratios: These are those ratios whose elements belong both to the Trading
and Profit and Loss Account as well as to the Balance Sheet, like Debtors Turnover
Ratio, etc.
II. Functional Classification: This classification reflects the functional need and the purpose of
calculating ratio. The basic rationale to compute ratio is to ascertain liquidity, solvency, financial

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performance and profitability of a business. Consequently, the Functional Classification
classifies various accounting ratios as:
⮚ Liquidity Ratio: These ratios are calculated to determine short term solvency.
⮚ Solvency Ratio: These ratios are calculated to determine long term solvency.
⮚ Activity Ratio: These ratios are calculated for measuring the operational efficiency and
efficacy of the operations. These ratios relate to sales or cost of goods sold.
⮚ Profitability Ratio: These ratios are calculated to assess the financial performance and
the financial viability of the business.

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Q3 What relationships will be established to study:
a. Inventory Turnover
b. Trade Receivables Turnover
c. Trade Payables Turnover
d. Working Capital Turnover

Answer. a. Inventory Turnover Ratio: This ratio is computed to determine the efficiency with
which the stock is used. This ratio is based on the relationship between cost of goods sold and
average stock kept during the year.
Cost of Goods Sold
Inventory/Stock Turnover ratio=
Average stock
Cost of goods sold=opening stock + purchases + Direct Expenses – closing stock
Or, cost of goods sold = net sales-gross profit
opening stock+ closing stock
Average stock=
2
b. Debtors Turnover Ratio or Trade Receivables Turnover Ratio: This ratio is computed to
determine the rate at which the amount is collected from the debtors. It establishes the
relationship between net credit sales and average accounts receivables.
net credit sales
Debtors turnover ratio=
averageaccounts recievable
Net credit sales=total sales-cash sales
Average accounts receivable=
Opening debtors+opening Bills receivable+ closing debtor +closing bills receivable
2

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c. Trade Payables Turnover Ratio: This ratio is known as Creditors Turnover Ratio. It is
computed to determine the rate at which the amount is paid to the creditors. It establishes the
relationship between net credit purchases and average accounts payables.
Net credit purchases
Payable Turnover ratio=
averageaccounts payable
Net credit purchases=Total Purchases-Cash purchases
Average accounts payable=
Opening creditor+Opening bliss payable+closing creditor+ closing bills payable
2
d. Working Capital Turnover Ratio: This ratio is computed to determine how efficiently the
working capital is utilized in making sales. It establishes the relationship between net sales and
working capital.
Net sales
Working capital turnover ratio=
Working capital
Net sales=Total sales-Sales return
Working Capital=Current asset-current liability

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Q4 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?

Answer. The liquidity of a business firm is measured by its ability to pay its long term obligations.
The long term obligations include payments of principal amount on the due date and payments
of interests on the regular basis. Long term solvency of any business can be calculated on the
basis of the following ratios.
⮚ Debt-Equity Ratio- It depicts the relationship between the borrowed fund and owner’s
funds. The lower the debt-equity ratio higher will be the degree of security to the lenders.
A low debt-equity ratio implies that the company can easily meet its long term
obligations.
Long−term Debt
Debt-Equity Ratio=
Equity∨share holders fund
⮚ Total Assets to Debt Ratio- It shows the relationship between the total assets and the
long term loans. A high Total Assets to Debt Ratio implies that more assets are financed
by the owner’s fund and the company can easily meet its long-term obligations. Thus, a
higher ratio implies more security to the lenders.

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Total assets
Total assets to Debt Ratio=
Long−term Debt
⮚ Interest Coverage Ratio- This ratio depicts the relationship between amount of profit
utilized for paying interest and amount of interest payable. A high Interest Coverage
Ratio implies that the company can easily meet all its interest obligations out of its profit.
Net profit before interest ∧tax
Interest coverage ratio=
Interest on Long−term Loan

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Q5 The average age of inventory is viewed as the average length of time inventory is held by
the firm or as the average number of day’s sales in inventory. Why?

Answer. Inventory Turnover Ratio: This ratio is computed to determine the efficiency with which
the stock is used. This ratio is based on the relationship between cost of goods sold and
average stock kept during the year.
Cost of goods sold
Inventory/Stock Turnover ratio=
Average stock
Cost of goods sold=opening stock+ Purchases +Direct Expenses-Closing stock
Or, Cost of goods sold= Net sales-Gross profit
Opening stock+ Closing stock
Average stock=
2
Days∈a year
Average age of inventory=
Inventory turnover ratio
It shows the rate with which the stock is turned into sales or the number of times the stock in
turned into sales during the year. In other words, this ratio reveals the average length of time for
which the inventory is held by the firm.

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Q1 What are liquidity ratios? Discuss the importance of current and liquid ratio.

Answer. Liquidity ratios are calculated to determine the short-term solvency of a business, i.e.
the ability of the business to pay back its current dues. Liquidity means easy conversion of
assets into cash without any significant loss and delay.

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Short-term creditors are interested in ascertaining liquidity ratios for timely payment of their
debts.
Liquidity ratio includes
⮚ Current Ratio
⮚ Liquid Ratio or Quick Ratio

⮚ Current Ratio- It explains the relationship between current assets and current liabilities. It
is calculated as:
Current asset
Current ratio=
Current liability
Currents Assets are those assets that can be easily converted into cash within a short period of
time like, cash in hand, cash at bank, marketable securities, debtors, stock, bills receivables,
prepaid expenses. etc.
Current Liabilities are those liabilities that are to be repaid within a year like, bank overdraft, bills
payables, Short-term creditors, provision for tax, outstanding expenses etc.
Importance of Current Ratio
It helps in assessing the firm’s ability to meet its current liabilities on time. The excess of current
assets over current liabilities provide a sense of safety and security to the creditors. The ideal
ratio of current assets over current liabilities is 2:1. It means that the firm has sufficient funds to
meet its current liabilities. A higher ratio indicates poor investment policies of management and
low ratio indicates shortage of working capital and lack of liquidity.
⮚ Liquid Ratio- It explains the relationship between liquid assets and current liabilities. It
indicates whether a firm has sufficient funds to pay its current liabilities immediately. It is
calculated as:
Liquid asset
Liquid ratio=
Current liabilities
Liquid assets=Current assets-stock-Prepaid Expenses
Importance of Liquid Ratio
⮚ It helps in determining whether a firm has sufficient funds if it has to pay all its current
liabilities immediately.
⮚ It does not include stock, since it takes comparatively more time to convert the stock into
cash. Further prepaid expenses are also not included in liquid assets, since these
cannot be converted into cash. The ideal Liquidity Ratio is considered to be 1:1. It
means that the firm has a rupee in form of liquid assets for every rupee of current
liabilities.

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Q2 How would you study the solvency position of the firm?

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Answer. Solvency position of a firm is studied with the help of the Solvency Ratios. Solvency
ratios are the measures of the long-term financial position of the firm in terms of its ability to pay
its long-term liabilities. In other words, the solvency of the firm is measured by its ability to pay
its long term obligation on the due date. The long term obligations include payments of principal
amount on the due date and payments of interests on the regular basis. Long term solvency of
any business can be calculated on the basis of the following ratios.
⮚ Debt-Equity Ratio- It depicts the relationship between the borrowed fund and owner’s
funds. The lower the debt-equity ratio higher will be the degree of security to the lenders.
A low debt-equity ratio implies that the company can easily meet its long term
obligations.
Long−term Debt
Debt-equity Ratio=
Equity∨Share holders Fund
Equity or the Shareholders Fund includes Preference Share Capital, Equity Share Capital,
Capital Reserve, Securities Premium, General Reserve less Accumulated Loss and Fictitious
Assets
⮚ Total Assets to Debt Ratio- It shows the relationship between the total assets and the
long term loans. A high Total Assets to Debt Ratio implies that more assets are financed
by the owner’s fund and the company can easily meet its long-term obligations. Thus, a
higher ratio implies more security to the lenders.
Total Assets
Total Assets to Debt Ratio=
Long−Term Debt
Total Assets includes all fixed and current assets except fictitious assets like, Preliminary
Expenses, Underwriting Commission, etc.
Debt includes all long-term loans that are to be repaid after one year. It includes debentures,
mortgage loans, bank loans, loans from other financial institutions, etc.
⮚ Interest Coverage Ratio- This ratio depicts the relationship between amount of profit
utilize for paying interest and amount of interest payable. A high Interest Coverage Ratio
implies that the company can easily meet all its interest obligations out of its profit.
Net profit before Interest∧Tax
Interest Coverage Ratio=
Interest on longterm Loan
⮚ Proprietary Ratio- It shows the relationship between the Shareholders Fund and the
Total Assets. This ratio reveals the financial position of a business. The higher the ratio
the higher will be the degree of safety for the creditors. It is calculated as:
Shareholders Fund Equity
Proprietary Ratio= or
Total Assets Total assets
Total Assets includes all fixed and current assets except fictitious assets like, Preliminary
Expenses, Underwriting Commission, etc.

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Q3 What are important profitability ratios? How are these worked out?

Answer. Profitability ratios are calculated on the basis of profit earned by a business. This ratio
gives a percentage measure to assess the financial viability, profitability and operational
efficiency of the business. The various important Profitability Ratios are as follows:
1. Gross Profit Ratio
2. Operating Ratio
3. Operating Profit Ratio
4. Net Profit Ratio
5. Return on Investment or Capital Employed
6. Earnings per Share Ratio
7. Dividend Payout Ratio
8. Price Earnings Ratio
1. Gross Profit Ratio- It shows the relationship between Gross Profit and Net Sales. It depicts
the trading efficiency of a business. A higher Gross Profit Ratio implies a better position of a
business, whereas a low Gross Profit Ratio implies an inefficient unfavorable sales policy.
Gross profit
Gross Profit Ratio= ∗100
Net sales
Gross profit=Net sales-Cost of Goods sold
Net sales=Total sales-sales return
Cost of goods sold=Opening stock+ Purchases+ Direct expenses-closing stock
2. Operating Ratio- It shows the relationship between Cost of Operation and Net Sales. This
ratio depicts the operational efficiency of a business. A low Operating Ratio implies higher
operational efficiency of the business. A low Operating Ratio is considered better for the
business as it enables the business to be left with a greater amount after covering its operation
costs to pay for interests and dividends.
Operating Cost
Operating Ratio= ∗100
Net sales
Operating Cost=Cost of goods sold+ Operating Expenses
Cost of goods sold=Sales-Gross Profit

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3. Operating Profit Ratio- It shows the relationship between the Operating Profit and Net Sales.
It helps in assessing the operational efficiency and the performance of the business.
Operating Profit
Operating Profit Ratio= ∗100
sales
Operating Profit Ratio=100-Operating Ratio
Operating Profit=Sales-Operation cost

4. Net Profit Ratio- It shows the relationship between net profit and sales. Higher ratio is better
for firm. It depicts the overall efficiency of a business and acts as an important tool to the
investors for analyzing and measuring the viability and performance of the business.
Net profit
Net profit ratio= ∗100
Net sales
Profit before tax
Or, Net Profit Ratio= ∗100
Net sales
Profit aftertax
Or, Net Profit ratio= ∗100
net sales
Net sales=Total sales-Sales return

5. Return on Investment or Capital Employed- It shows the relationship between the profit
earned and the capital employed to earn that profit. It is calculated as:
Profit before interest ∧Tax
Return on investment or capital Employed= ∗100
Capital Employeed
Capital Employed=Fixed Assets + Current Assets – Current Liabilities
Or, Capital Employed=Share capital+ Reserve and surplus+ Long-term Funds- Fictitious Assets
This ratio depicts the efficiency with which the business has utilized the capital invested by the
investors. It is an important yardstick to assess the profit earning capacity of the business.

6. Earning per Shares- It shows the relationship between the amount of profit available to
distribute as dividend among the equity shareholders and number of equity shares.
Profit available for equity shareholders
Earning per Share=
Number of equity shares
Profit available for equity shareholders=Net profit after Tax-Preferences Share Dividend

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7. Dividend Payout Ratio- It shows the relationship between the dividend per share and
earnings per share. This ratio depicts the amount of earnings that is distributed in the form of
dividend among the shareholders. A high Dividend Payout Ratio implies a better position and
goodwill of the business for the shareholders.
Dividend Per Share
Dividend Payout ratio=
Earning per share
Dividend Paid
Dividend per share=
No . of shares

8. Price Earning Ratio- It shows the relationship between the market price of a share and the
earnings per share. This ratio is the most common tool that is used in the stock markets. This
ratio depicts the degree of reliance and trust that the shareholders have on the business. This
ratio reflects the expectation of the shareholders regarding the rise in the future prices of the
company’s shares. A higher Price Earning Ratio definitely enables a company to enjoy favorable
position in the market.
Market Price of a share
Price Earning Ratio=
Earning per share

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Q4 The current ratio provides a better measure of overall liquidity only when a firm’s inventory
cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure
of overall liquidity. Explain.

Answer.
⮚ Current Ratio- It explains the relationship between current assets and current liabilities. It
is calculated as:
Current assets
Current Ratio=
Current liabilties
Currents Assets are those assets that are easily converted into cash within a short period of
time like cash in hand, cash at bank, marketable securities, debtors, stock, bills receivables,
prepaid expenses. etc.
Current Liabilities are those liabilities that are to be repaid within a year like bank overdraft, bills
payables, Short-term creditors, provision for tax, outstanding expenses etc.
⮚ Liquid Ratio- It explains the relationship between liquid assets and current liabilities. It
indicates whether a firm has sufficient funds to pay its current liabilities immediately. It is
calculated as:

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Liquid assets
Liquid Ratio=
Current Liabilities
Liquid Assets=Current assets-Stock-Prepaid Expenses
Generally, Current Ratio is preferable for such type of business where the stock or the
inventories cannot easily be converted into cash like heavy machinery manufacturing
companies, locomotive companies, etc. This is because, the heavy stocks like machinery, heavy
tools etc. cannot be easily sold off. But on the other hand, the businesses where the stock can
be easily realized or sold off regard Liquid Ratio to be more suitable measure to reveal their
liquidity position. For example, the inventories of a service sector company is very liquid as
there are no stock kept for sale, so they prefer Liquid Ratio as a measure of overall liquidity.
Moreover, sometimes companies prefer to resort to Liquid Ratio instead of Current Ratio, if the
prices of the stock held are prone to fluctuate. This is because if the prices of the inventories
fluctuate more, then this may affect their liquidity position of the business and may reduce (or
overcast) the Current Ratio. Consequently, they prefer Liquid Ratio as it excludes inventories
and stocks.
Thirdly, if the stock forms the major portion of a company’s current assets, then they would
prefer Current Ratio and not Liquid Ratio. This is because their current assets mostly consist of
stock. The Liquid Ratio of such company will be very low as liquid assets exclude stock. This will
reduce their Liquid Ratio and may create a bad image for the creditors. In such a case, Current
Ratio provides better measure of overall liquidity.

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Q1 Following is the Balance Sheet of Raj Oil Mills Limited as at March 31, 2016

Particulars Rs.
I. Equity and Liabilities:
1. Shareholders’ funds
a) Share capital 7,90,000
b) Reserves and surplus 35,000
2. Current Liabilities
a) Trade Payables 72,000
Total 8,97,000
II. Assets
1. Non-current Assets
a) Fixed assets
Tangible assets 7,53,000

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2. Current Assets
a) Inventories 55,800
b) Trade Receivables 28,800
c) Cash and cash 59,400
equivalents
Total 8,97,000

Calculate Current Ratio.
Current asset
Answer. Current Ratio=
Current Liability
1,44,000
=
72,000
= 2:1
Current Assets = Inventories +Trade Receivables + Cash
= 55,800 + 28,800 + 59,400
= Rs 1,44,000
Current Liabilities = Trade Payables = Rs 72,000

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Q2 Following is the Balance Sheet of Title Machine Ltd. as at March 31, 2017.

Amount
Particulars
Rs.
I. Equity and Liabilities
1. Shareholders’ funds
a) Share capital 24,00,000
b) Reserves and surplus 6,00,000
2. Non-current liabilities
a) Long-term borrowings 9,00,000
3. Current liabilities

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a) Short-term borrowings 6,00,000
b) Trade payables 23,40,000
c) Short-term provisions 60,000
Total 69,00,000
II. Assets
1. Non-current Assets
a) Fixed assets
Tangible assets 45,00,000
2. Current Assets
a) Inventories 12,00,000
b) Trade receivables 9,00,000
c) Cash and cash equivalents 2,28,000
d) Short-term loans and 72,000
advances
Total 69,00,000

Calculate Current Ratio and Liquid Ratio.
Answer.
⮚ Current Ratio

Current asset
Current Ratio=
Current liabilities
24,00,000
=
30,00,000
¿ 0.8 :1

Current Assets = Inventories +Trade Receivables + Cash + Short term Loans and Advances
= 12,00,000 + 9,00,000 + 2,28,000 + 72,000
= Rs 24,00,000
Current Liabilities = Trade Payables + Short-term Borrowings + Short-term Provisions
= 23,40,000 + 6,00,000 + 60,000
= Rs 30,00,000

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⮚ Quick Ratio

Quick asset
Quick Ratio=
Current liabilities
12,00,000
=
30,00,000
¿ 0.4 : 1
Quick Assets = Trade Receivables + Cash + Short term Loans and Advances
= 9,00,000 + 2,28,000 + 72,000
= Rs 12,00,000

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Q3 Current Ratio is 3.5:1. Working Capital is Rs 90,000. Calculate the amount of Current Assets
and Current Liabilities.
Current asset
Answer. Current ratio=
Current liabilities
Current asset
Or, 3.5=
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
90,000
Or, Current liabilities= =36,000
2.5
Or, Current assets=3.5 Current liabilities
=3.5*36,000
=1,26,000

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Q4 Shine Limited has a current ratio 4.5:1 and quick ratio 3:1; if the inventory is 36,000,
calculate current liabilities and current assets.
Answer.
Current asset
Current ratio=
Current liabilities
4.5 current asset
Or, =
1 Current Liabilities
or, 4.5 Current Liabilities = Current Assets
Quick asset
Quick Ratio=
Current liabilities
Quick Asset
Or, 3 :1=
Current liabilities
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
Or, Current Assets=4.5*24,000
=1,08,000

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Q5 Current liabilities of a company are Rs 75,000. If current ratio is 4:1 and liquid ratio is 1:1,
calculate value of current assets, liquid assets and inventory.
Answer.
Current asset
Current Ratio=
Current Liabilities
Current asset
or. 4=
75,000

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or, 4 × 75,000 = Current Assets
or, Current Assets = 3,00,000
Liquid asset
Liquid Ratio=
Current Liabilities
Liquid Asset
Or, l=
75,000
Liquid Assets = 75,000

Inventory = Current Assets − Liquid Assets
= 3,00,000 − 75,000
= 2,25,000

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Q6 Handa Ltd.has inventory of Rs 20,000. Total liquid assets are Rs 1,00,000 and quick ratio is
2:1. Calculate current ratio.
Answer.
Liquid Assets
Quick Ratio=
Current Liabilities
1,00,000
or, 2=
Current liabilities
1,00,000
Or, Current liabilities= =50000
2
Current Assets = Liquid Assets + Inventory
= 1,00,000 + 20,000
= 1,20,000
Current asset
Current ratio=
Current liabilities
1,20,000
=
50,000
2.4
= =2.4 : 1
1

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Q7 Calculate debt equity ratio from the following information:

Rs
Total Assets 15,00,000
Current Liabilities 6,00,000
Total Debts 12,00,000

Answer.
Debt
Debt Equity Ratio=
Equity
Equity = Total assets-Total Debts
=15,00,000-12,00,000
=3,00,000
Long Term Debts = Total Debts − Current Liabilities

Long term debt
Debt Equity Ratio=
Equity
6,00,000 2
Or, Debt Equity Ratio= = =2 :1
3,00,000 1

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Q8 Calculate Current Ratio if:
Inventory is Rs 6,00,000; Liquid Assets Rs 24,00,000; Quick Ratio 2:1.
Answer.
Liquid Assets
Quick Ratio=
Current Liabilities
24,00,000
or, 2=
Current Liabilities
24,00,000
Current Liabilities= =12,00,000
2
Current Assets = Liquid Assets + Inventory
=24,00,000+6,00,000
=30,00,000

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Current Assets 30,00,000 2.5
Current Ratio= = = =2.5 :1
Current Liabilities 12,00,000 1

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Q9 Compute Stock Turnover Ratio from the following information:

Rs
Net Revenue from Operations 2,00,000
Gross Profit 50,000
Inventory at the end 60,000
Excess of inventory at the end over inventory in the 20,000
beginning

Answer.
Cost of Goods Sold
Inventory Turnover Ratio=
Average Inventory
Cost of Goods Sold=Net Sales-Gross Profit
=2,00,000-50,=1,50,000
Inventory in the beginning=Inventory at the end-20,000
=60,000-20,000
=40,000
Inventry ∈the begining+ Inventory at the end
Average inventory=
2
40,000+60,000
¿ =50,000
2
1,50,000
Inventory Turnover Ratio= =3׿
50,000

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Q10 Calculate following ratios from the following information:
(i) Current ratio (ii) Acid test ratio (iii) Operating Ratio (iv) Gross Profit Ratio

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Rs
Current Assets 35,000
Current Liabilities 17,500
Inventory 15,000
Operating Expenses 20,000
Revenue from Operations 60,000
Cost of Goods Sold 30,000

Answer.
Current aasset
i) Current Ratio=
Current Liabilities
35,000
Current Ratio= =2:1
17,500
Liquid asset
ii) Acid Test Ratio=
Current liabilities
Liquid Asset=Current asset-Inventory
=35,000-15,000
=20,000
20,000 1.143
Acid Test Ratio= = =1.143 : 1
17,500 1
Net Revenue
iii)Operating Ratio= Cost of goods sold+Operating Expenses
operation ¿∗100
¿
30,000+ 20,000
= ∗100
60,000
50,000
= ∗100=83.33
60,000
Net revenue
iv)Gross profit ratio= Gross profit
operation ¿∗100
¿
Gross profit=Net revenue from operation-Cost of goods sold
=60,000-30,000=30,000
30,000
Gross profit ratio= ∗100=50
60,000

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Page : 230 , Block Name : Numerical Questions

Q11 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:

Rs
Revenue from 25,20,000
Operations
Net Profit 3,60,000
Cast of 19,20,000
Revenue from
Operations
Long-term 9,00,000
Debts
Trade Payables 2,00,000
Average 8,00,000
Inventory
Current Assets 7,60,000
Fixed Assets 14,40,000
Current 6,00,000
Liabilities
Net Profit 8,00,000
before Interest
and Tax

Answer.
Net revenue
(i) Gross profit ratio= Gross profit
operation ¿∗100
¿
Gross profit=Net revenue from operation-Cost of revenue from operations
=25,20,000-19,20,000=6,00,000
6,00,000
Gross profit= ∗100=23.81
25,20,000

Page 19 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

Cost of revenue
(ii)Inventory Turnover Ratio= ¿ operation ¿
Average inventory
19,20,000
= =2.4 Times
8,00,000
Current Ratio
(iii)Current ratio=
Current Liabilities
Current Assets=Liquid Assets+ Inventory
=7,60,000+8,00,000
=15,60,000
15,60,000 2.6
Current Ratio= = =2.6 :1
6,00,000 1
Liquid Assets
(iv)Liquid Ratio=
Current Liabilities
7,60,000 1.27
= = =1.27 : 1
6,00,000 1
Net revenue
(v)Net profit ratio= Net profit
Operation ¿∗100
¿
3,60,000
= ∗100=14.28
25,20,000
Revnue
(vi)Working capital ratio= ¿ operation ¿
Working capital
Working capital=Current assets-Current Liabilities
=15,60,000-6,00,000=9,60,000
25,20,000
Working capital ratio= =2.625׿
9,60,000

Page : 230 , Block Name : Numerical Questions

Q12 Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio and
Proprietary Ratio from the following information:

Page 20 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

Rs
Paid-up Share Capital 5,00,000
Current Assets 4,00,000
Revenue from Operations 10,00,000
13% Debentures 2,00,000
Current Liabilities 2,80,000
Cost of Revenue from Operations 6,00,000

Answer.
Net revenue
Gross profit ratio= Gross profit
operation ¿∗100
¿
Gross Profit=Net revenue from operation-Cost of Revenue from Operation
=10,00,000-6,00,000=4,00,000
4,00,000
Gross profit ratio= ∗100=40
10,00,000
Revenue
Working capital Ratio= ¿ operation ¿
Working capital
Working capital=Current Assets-Current Liabilities
=4,00,000-2,80,000=1,20,000
10,00,000
Working capital Ratio= =8.33׿
1,2,000
Debt 2,00,000
Debt equity ratio= = =2.5=0.4 :1
Equity 5,00,000
Shareholders Fund
Proprietary Ratio=
Total assets
Total assets=Paid up capital+ Debentures+ Current Liabilities
=5,00,000+2,00,000+2,80,000=9,80,000
5,00,000
Proprietary Ratio= =25.49=0.51 :1
9,80,000

Page : 231 , Block Name : Numerical Questions

Page 21 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

Q13 Calculate Inventory Turnover Ratio if:
Inventory in the beginning is Rs 76,250, Inventory at the end is 98,500, Gross Revenue from
Operations is Rs 5,20,000, Return Inwards is Rs 20,000, Purchases is Rs 3,22,250.

Answer.
Cost of revenue
Inventory Turnover ratio= ¿ operation ¿
Average inventory
Cost of revenue from opertation=Inventory in the beginning+Purchases-Inventory at the end
=76,250+3,22,250-98,500=3,00,000
Inventory ∈the beginning+ Inventory∈the end
Average inventory=
2
76250+ 98000
= =87375
2
3,00,000
Inventory Turnover ratio= =3.43׿
87,375

Page : 231 , Block Name : Numerical Questions

Q14 Calculate Inventory Turnover Ratio from the data given below:

Rs
Inventory at the beginning of the year 10,000
Stock* at the end of the year 5,000
Carriage 2,500
Revenue from Operations 50,000
Purchases 25,000
*Since the very first item is Inventory in the beginning, so this item should be Inventory at the
end.

Answer.

Page 22 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

Cost of revenue
Inventory Turnover ratio= ¿ operation ¿
Average inventory
Cost of revenue from opertation=Inventory in the beginning+Purchases+Carriage-Inventory at
the end
=10,000+25,000+2,500-5,000=32,500
Inventory ∈the beginning+ Inventory∈the end
Average inventory=
2
10,000+5,000
= =7,500
2
32,500
Inventory Turnover ratio= =4.33׿
7,500

Page : 231 , Block Name : Numerical Questions

Q15 A trading firm’s average inventory is Rs 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.

Answer.
Cost of revenue
Inventory Turnover ratio= ¿ operation ¿
Average inventory
Cost of revenue
Or, 8= ¿ operation ¿
20,000
Or, Cost of revenue from operation=20,000*8
Or, Cost of revenue from operation=1,60,000
Let Sale Price be Rs 100
Then Profit is Rs 20
Hence, the Cost of Revenue from Operations = Rs 100 − Rs 20 = Rs 80
If the Cost of Revenue from Operations is Rs 80, then Revenue from Operations = 100
100
If the Cost of Revenue from Operations is Rs 1, then Revenue from Operations =
80
If the Cost of revenue from operation is 1,60,000 then,

Page 23 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

100
Revenue from operation= ∗1,60,000=2,00,000
80
Profit=Net Revenue from operation- Cost of revenue from operation
=2,00,000-1,60,000=40,000

Page : 231 , Block Name : Numerical Questions

Q16 You are able to collect the following information about a company for two years:

2015-16 2016-17
Book Rs 4,00,000 R 5,00,000
Debts on s
Apr. 01
Book R 5,60,000
Debts on s
Mar. 31
Stock in Rs 6,00,000 R 9,00,000
trade on s
Mar. 31
Revenue Rs 3,00,000 R 24,00,000
from s
Operation
s (at gross
profit of
25%)
Calculate Inventory Turnover Ratio and Trade Receivables Turnover Ratio if in the year 2015-16
stock in trade increased by Rs 2,00,000.

Answer.
Cost of revenue
Inventory Turnover ratio= ¿ operation ¿
Average inventory
Cost of revenue from opertation=Revenue from operation-Gross profit
=24,00,000-6,00,000=18,00,000
Inventory ∈the beginning+ Inventory∈the end
Average inventory=
2

Page 24 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

6,00,000+ 9,00,000
= =7,50,000
2
18,00,000
Inventory Turnover ratio= =2.4׿
7,50,000
Net credit sales
Trade Receivable turnover ratio=
Average trade receivable
Trade receivable∈thebeginning+ Trade receivable at the end
Average trade receivable=
2
5,00,000+5,60,000
= =5,30,000
2
24,00,000
Trade receivable Turnover ratio= =4.53׿
5,30,000
Note: It has been assumed that all sales are credit sales

Page : 231 , Block Name : Numerical Questions

Q17 The following Balance Sheet and other information, calculate following ratios:
(i) Debt-Equity Ratio (ii) Working Capital Turnover Ratio (iii) Trade Receivables Turnover Ratio
Balance Sheet as at March 31, 2017
Particulars Note Rs.
No.
I. Equity and Liabilities:
1. Shareholders’ funds
a) Share capital 10,00,000
b) Reserves and 9,00,000
surplus
2. Non-current
Liabilities
a) Long-term 12,00,000
borrowings
3. Current Liabilities
a) Trade payables 5,00,000
Total 36,00,000
II. Assets

Page 25 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

1. Non-current Assets
a) Fixed assets
Tangible assets 18,00,000
2. Current Assets
a) Inventories 4,00,000
b) Trade Receivables 9,00,000
c) Cash and cash 5,00,000
equivalents
Total 36,00,000

Additional Information: Revenue from Operations Rs. 18,00,000 Calculate:
i) Debt-Equity Ratio
ii) Working Capital Turnover Ratio
iii) Trade Receivables Turnover Ratio
(Debt-Equity Ratio 0.63:1; Working Capital Turnover Ratio 1.39 times; Trade Receivables
Turnover Ratio 2 times)

Answer.
1. Debt-Equity Ratio
Debt 12,00,000
Debt equity ratio= = =0.63:1
Equity 19,00,000
Debt = Long Term Borrowings = Rs 12,00,0000
Equity = Share Capital + Reserve and Surplus
= 10,00,000 + 9,00,000
= Rs 19,00,000
2. Working Capital Turnover Ratio
Revenue
Working Capital Turnover Ratio= ¿ 18,00,000
¿ operation = =1.39׿
Working capital 13,00,000
Revenue from Operations = Rs 18, 00,000
Working Capital = Current Assets – Current Liabilities

Page 26 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

= 18,00,000 – 5,00,000
= Rs 13,00,000
3. Trade Receivables Turnover Ratio
Net credit sales 18,00,000
Trade Receivables Turnover Ratio= = =2׿
Average Trade receivable 9,00,000
Net Credit Sales = Rs 18,00,000
Average Trade Receivables = Rs 9,00,000
Notes:
1. Revenue from Operations are assumed to be revenue generated from credit sales.
2. The amount of trade receivables given in the Balance Sheet is assumed to be Average Trade
Receivables.

Page : 232 , Block Name : Numerical Questions

Q18 From the following information, calculate the following ratios:
i) Quick Ratio
ii) Inventory Turnover Ratio
iii) Return on Investment
Rs.
Inventory in the 50,000
beginning
Inventory at the end 60,000
Revenue from 4,00,000
operations
Gross Profit 1,94,000
Cash and Cash 40,000
Equivalents
Trade Receivables 1,00,000
Trade Payables 1,90,000
Other Current 70,000
Liabilities
Share Capital 2,00,000
Reserves and 1,40,000

Page 27 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

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

Answer.
Quick Assets
(i)Quick Ratio=
Current Liabilities
Quick Assets=Cash+ Debtors
=40,000+1,00,000=1,40,000
Current liabilities= Creditors + Outstanding Expenses
=1,90,000+70,000
=2,60,000
1,40,000
Quick Ratio= =7.13=0.54 :1
2,60,000
Cost of revenue
(ii)Inventory Turnover ratio= ¿ operation ¿
Average inventory
Cost of revenue from operation=revenue from operation-Gross profit
=4,00,000-1,94,000=2,06,000
Inventory ∈the beginning+ Inventory∈the end
Average inventory=
2
50,000+ 60,000
= =55,000
2
2,06,000
Inventory turnover ratio= =3.74׿
55,000
Profit before interest ∧tax
Return on investment= ∗100
Capital employeed
Capital employed=Equity Share capital+ Profit and loss
=2,00,000+1,40,000=3,40,000
1,40,000
Return on investment= ∗100=41.17
3,40,000

Page : 232 , Block Name : Numerical Questions

Page 28 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

Q19 From the following, calculate (a) Debt Equity Ratio (b) Total Assets to Debt Ratio (c)
Proprietary Ratio.

Rs
Equity Share Capital 75,000
Preference Share Capital 25,000
General Reserve 45,000
Accumulated Profits 30,000
Debentures 75,000
Sundry Creditors 40,000
Outstanding Expenses 10,000

Answer.
Debt
(a) Debt equity ratio=
Equity
Equity/Shareholders Funds=Equity Share Capital+ Preference Share Capital +General
Reserve+ Accidental profit
=75,000+25,000+45,000+30,000=1,75,000
Debt = Debentures = 75,000
75,000 3
Debt Equity Ratio= = =0.43 :1
1,75,000 7
Total assets
(b) Total assets to debt ratio=
Debt
Total assets=Equity Share Capital+ Preferences Share Capital +General reserve +Accumulated
Profits +Debentures+ Sundry Creditors +Outstanding Expenses
=75,000+25,000+45,000+30,000+75,000+40,000+10,000=3,00,000
3,00,000
Total asset to debt ratio= =4 :1
75,000
Shareholders fund
(c)Proprietary Ratio=
Net assets
1,75,000 7
Proprietary Ratio= = =7.12∨0.58 :1
3,00,000 12

Page 29 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

Page : 233 , Block Name : Numerical Questions

Q20 Cost of Revenue from Operations is Rs 1,50,000. Operating expenses are Rs 60,000.
Revenue from Operations is Rs 2,50,000. Calculate Operating Ratio.

Answer.
Cost of revenue
Operating ratio= Net revenue
¿ operation+Operating Expenses ¿ operation ¿∗100
¿
1,50,000+60,000
= ∗100
2,50,000
2,10,000
= ∗100=84
2,50,000

Page : 233 , Block Name : Numerical Questions
Q21 The following is the summarized transactions and Statement of Profit and Loss Account for
the year ending March 31, 2007 and the Balance Sheet as on the basis of following information,
calculate:
(i) Gross Profit Ratio (ii) Current Ratio (iii) Acid Test Ratio (iv) Inventory Turnover Ratio (v) Fixed
Assets Turnover Ratio
Rs.
Gross Profit 50,000
Revenue from 1,00,000
Operations
Inventory 15,000
Trade Receivables 27,500
Cash and Cash 17,500
Equivalents
Current Liabilities 40,000
Land & Building 50,000
Plant & Machinery 30,000
Furniture 20,000

Page 30 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

Answer.
Revenue
(i)Gross Profit Ratio= Gross Profit
Operation¿∗100
¿
50,000
= ∗100=50
1,00,000
Current asset
(ii)Current Ratio=
Current liabilities
Current Assets=Inventory+ Trade Receivable +Cash and Cash Equivalents
=15,000+27,500+17,500=60,000
60,000
Current Ratio= =1.5 :1
40,000
Liquid Assets
(iii)Acid test Ratio=
Current Liabilities
Liquid Assets=Current Assets-Inventory
=60,000-15,000=45,000
45,000
Acid test ratio= =1.125 : 1
40,000
Cost of revenue
(iv)Inventory Turnover Ratio= ¿ Opeartion ¿
Average Inventory
Cost of revenue from operation=Revenue from operation-Gross profit
=1,00,000-50,000=50,000
Average Inventory = 15,000*
*Note: Since values for inventory in the beginning and inventory at the end is not given, the
amount of inventory is assumed to be average inventory.
50,000
Inventory turnover ratio= =3.33׿
15,000
Revenue
(v) Fixed assets turnover ratio= Net
¿ operation ¿ assets ¿
¿
Net Fixed Assets=Land & Building +Plant and Machinery +Furniture
=50,000+30,000+20,000=1,00,000

Page 31 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

1,00,000
Fixed Assets Turnover Ratio= =1 :1
1,00,000

Page : 233 , Block Name : Numerical Questions

Q22 From the following information calculate Gross Profit Ratio, Inventory Turnover Ratio and
Trade Receivables Turnover Ratio.

Rs
Revenue from 3,00,000
Operations
Cost of Revenue 2,40,000
from Operations
Inventory at the 62,000
end
Gross Profit 60,000
Inventory in the 58,000
beginning
Trade Receivables 32,000

Answer.
Net revenue
Gross profit Ratio= Gross Profit
operation ¿∗100
¿
Gross profit=Net revenue from operation-Cost of revenue from operation
=3,00,000-2,40,000=60,000

Cost of revenue
Gross profit Ratio= ¿ operation ¿
Average inventory
Inventory ∈the beginning+ Inventory at the end
Average inventory=
2
58,000+ 62,000
= =60,000
2

Page 32 of 33 Aglasem Schools

Book Name : Accountancy-II Ncert Solutions | Chapter-5 Accountancy

2,40,000
Inventory Turnover ratio= =4׿
60,000
Net reevenue
Trade Receivable Ratio= ¿ operation ¿
Average Trade Receivable
3,00,000
= =9.4׿
32,000
Note: In the solution, Trade Receivables are assumed as the Average Trade Receivables

Page : 234 , Block Name : Numerical Questions

Page 33 of 33 Aglasem Schools