# Theory MCQs of Accounting Ratios (Accountancy class 12)

Looking for Theory MCQs with answers of Accounting Ratios chapter of Accountancy class 12 CBSE, ISC and other state Board.

We have compiled very important MCQs of the Theory portion of the Accounting Ratios chapter of class 12

## Theory Multiple Choice Questions of Accounting Ratios with answers of Accountancy class 12

Let’s Practice

The current Ratio establishes a relation between

a) (Current Assets – Inventory) and Current Liabilities
b) Quick Assets and Current Liabilities
c) Current Assets and Current Liabilities
d) None of the above

Ans – c)

Which of the following is/are objectives of ratio analysis?

a) To know the areas of the business which need more attention.
b) To provide a deeper analysis of the profitability, liquidity, solvency
and efficiency levels in the business.
c) To provide information by making cross-sectional analysis by comparing the performance with the best industry standards
d) All of the above

Ans – d)

The Current Ratio is classified under the group of

a) Solvency Ratios
b) Liquidity Ratios
c) Activity Ratios
d) Profitability Ratios

Ans – b)

Which of the following points out the significance of ratio analysis?

a) It helps the business in identifying the problem areas.
b) It ignores price level changes.
c) It ignores qualitative aspects
d) All of the above

Ans – a)

The proprietary Ratio falls under the group of

a) Liquidity Ratios
b) Solvency Ratios
c) Activity Ratios
d) Profitability Ratios

Ans – b)

Ratio analysis can help know about the potential areas which can be improved
with the effort in the desired direction.

a) True
b) False
c) Can’t say
d) Partially true

Ans – b)

Inventory Turnover Ratio falls under the group of

a) Activity Ratios
b) Solvency Ratios
c) Profitability Ratios
d) Liquidity Ratios

Ans – a)

Working capital is the excess of current assets over current liabilities.

a) True
b) False
c) Can’t say
d) Partially true

Ans – a)

Young India Ltd. has an operating Profit Ratio of 20%. To maintain this ratio at 25%, management may

a) Increase selling price of a stock in trade
b) Reduce the cost of Revenue from operations
c) Increase selling price of a stock in trade and reduce the cost of revenue
from operations
d) All of the above.

Ans – d)

The quick ratio _ the short-term financial position.

a) Higher, better
b) Lower, better
c) Higher, poorer
d) Lower; Poorer

Ans – a)

_________ is considered as an ideal current ratio.

a) 1 : 1
b) 4 : 1
c) 2 : 1
d) There is no such value

Ans – c)

A higher total asset to debt ratio is beneficial as it indicates a larger
the safety margin for lenders.

a) True
b) False
c) Can’t say
d) Partially True

Ans – a)

A transaction involving a decrease in Debt-Equity Ratio and increase in Current Ratio is

a) Issue of Debentures against in purchase of fixed assets
b) Issue of Debentures for cash
c) Redemption of Preference shares for cash
d) Issue of Equity shares for cash

Ans – d)

_______ means the firm’s ability to meet its long-term liabilities.

a) Solvency
b) Liquidity
c) Efficiency
d) None of the above

Ans – a)

Which of the following ratios measure the short term solvency of an

a) Current Ratio
b) Liquid Ratio
c) Debt Equity Ratio
d) Both a) and b)

Ans – d)

Working Capital Turnover Ratio falls under the group of

a) Activity Ratios
b) Solvency Ratios
c) Liquidity Ratios
d) Profitability Ratios

Ans – a)

_____________ + Operating Profit ratio (%) = 100.

a) Operating Ratio (%)
b) Gross Profit Ratio
c) Net Profit Ratio
d) None of these

Ans – a)

____________ Provides an approximation of the average time that it takes to
collect debtors.

a) Average Collection period
b) Average payment period
c) Debtors turnover ratio
d) None of the above

Ans – a)

Return on Investment falls under the group of

a) Liquidity Ratios
b) Profitability Ratios
c) Solvency Ratios
d) Activity Ratios

Ans – b)

Operating Ratio falls under the group of

a) Activity Ratios
b) Liquidity Ratios
c) Solvency Ratios
d) Profitability Ratios

Ans – d)

A lower trade receivable ratio indicates the inefficient credit sales policy
of the management.

a) True
b) False
c) Can’t say
d) Partially true

Ans – a)

The purchase of goods ₹ 40,000 for cash will increase the operating ratio.

a) True
b) False
c) Can’t say
d) Partially True

Ans – a)

Provision for Doubtful Debts is deducted from Trade Receivables while computing

a) Current Ratio
b) Quick Ratio
d) a) and b)

Ans – d)

If current assets and current liabilities are both reduced by the same amount, the
current ratio will

a) increase
b) Decrease
c) No change
d) Either a) or b)

Ans – a)

The current ratio of Vidur Pvt Ltd is 3:2. The accountant wants to maintain it at
2:1. Following options are available.

i) He can repay bills payable
ii) He can take short term loan
iii) He can purchase goods on credit

Choose the correct option.

a) Only i) is correct
b) only ii) is correct
c) only i) and iii) are correct
d) Only ii) and iii) are correct

Ans – a)

The operating profit ratio is classified under the group of

a) Profitability Ratios
b) Solvency Ratios
c) Liquidity Ratios
d) Activity Ratios

Ans – a)

The difference between Total Assets and Current liabilities is

a) Total Assets
b) Total Debts
c) Capital Employed
d) Shareholders Funds

Ans – c)

A ratio reflects quantitative as well as qualitative aspects of results.

a) True
b) False
c) Can’t say
d) Partially True

Ans – b)

Ratios are comparable even if different accounting policies and procedures
are followed by different firms

a) True
b) False
c) Can’t say
d) Partially true

Ans – b)

The aggregate of Non-current Assets and Current Asset is

a) Quick Assets
b) Total Assets
c) Total Debts
d) Capital Employed

Ans – b)

Liquidity ratios assess the enterprise’s ability to meet its _
financial obligations.

a) Short term
b) Long term
c) Both a) and b)
d) None of these

Ans – a)

What will be the effect on the current ratio if a bills payable is discharged on
maturity.

a) it will increase
b) it will decrease
c) Either a) or b)
d) Can’t say

Ans – a)

Which of the following is not true?

a) Gross profit = Revenue from operations – Cost of Revenue from operations
b) Operating Profit = Revenue from Operations – Operating Cost.
c) Equity – Total Assets – Total Debts
d) Equity = Capital Employed + Debt

Ans – d)

A transaction involving a decrease in both current Ratio and Quick Ratio is

a) Sale of Noncurrent Asset for cash
b) Sale of Stock in Trade at a loss
c) Cash payment of a Non-current Liability
d) Issue of Bonus Shares

Ans – c)

Which of the following is/are not the components of quick assets.

a) Inventories
b) Prepaid expenses
c) Cash and cash equivalents
d) Both a) and b)

Ans – d)

Which of the following ratios measure the long-term solvency of an organization.

a) Debt-quity ratio
b) Liquid ratio
c) Proprietary ratio
d) Both a0 and c)

Ans – d)

Which of the following is not an Activity Ratio?

a) Inventory Turnover Ratio
b) Interest coverage Ratio
c) Working Capital Turnover Ratio

Ans – b)

The is a measure of liquidity which excludes _______ generally the least liquid asset.

c) current ratio, inventory
d) liquid ratio, inventory

Ans – d)

A very high current ratio implies heavy investment in current assets which is not a good sign
as it reflects under-utilization or improper utilization of resources.

a) True
b) False
c) Can’t say
d) Partially true

Ans – a)

The debt Equity ratio is the relationship between

a) Long term debts and share capital
b) Long term debts and shareholders Funds
c) Long term debts and Total Assets
d) Long term debts and working capital

Ans – b)

Interest Coverage Ratio is the relationship between

a) Net Profit and interest charge
b) Gross Profit and interest charge
c) Profit before interest and tax and interest on long term Borrowings
d) Profit after interest and tax and interest on Long term Borrowings

Ans – c)

Purchase of machinery for cash will _ the quick ratio.

a) increase
b) Decrease
c) No change
d) Either a) or b)

Ans – b)

Generally, a lower current ratio is considered better.

a) True
b) False
c) Can’t say
d) Partially True

Ans – b)

The difference between Revenue from Operations and Operating Profit is

a) Gross Profit
b) Operating Profit
c) Operating cost
d) Net Profit before tax

Ans – c)

Out of the following, a ratio that is not a part of the Profitability Ratio is

a) Proprietary Ratio
b) Gross Profit Ratio
c) Operating Ratio
d) Net Profit Ratio

Ans – a)

The ______ ratio provides information critical to the long-run operation of the firm.

a) Liquidity
b) activity
c) solvency
d) Profitability

Ans – c)

1:1 is the ideal quick ratio

a) True
b) False
c) Can’t say
d) Partially true

Ans – a)

The two basic measures of operational efficiency of a company are

a) Inventory Turnover Ratio and Working Capital Turnover Ratio
b) Liquid Ratio and Operating Ratio
c) Liquid Ratio and Current Ratio
d) Gross Profit Margin and Net profit margin

Ans – a)

_______ ratios are calculated for measuring the efficiency of operations of business based on effective utilization of resources.

a) Liquidity ratios
b) Solvency ratios
c) Activity ratios
d) None of these

Ans – c)

Inventory turnover ratio shows the relationship between the _ during a given period and the _ carried during the period.

a) Cost of revenue from operations: average inventory.
b) cost of revenue from operations, closing inventory
c) cost of revenue from operations, opening inventory
d) None of the above

Ans – a)

Name the difference between Capital Employed and Non-current Liabilities.

a) Shareholder’s funds
b) Capital Employed
c) Total Debts
d) Total Assets

Ans – a)

The profitability Ratio in relation to investment is

a) Gross Profit Ratio
b) Operating Profit Ratio
c) Operating Ratio
d) Return on Investment

Ans – d)

If P Ltd obtains a Bank loan of ₹ 30,00,000 payable after 5 years, then its proprietary ratio will

a) Increase
b) Decrease
c) No change
d) Either a) or b)

Ans – b)

The debt-equity ratio expresses the relationship between short-term debt and equity share capital of an enterprise.

a) True
b) False
c) can’t say
d) Partially True

Ans – b)

The objective of the Current Ratio is

a) To assess the firm’s ability to meet its short-term liabilities on time.
b) To assess the ability of the firm to meet its current liabilities
immediately
c) To assess the ability of the firm to meet its long term liabilities
d) to measure the proportion of total assets funded by the shareholders

Ans – a)

The ratio that measures the relationship between operating profit and Revenue from operations are

a) Operating Ratio
b) Operating Profit Ratio
c) Gross Profit ratio
d) Net Profit Raito

Ans – b)

Purchase returns amounting to ₹ 20,000 will deteriorate the inventory turnover ratio.

a) True
b) False
c) Can’t say
d) Partially true

Ans – b)

________ are especially interested in the average payment period since it provides them with a sense of the bill paying patterns of the firm.

a) Customers
b) Stockholders
c) Lenders and suppliers

Ans – c)

Which of the following is not correct?

a) Equity = Capital Employed + Debt
b) Equity = Share capital + Reserves and Surplus
c) Debt = Long term Borrowings + Long term provisions
d) Working Capital = Current Assets – Current Liabilities

Ans – a)

A transaction that does not change both the Current Ratio and Quick Ratio is

a) Sale of Stock in Trade at a loss
b) Cash payment of a Non-current liability
d) Sale of furniture for cash

Ans – c)

Low __ may be due to bad buying behavior, obsolete stock, and is a danger signal.

a) average payment period
b) Inventory turnover ratio
c) average collection period
d) quick ratio

Ans – a)

A very high working capital turnover ratio may be a sign of _________

d) None of these

Ans – b)

The _____ may indicate that the firm is experiencing stockouts and lost sales.

a) Average Payment Period
b) Inventory Turnover Ratio
c) Average Collection Period
d) Quick Ratio

Ans – b)

While computing the current Ratio, Current Assets does not include:

a) Loose tools and stores and spares
c) Prepaid Expenses
d) Both a) and b)

Ans – d)

The ________ ratios are primarily measures of return.

a) activity
b) profitability
c) liquidity
d) debt

Ans – b)

Interest coverage ratio depicts the relationship between net profit before interest and tax
and interest payable on long-term debts.

a) True
b) False
c) can’t say
d) Partially true

Ans – a)

Which of the following will increase the liquid ratio without affecting current
ratio?

a) Sale of stock at a loss
b) Sale of stock at a profit
c) Sale of investment at cost
d) Sale of stock at cost

Ans – d)

Which of the following will reduce the current ratio?

a) Payment of Bills payable on maturity
b) Conversion of debentures into equity shares
c) Declaration of final dividend
d) Issue of bonus shares

Ans – c)

The _______ is useful in evaluating credit and collection policies.

a) Average payment period
b) current ratio
c) average collection period
d) current asset turnover

Ans – c)

Profitability ratios help in assessing the overall efficiency with which a business is being managed.

a) True
b) False
c) Can’t say
d) Partially true

Ans – a)

Total Assets to debt ratio is a:

a) Profitability Ratio
b) Solvency Ratio
c) Activity Ratio
d) Liquidity Ratio

Ans – b)

Which of the following will have no effect on the Debt Equity Ratio?

a) Purchase of fixed asset by taking long term loan
b) Conversion of debentures into shares
c) Issue of bonus shares
d) Sale of fixed assets at a loss

Ans – c)

The interest coverage ratio is given by:

a) Net Profit/Interest on long term borrowing
b) Long term borrowings/Interest on long term borrowings
c) Profit before interest and tax/interest on long term borrowings
d) Profit before Tax/Interest on long term borrowings

Ans – c)

The total assets to debt ratio establish a relationship between ______ and _____ .

a) total assets; total long term debts
b) total assets; total debts
c) non-current assets; total long term debts
d) None of the above

Ans – a)

______ the ratio shows the extent to which the total assets have been financed by the proprietor.

a) Proprietary ratio
b) Debt equity ratio
c) Total assets to debt ratio
d) None of the above

Ans – a)

Which of the ratios show how efficiently a company’s resources are used?

a) Profitability Ratio
b) Solvency Ratio
c) Activity Ratio
d) Liquidity Ratio

Ans – c)

To calculate the trade receivable turnover ratio __ is divided by average trade receivables.

a) Gross Revenue from Operations
b) Net Revenue from Operations
c) Net Credit Revenue from Operations
d) Net Cash Revenue from Operations

Ans – c)

A rise in the operating ratio will indicate a rise in inefficiency.

a) True
b) False
c) Can’t say
d) Partially true

Ans – b)

Which ratio indicates the speed with which amount is being paid to the creditors?

c) Inventory turnover ratio
d) None of the above

Ans – a)

Which ratio is complementary to each other?

a) Current and Liquid Ratio
b) Operating and Operating Profit Ratio
c) Gross and Net profit ratio

Ans – b)

The best definition of capital employed in calculating the rate of return on investment is:

a) Current Assets + Gross Fixed Assets
b) Current Assets + Non-current Assets
c) Working capital + Gross Fixed Assets
d) Working Capital + Non-Current Assets

Ans – d)

Which of the following formulas is used to calculate working capital turnover ratio?

a) revenue from operations/current assets
b) Revenue from operations/COGS
c) Gross Sales/COGS
d) Revenue from operations/current assets current liabilities

Ans – d)

Which of the following groups of ratios primarily measure risk?

a) Liquidity, activity, and profitability
b) Liquidity, activity, and common stock
c) Liquidity, activity, and debt
d) Activity, debt, and profitability

Ans – c)

Collection of debtors will ________ .

a) Decreases current ratio
b) increases the current ratio
c) has no effect on the current ratio
d) none of the above

Ans – c)

A transaction involving a decrease in Debt-Equity ratio and an increase in Current Ratio is:

a) Issue of Debentures against the purchase of fixed assets
b) Redemption of preference shares for cash
c) Issue of shares for cash
d) Issue of debentures for cash

Ans – c)

The two basic measures of operational efficiency of a company are

a) Inventory turnover ratio and working capital turnover ratio
b) Liquid Ratio and Operating Ratio
c) Liquid Ratio and Current Ratio
d) Gross Profit Margin and Net Profit Margin

Ans – d)

What will be the current ratio of a company whose net working capital is Zero?

a) 1:1
b) 0
c) 1.5
b) Can’t say

Ans – a)

If 365 is divided by the Inventory Turnover ratio, it becomes a measure of:

a) Revenue from Operations Efficiency
b) Average Collection period
c) Average age of Inventory
d) Revenue from Operations Turnover

Ans – c)

The ______ indicates the percentage of each sales rupee remaining after the firm has paid the cost of goods sold.

a) Net profit margin
b) Gross Profit Margin
c) Operating Cost Margin
d) Earnings available to equity shareholders

Ans – b)

The _______ may indicate that the firm is experiencing stockouts and lost sales.

a) Average payment method
b) Inventory turnover ratio
c) Average Collection period
d) Quick ratio

Ans – b)

What will be the effect of the purchase of goods for cash ₹3000 on gross profit ratio?

a) It will increase
b) It will decrease
c) Either a) or b)
d) No change

Ans – b)

The higher the ratio, the more favorable it is, does not stand true for:

a) Liquidity Ratio
b) Net profit Ratio
c) Operating Ratio
d) Inventory turnover Ratio

Ans – c)

Two basic measures of liquidity are:

a) Inventory turnover and a current ratio
b) Current ratio and Quick ratio
c) Gross Profit ratio and Operating ratio
d) Current ratio and Average Collection period

Ans – b)

The sale of goods on credit for ₹67,000 will increase the gross profit ratio. Is this statement true?

a) True
b) False
c) Can’t say
d) Partially True

Ans – a)

Liquid Assets do not include:

a) Bills Receivable
b) Debtors
c) Inventory
d) Bank Balance

Ans – c)

The difference between Operating costs and Operating Expenses is:

a) Operating profit
b) Net profit
c) Cost of revenue from operations
d) None of these

Ans – c)

Which of the following is expressed as a pure ratio?

a) Inventory turnover ratio
b) quick ratio
c) Gross Profit ratio
d) None of these

Ans – b)

Which of the following ratios is expressed in times?

a) Inventory turnover ratio
b) Current ratio
c) Net profit ratio
d) None of these

Ans – a)

To assess the efficiency of inventory management in the business, we may use:

a) Operating profit ratio
b) Current ratio
c) Inventory Turnover ratio
d) Debt Equity ratio

Ans – c)

Working capital is the :

a) Cash and bank balance
b) Loans borrowed from the banks
c) Difference between current assets and current liabilities
d) Difference between current assets and fixed assets

Ans – c)

Current assets include only those assets which are expected to be realized within:

a) 3 months
b) 6 months
c) 9 years
d) 2 years

Ans – a)

Which of the following will decrease the Debt Equity Ratio?

a) Purchase of a fixed asset by taking a long term loan
b) Purchase of a fixed asset by issuing shares for consideration.
c) Sale of fixed assets (book value ₹ 10,0000) for ₹8,000.
d) Issue of debentures of ₹ 2,00,000 in the market

Ans – b)

What does a low proprietary ratio mean?

a) Adequate safety cover for lender and creditors
b) Greater risk to unsecured lenders and creditors
c) Shareholders funds are more than the total assets
d) None of these

Ans – b)

The current ratio of Vidur Pvt Ltd is 3:2. The accountant wants to maintain it at
2:1. following options are available.

i) He can repay Bills payable
ii) He can purchase goods on credit
iii) He can take short term loan

choose the correct option.

a) Only i) is correct
b) Only ii) is correct
c) Only i) and iii) are correct
d) All are correct

Ans – a)

Which of the following ratios is not a solvency ratio?

a) Debt to Equity ratio
b) Current Ratio
c) Total Assets to Debt Ratio
d) Proprietary Ratio

Ans – b)

The Liquidity ratio of concern is 1.5:1, and it purchased goods of ₹ 50,000
for cash, The ratio will:

a) increase
b) decrease
c) not change
d) may increase or decrease

Ans – b)

_______ of a business means the business is in a position to meet its short-term financial obligations as and when they become due.

a) Liquidity
b) Profitability
c) Solvency
d) All of these

Ans – a)

Which of the following transaction will decrease the Quick Ratio?

a) Debentures converted into equity shares
c) Payment received from a debtor
d) All of these

Ans – b)

The interest coverage ratio is a :

a) Solvency Ratio
b) Activity Ratio
c) Profitability Ratio
d) Liquidity Ratio

Ans – a)

Current and Liquid ratios fall under the head of:

a) Solvency Ratio
b) Liquidity Ratio
c) Activity Ratio
d) Profitability Ratio

Ans – b)

Two basic measures of Long term Solvency are:

a) Inventory turnover ratio and a current ratio
b) Total asset to Debt ratio and Proprietory ratio
c) Gross Profit Ratio and Operating ratio
d) Current ratio and average collection period

Ans – b)

The Current Ratio is:

a) Liquid Assets/Current Assets
b) Fixed Assets/Current Assets
c) Current Assets/Current Liabilities
d) Liquid Assets/Current Liabilities

Ans – c)

Liquid Assets do not include:

a) Bills Receivable
b) Debtors
c) Inventory and Prepaid Expenses
d) Inventory

Ans – c)

Working Capital is the:

a) Cash and Bank Balance
b) Capital borrowed from Banks
c) Difference between current assets and current liabilities
d) Difference between current assets and Fixed Assets

Ans – c)

Working Capital is:

a) Current Assest + Non-current assets – Current liabilities
b) Capital Employed – Non-current assets
c) Fixed Assets – Current Liabilities
d) All current assets except inventory and prepaid expenses

Ans – b)

Current Assets is:

a) Working Capital + Current Liabilities
b) Quick Assets + Inventory + Prepaid Expenses
c) Total Assets – Non-current assets
d) All of the above

Ans – d)

Shareholders Funds or Equity is:

a) Total Assets – Total Debts – (Non Current Liabilities + Current
Liabilities)
b) Capital Employed – Long term debts
c) Equity and Preference Share Capital + Reserve and Surplus
d) All of the above

Ans – d)