NCERT Solutions Class 12 Accounting Ratios: This article presents detailed NCERT Solutions for CBSE Class 12 Accountancy Part 2 Chapter 5, Accounting Ratios. Also, find attached a PDF download link for the same. These NCERT Solutions have been prepared by our subject matter experts as per the Updated CBSE Syllabus 2023-2024. Students can be carefree while referring to these solutions since they have been prepared by keeping CBSE’s deleted topics and chapters in mind.
Central Board of Secondary Education(CBSE) keeps on changing its syllabus and curriculum to keep students updated and relevant as per the requirement of the current generation. So, it is advised to keep an updated syllabus and curriculum in mind while preparing for your Board Examinations. Referring to these NCERT Solutions and reading your chapters thoroughly can help you score well in examinations. You can also refer to the study materials provided by us to feel confident during examinations.
Related:
CBSE Class 12 Accountancy Syllabus 2023-24 (PDF)
CBSE Class 12 Accountancy Sample Paper 2023-24 (PDF)
NCERT Solutions for Class 12 Accountancy 2023-2024
MCQs for CBSE Class 12 Accountancy 2023-2024
NCERT Solutions for Class 12 Accountancy Chapter Accounting Ratios are:
Short Answer Questions
1. What do you mean by Ratio Analysis?
Answer. Ratio analysis is a technique used for the interpretation of financial records and data. This technique involves regrouping of data into arithmetical relationships and using it to interpret the records.
2. What are various types of ratios?
Answer. Ratios are divided into two types, traditional classification, and functional classification. Both of the divisions are further sub-divided into certain classifications. Each of the sub-divisions from each of the above classifications is mentioned below:
a) Traditional classification– They are subdivided into the following types: Statement of profit and loss ratios, balance sheet ratios, and composite ratios.
b) Functional classification– They can be sub-divided into liquidity ratios, solvency ratios, activity ratios, profitability ratios
3. What relationships will be established to study:
a) Inventory turnover– This ratio expresses the relationship between the cost of revenue from operations and average inventory.
b) Trade receivables turnover– Trade receivables turnover expresses the relationship between credit revenue from operations and trade receivables.
c) Trade payables turnover– The relationship between credit purchases and trade payable is determined by this ratio.
d) Working capital turnover– It expresses the relationship between net revenue from the operation, working capital, and working capital turnover.
4. 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 ratios used for this purpose are:
- Debt Equity Ratio– It determines the relationship between the borrower’s funds and the owner’s funds. It is calculated as: Debt-Equity Ratio = Long-term Debts/ Shareholders’ Funds
- Total Assets to debt ratio– It is measured to determine the extent of the coverage of long-term debts by assets. It can be calculated as Total assets to Debt Ratio = Total assets/Long-term debts
- Interest Coverage Ratio– It expresses the relationship between profits available for payment of interest and the amount of interest payable. It can be calculated as: Interest Coverage Ratio = Net Profit before Interest and Tax/ Interest on long-term debts
5. The average age of inventory is viewed as the average length of time inventory is held by the firm for which explains with reasons.
Answer. The inventory turnover ratio can be used to compute the average age of inventory. The following procedure of calculation is followed for the same.
Inventory/Stock Turnover Ratio= Cost of goods sold/Average Stock
Cost of goods sold= Opening stock+ Purchases+ Direct Expenses – Closing Stock
Cost of goods sold= Net sales- Gross Profit
Average Stock= (Opening Stock + Closing Stock)/2
The average age of inventory= (Days in a year/ Inventory turnover ratio)
Long Answer Questions
1. What are liquidity ratios? Discuss the importance of current and liquid ratio.
Answer.The liquidity ratio is the calculation of the liquid and liquidity of an organization. To fulfill its needs and requirements and stay true to its commitments, the company needs liquid funds. The ability of a company to pay the amount to its stakeholders as and when required is called liquidity. And the measurement of both is called liquidity ratio.
Current ratio, also known as working capital ratio is the measurement of the current assets and current liabilities of the company. They are important because it provides the ratio of current assets and current liabilities. If the ratio of current assets is greater than current liabilities, then it acts as a safety margin for the company.
Liquidity ratio as stated above is the calculation of a company’s ability to pay the shares to its stakeholders as and when required. If a company has a sufficient amount to repay its liabilities on time, then it is called a quick ratio. Liquid ratio is also named as an Acid test or Quick ratio.
2. How would you study the Solvency position of the firm?
Answer. The solvency position of the firm can be studied by using the solvency ratio as the measurement technique for determining the financial position of the company. Solvency ratio helps calculate the ability of the business to service its debt in the long run. Following ratios under solvency ratios are useful for calculation of solvency position of the firm:
- Debt Equity Ratio– It measures the relationship between long-term debt and equity. It is calculated as Debt-Equity Ratio = Long − term Debts/Shareholders’ Funds
- Debt to Capital Employed Ratio– It refers to the ratio of long-term debt to the total of external and internal funds. It can be calculated as Debt to Capital Employed Ratio = Long-term Debt/Capital Employed (or Net Assets)
- Proprietary Ratio– It expresses the relationship of the proprietor’s (shareholders) funds to net assets. It can be calculated as Proprietary Ratio = Shareholders’, Funds/Capital employed (or net assets)
- Total Assets to Debt Ratio– It measures the extent of the coverage of long-term debts by assets. The calculation can be done as Total assets to Debt Ratio = Total assets/Long-term debts
- Interest Coverage Ratio– This ratio measures of security of interest payable on long-term debts. It expresses the relationship between profits available for payment of interest and the amount of interest payable. It can be calculated as Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on long-term debts
3. What are various profitability ratios? How are these worked out?
Answer. Profitability ratios are the calculation of earning capacity of the business. It analyses and finds the relationship between the earning capacity and utilization of resources employed. Various profitability ratios are as follows:
- Gross profit ratio– It can be worked out as:
Gross Profit Ratio = Gross Profit/Net Revenue of Operations x 100
- Operating ratio– It can be worked out as:
Operating Ratio = (Cost of Revenue from Operations + Operating Expenses)/ Net Revenue from Operations ×100
- Operating profit ratio– It can be worked out as:
Operating Profit Ratio = 100 – Operating Ratio
Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100; where Operating Profit = Revenue from Operations – Operating Cost
- Net profit ratio– It can be worked out as:
Net Profit Ratio = Net profit/Revenue from Operations × 100
- Return on Investment (ROI) or Return on Capital Employed (ROCE)– It can be worked out as:
Return on Investment (or Capital Employed) = Profit before Interest and Tax/ Capital Employed × 100
- Return on Net Worth (RONW)– It can be worked out as:
Return on Shareholders’ Fund = Profit after Tax Shareholders’ Funds × 100
- Earnings per share– It can be worked out as:
EPS = Profit available for equity shareholders/Number of Equity Shares
- Book value per share– It can be worked out as:
Book Value per share = Equity shareholders’ funds/Number of Equity Shares
- Dividend payout ratio– It can be worked out as:
Dividend Payout Ratio = Dividend per share/ Earnings per share
- Price earning ratio– It can be worked out as:
P/E Ratio = Market Price of a share/earnings per share
4. 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. The statement written above is absolutely correct. Liquidity of the company can be measured through current ratio as well as quick ratio. Current ratio measures the proportion of current assets and current liabilities of the company. With this measurement, company’s financial position can be determined. If the ratio of current assets exceeds current liabilities, then it is determined that the position of the company is safe and vice versa. Thus, the current ratio helps in providing a measure of overall liquidity. Quick ratio, on the other hand, is the measure of a quick asset to current liabilities. Quick assets are defined as those assets which are quickly convertible into cash. As stated above, since quick assets are those that are convertible into cash, a quick ratio is preferred when the inventory to be measured is liquid.
Numerical Problems:
1. Following is the Balance Sheet of Raj Oil Mills Limited as at March 31, Calculate current ratio.
|
Particulars |
(Rs.) |
|
I. Equity and Liabilities: 1. Shareholders’ funds a) Share capital b) Reserves and surplus 2. Current Liabilities Trade Payables Total II. Assets 1. Non-current Assets Fixed assets – Tangible assets 2. Current Assets a) Inventories b) Trade Receivables c) Cash and cash equivalents Total |
7,90,000 |
|
35,000 |
|
|
72,000 |
|
|
8,97,000 |
|
|
7,53,000 |
|
|
55,800 |
|
|
28,800 |
|
|
59,400 |
|
|
8,97,000 |
Solution:
As per the formula,
Current Ratio= Current Asset/ 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 = 72,000
2. Following is the Balance Sheet of Title Machine as at March 31, 2017.
|
Particulars |
Amount (Rs.) |
|
I. Equity and Liabilities 1. Shareholders’ funds a) Share capital b) Reserves and surplus 2. Non-current liabilities Long-term borrowings 3. Current liabilities a) Short-term borrowings b) Trade payables c) Short-term provisions Total II. Assets 1. Non-current assets Fixed assets – Tangible assets 2. Current Assets a) Inventories b) Trade receivables c) Cash and cash equivalents d) Short-term loans and advances Total |
24,00,000 |
|
6,00,000 |
|
|
9,00,000 |
|
|
6,00,000 |
|
|
23,40,000 |
|
|
60,000 |
|
|
69,00,000 |
|
|
45,00,000 |
|
|
12,00,000 |
|
|
9,00,000 |
|
|
2,28,000 |
|
|
72,000 |
|
|
69,00,000 |
|
|
|
Calculate Current Ratio and Liquid Ratio.
Solution:
As per the formula,
Current Ratio= Current Asset/ Current Liability
= 24,00,000/ 30,00,000
= 0.8:1
Current Assets= Inventories+ Trade Receivables+ Cash+ Short term loan and advances
= 12,00,800 + 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
= 30,00,000
Now,
Quick Ratio= Quick Assets/Current Liabilities
= 12,00,000/30,00,000
= 0.4/1
Quick Assets= Trade Receivables+ Cash+ Short term loan and advances
= 9,00,000+ 2,28,000+ 72,000
= 12,00,000
3. Current Ratio is 3.5: 1. Working Capital is Rs. 90,000. Calculate the amount of CurrentAssets and Current
Solution:
Current Ratio= Current Assets/Current Liabilities
3.5 = Current Assets/Current Liabilities
Current Assets= 3.5 x Current Liabilities……….(I) Let this be equation 1
Working Capital= Current Assets- Current Liabilities
= 90,000
Or, Current Assets- Current Liabilities= 90,000
Or, 3.5 Current Liabilities- Current Liabilities = 90,000
0r, 2.5 Current Liabilities= 90,000
Or, Current Liabilities= 90,000/2.5
Or, Current Liabilities= 36,000
Current Assets= 3.5 Current Liabilities
= 3.5 x 36,000
= 1,26,000
4. Shine Limited has a current ratio of 4.5: 1 and quick ratio 3: 1; if the inventory is 36,000, calculate the Current Liabilities and Current
Solution:
Current Ratio= Current Assets/Current Liabilities
4.5= Current Assets/Current Liabilities
Current Assets= 4.5 Current Liabilities………(1)
Now,
Quick ratio= Quick Assets/ Current Liabilities
3:1 = Quick Assets/ Current Liabilities
3 Current Liabilities= Quick Assets
Also,
Quick Assets= Current Assets- Inventory
= Current Assets- 36,000
Current Assets- Quick Assets= 36,000
Now, applying eq 1
4.5 Current Liabilities- 3 Current Liabilities= 36,000
1.5 Current Liabilitiess= 36,000
Current Liabilities= 36,000/1.5
= 24,000
Now,
Current Assets= 4.5 Current Liabilities
= 4.5 x 24,000
= 1,08,000
5. Current Liabilities of a company are 75,000. If current ratio is 4:1 and Liquid Ratio is 1: 1, calculate value of Current Assets, Liquid Assets, and Inventory.
Solution:
Current Ratio= Current Assets/Current Liabilities
4= Current Assets/75,000
Current Assets= 3,00,000
Now,
Liquid ratio= Liquid Assets/ Current Liabilities
1= Liquid Assets/ 75,000
Liquid Assets= 75,000
Now,
Inventory= Current Assets- Liquid Assets
= 3,00,000- 75,000
= 2,25,000
6. Handa has an inventory of Rs. 20,000. Total liquid assets are Rs. 1,00,000 and quick ratio is 2: 1. Calculate the current ratio.
Solution:
Quick Ratio= Liquid Assets/ Current Liabilities
Or, 2 = 1,00,000/ Current Liabilities
Or, Current Liabilities= 50,000
Now,
Current Assets= Inventory + Liquid Assets
= 20,000 + 1,00,000
= 1,20,000
Now,
Current Ratio = Current Assets/ Current Liabilities
= 1,20,000 / 50,000
= 2.4 : 1
7. Calculate debt-equity ratio from the following information:
Total Assets 15,00,000
Current Liabilities Rs. 6,00,000
Total Debts Rs. 12,00,000
Solution:
Debt Equity Ratio = Debt/ Equity
Equity= Total Assets- Total Debt
= 15,00,000 – 12,00,000
= 3,00,000
Now,
Long term debts= Total debts- Current Liabilities
Debt Equity Ratio = Long-term debt/ Equity
= 6,00,000/ 3,00,000
= 2/1
Hence, Debt Equity ratio is 2:1
For complete NCERT Solutions for CBSE Class 12 Accounting Ratios, click on the link below.
Also Find:
CBSE Class 12 Syllabus 2023-24 (All Subjects)
CBSE Class 12 Sample Papers 2023-24 (All Subjects)
NCERT Books for Class 12 (All Subjects)
NCERT Solutions for Class 12 (All Subjects)
