Practice Questions

Calculate the Interest Coverage Ratio if the Net Profit before Interest and Tax is Rs. 5,00,000 and interest on long-term debt is Rs. 1,00,000.

Recall another name commonly used for Activity Ratios.

Define the term 'accounting ratio' as used in financial statement analysis.

Justify the inclusion of 'Money received against share warrants' in the calculation of Shareholders' Funds for the Debt-Equity Ratio.

Evaluate why a very low Trade Payables Turnover Ratio might be a cause for concern for a business.

Calculate the Inventory Turnover Ratio if the Cost of Revenue from Operations is Rs. 3,60,000, opening inventory is Rs. 70,000, and closing inventory is Rs. 50,000.

Calculate the Gross Profit Ratio if Revenue from Operations is Rs. 5,00,000 and Gross Profit is Rs. 1,25,000.

Calculate the Trade Receivables Turnover Ratio if Net Credit Revenue from Operations is Rs. 8,00,000 and Average Trade Receivables are Rs. 1,00,000.

Name the two primary ratios used to measure the short-term solvency of a business.

Propose one non-financial, qualitative factor that must be considered alongside the Price/Earning (P/E) Ratio to evaluate a company's stock.

State the formula used to calculate the Debt-Equity Ratio.

List any three objectives of ratio analysis.

Identify the type of ratio under traditional classification where one variable is from the Statement of Profit and Loss and the other is from the Balance Sheet.

Describe what 'Quick Assets' are and list two items that are typically excluded from current assets to calculate them.

Demonstrate the calculation of Return on Investment (ROI) using the following figures: Net Profit after Tax: Rs. 3,50,000 Tax Rate: 30% 12% Long-term Debt: Rs. 5,00,000 Shareholders' Funds: Rs. 15,00,000 Show the step-by-step calculation of Profit before Interest and Tax (PBIT) and Capital Employed.

Name the four main types of ratios based on functional classification and briefly describe each.

Explain the significance of the Current Ratio.

Explain the primary purpose of calculating Solvency Ratios.

Define Gross Profit Ratio and Net Profit Ratio.

A company's current ratio is 1.8:1. Analyze the effect of the 'Purchase of goods for Rs. 50,000 on credit' on this ratio. State whether the ratio will improve, decline, or not change, providing a reasoned explanation with a numerical example.

Compare and contrast the Debt-Equity Ratio and the Proprietary Ratio. Examine how both ratios provide different perspectives on the long-term financial solvency of a business, highlighting what each ratio signifies for creditors and owners respectively.

Compare the objective of liquidity ratios with that of solvency ratios. Explain why a short-term lender like a supplier would be more interested in liquidity ratios, while a long-term lender like a debenture holder would focus on solvency ratios.

A firm has a current ratio of 4:1 and a quick ratio of 2.5:1. If its inventory is valued at Rs. 60,000, solve for its current assets and current liabilities.

Examine how 'variations in accounting practices' can limit the usefulness of inter-firm comparison using accounting ratios. Provide two specific examples of differing accounting policies that could distort such a comparison.

A company's Debt-Equity Ratio is 2.5:1, which is considered high. Analyze the effect of 'conversion of debentures worth Rs. 2,00,000 into equity shares' on this ratio. Will it improve or worsen the ratio from a lender's perspective?

Propose a strategy for a company with a high Current Ratio of 4:1 but a low Quick Ratio of 0.8:1 to improve its liquidity management.

Analyze the implications of a very high Inventory Turnover Ratio. While generally considered positive, explain two potential risks or negative consequences associated with it.

Justify how a company's Inventory Turnover Ratio could be very high, yet the company might still be facing operational problems.

Evaluate whether a decrease in the Operating Ratio from 90% to 85% is always a positive indicator of a company's performance.

Justify why investors might prefer a company with a lower, but stable, Return on Investment (ROI) over a company with a high but volatile ROI.

Critique the statement: 'A company with a high Total Assets to Debt Ratio is always in a strong financial position.'

Design a simple framework for a bank loan officer to evaluate the creditworthiness of a small business using only three accounting ratios.

Critique the calculation of 'Average Inventory' by simply averaging the opening and closing inventory balances.

Propose how ratio analysis can be used to perform a basic SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis for a company.

From the following information, calculate: (i) Debt-Equity Ratio, (ii) Working Capital Turnover Ratio, and (iii) Return on Investment (ROI). Equity Share Capital: Rs. 8,00,000 10% Debentures: Rs. 4,00,000 General Reserve: Rs. 2,00,000 Current Assets: Rs. 5,00,000 Current Liabilities: Rs. 2,00,000 Revenue from Operations: Rs. 15,00,000 Profit before Interest and Tax: Rs. 3,00,000

A company has a quick ratio of 0.8:1. Analyze the implications of this ratio for the company's short-term financial health. Examine two transactions that could be undertaken by the management to improve this ratio to the ideal standard of 1:1, explaining the impact of each transaction on quick assets and current liabilities.

Evaluate the financial implications for a company that decides to redeem its long-term debentures by issuing new equity shares.

Explain any five limitations of ratio analysis.

Summarize what is indicated by a high Inventory Turnover Ratio.

Explain the concept of 'Return on Investment' (ROI).

Summarize the purpose and significance of Earnings Per Share (EPS), Book Value per Share, and Dividend Payout Ratio from a shareholder's perspective.

A company has a high Operating Profit Ratio but a low Net Profit Ratio. Analyze the potential reasons for this difference. Examine what types of expenses or incomes could cause this situation and what it indicates about the company's operational efficiency versus its overall financial management.

Critique the use of a Debt-Equity Ratio of 2:1 as a universal benchmark for assessing a company's long-term solvency.

Formulate a policy for managing trade receivables for a firm that wants to reduce its Average Collection Period from 90 days to 45 days without alienating its customers.

Create a hypothetical transaction that would improve a company's Current Ratio but reduce its Net Profit Ratio.