unit-III

Techniques of finanial statement analysis B. Accounting Ratios 

Exercise

1. Objective type Questions:

A. State whether the following statements are true or false :

 (1)The purpose of financial reporting is to inform the management only about the progress of the business. (False)

(2) Solvency ratios help the providers of long term loan in assessing the firm's ability to meet its obligations to long term creditors (True)

 (3) Ratio is always expressed as a quotient of one number divided by another number. (False)

(4) Ratios facilitate inter period comparison of performance. (True)

(5) Ratio explains the quantitative and qualitative aspects of business. (False)

 (6) Quick assets include all current assets. (False)

(7) Price earning ratio shows the relationship between net earning per share to the market price of a share. (True)

(8) Current Ratio is a better indicator than quick ratio about short term solvency of a firm.(False) 

(9) Debt-equity is also called leverage Ratio. (True)

(10) Investment Ratio shows liquidity and profitability of the enterprise. (True) 

(11) The amount of gross assets is equal to capital employed. (False)

(12) Return on Investment ratio measures profitability of a business. (True)

(13) Liquidity ratio measures long term solvency of a concern (False)

(14) Gross profit ratio measures over all profitability of a concern (False)

 (15) The amount of gross assets is equal to net Capital empolyed (False)

3. Fill in the blanks :

(i)  _______ is useful in evaluating the credit policy. (Average collection period) 

 (ii) The_______ ratios test long term solvency of the business.(Solvency) 

(iii) Lenders and suppliers are interested in the average _______ period. (payment) 

(iv) ratio measures the activity of a firm regarding inventory. (Inventory turnover)

 (v) ratio more conservatively measures the short term liquid position of a firm. (Quick)

(vi) Ratio is an arithmetical relationship of one number to _______ (another number) 

(vii) Operation ratio is _______ (Operating cost/Net sales)

(viii) Rule of thumb of current ratio is ________ (2:1)

(ix) Capital employed is ________(Net Assets)

(x) Debt equity ratio is a relationship between ________ and shareholders' fund. (Long Term Debt.)

(xi) Two elements of a current ratio are current assets and _________ (current liabilities)

Objective Type Questions

C. Choose the Correct alternative:

(1) Debt-Equity Ratio measures.

(a) Profitability

(b) Activity

(c) Short Term financial position

(d) Long Term financial position

Ans. (d)

(2) Liquid Assets Consest of

(a) Current Assets- Inventory:

(b) Current Assets- Inventory-Prepaid Expenses

 (c) All Current Assets.

(d) Profit ability Ratio

Ans. (b)

(3) Return on Capital is measured by

(a) Acid Test Ratio 

(b) Activity Ratio 

(c) Debt-Equity Ratio

(d) Profit ability Ratio

Ans. (d)

(4) Higher is the ratio, lower is the Profitability is applicable to

(a) Groos profit Ratio.

(b) Operating Ratio.  

(c) Net Profit Ratio.

(d) Earning per share

Ans. (b)

(5) Short term creaditors are primarily concernned with

(a) Short term solvency

 (b) Profitability

 (c) Longterm solvency

(d) Share price 

Ans. (a)

(6) Short term liquidity is best judged by

(a) Current Ratio

(b)Acid test Ratio

(c) Debt-Equity Ratio

(d)Activity Ratio

Ans.(b)

(7) Performance of working capital is judged by

(a) Activity Ratio.

(b) Liquidity Ratio

(c) Gearing Ratio.

(d) Profitability Ratio.

Ans. (b)

(8) R.O.I is calculated on

 (a) Capital employed

 (b) Total Assets

 (c) Share capital  

Ans. (a)

(9) When fixed charge bearing long term funds are more than euqity share holders' funds, it is

(a) highly geared capatal

(b) Lowly geared capital

 (c) evenly geared capital

 (d) None of the above

Ans. (a)

(10) Long term creditors have greater security if the Debt-Fruity Ratio is

(a) Low

(b) High

(c) Even

(d) None of the above

Ans. (a)

D. Short Answer Type Questions:

1. Name liquidity ratios.

Ans.

2. Discuss the profitability ratios. 3. Discuss the term "Capital employed"

Ans.

4. Discuss any two limitations of ratio analysis.

Ans.

5. What are the objectives of Activity Ratios?

Ans.

6. What is the significance of Inventory Turn over Ratio?

Ans.

7. What is Debt-Equity Ratio.

Ans.

8. What does the Debt-Equity Ratio measure? 9. What are the objectives of Liquidity Ratios?

Ans.

10. What does the Debtors Turnover signifiy?

Ans.

III. Long Answer Type Questions :

1. What are the limitations of financial ratios as a technique for appraising the financial position of a company?

Ans.

2. What procedure would you accept to study the liquidity of a business firm?

Ans.

 3. How would you analyse the financial position of a Company from the point of view of 

(a) An investor 

(b) A creditor 

(c) A financial exeutive 

4. How does the Acid-test ratio differ from current ratio. How are they similar? What is the usefuness of liquidity ratios?

Ans.

5. As a technique of financial analysis ratios must be used with great precaution. Critically examine the importance and limitations of ratio analysis.

Ans.

 6. Explain the relationship between solvency, liquidity and profitability rations.

Ans.

7. "Ratios are indicators, sometimes pointers but not in themselves are powerful tools of management". Explain. 

Ans>

8. Explain the following terms

(i) Trading on equity, (ii) Operating leverage, (iii) Window dressing, (iv) Gearing ratio and (v) Return on Investment.

9. Who are the users of financial analysis? Explain the significance of such ratio to them. 

Ans.

10. "Ratio analysis is a tool to examine the health of business with a view to make financial results more intelligible" Explain

 Ans.

 11. Explain :

 (i) Current ratio, (ii) Inventory Turnover Ratio, (iii) Operating Ratio, (iv) Interest Coverage Ratio and (v) Debt-Equity Ratio.

Type by- Pinku moni bora.