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Financial Statement Analysis and Ratios Questions and Answers

11.

The ratio of shareholders funds to the total assets measures that shifts in the ratio of owned funds to total funds is ........................ .

Exam Year(s)

MH SET - 2021, SET Exam - 2021,

Answer: A

The keyed answer is the Economic equity ratio.

In the analysis of bank balance sheets, the economic equity ratio is shareholders' funds divided by total assets. It measures the share of the bank's assets financed by its owners, and changes in it show shifts in the proportion of owned funds to total funds.

The other names do not fit the definition. A liquidity ratio compares liquid assets with short-term liabilities, and 'fund based ratio' and 'total asset ratio' are not the names of this measure.

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12.

What is the index of conservatism in capital structure ?

Exam Year(s)

MH SET - 2024, SET Exam - 2024,

Answer: D

The index of conservatism is the proprietary ratio.

The proprietary ratio, shareholders' funds divided by total assets, shows how much of the business is financed by the owners. A high ratio means little reliance on borrowed funds, a conservative capital structure that protects creditors.

The working capital ratio measures short-term liquidity, the operating ratio operating efficiency, and the price-earnings ratio the market's valuation of earnings; none measures conservatism in the capital structure.

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13.

The projected cash operating expenditure of a firm for the next year is Rs. 1,82,000. It has quick current assets amounting to Rs. 40,000. What will be the defensive internal ratio ?

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: D

The defensive interval ratio is about 80 days.

The defensive interval ratio (printed 'internal') shows how many days a firm can meet its cash operating expenses out of its quick assets, without new revenue.

\[ \begin{aligned} \text{Daily expense} &= \frac{1,82,000}{365} \approx 498.6 \\ \text{DIR} &= \frac{40,000}{498.6} \approx 80\ \text{days} \end{aligned} \]

160 days would need double the quick assets, and 5 days or 500 days come from dividing the wrong way or ignoring the daily conversion.

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14.

When the Debt Turnover Ratio is 4, what is the average collection period ?

Exam Year(s)

UGC NET - 2012,

Answer: C

The average collection period is 3 months. With a debtors turnover ratio of 4, debtors are collected four times a year, so the collection period is the year divided by the turnover.

\[ \text{Period} = \frac{12}{4} = 3 \text{ months} \]

A period of 5 months would need a turnover of 2.4, 4 months a turnover of 3, and 2 months a turnover of 6, so they do not fit the given ratio.

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15.

Given below are two statements :

I. Activity ratios show where the company is going.
II. Balance Sheet ratios show how the company stand.
Codes :

Exam Year(s)

UGC NET - 2012,

Answer: B

Both statements are correct, as the key gives. Activity (turnover) ratios, such as stock turnover and debtors turnover, measure how efficiently the firm is using its assets and so indicate the direction in which the business is moving. Balance sheet ratios, such as the current ratio, show the financial position of the firm as it stands on a given date.

The alternatives saying that I or II is wrong, or that both are wrong, therefore do not match the classification followed in the ratio analysis chapter of the syllabus.

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16.

If the current ratio is 2 : 1 and working capital is ₹ 60,000, what is the value of the Current Assets ?

Exam Year(s)

UGC NET - 2012,

Answer: C

The current assets are Rs 1,20,000. A current ratio of 2 : 1 means that current assets are twice the current liabilities. Working capital is the difference, so it equals the current liabilities, which are therefore Rs 60,000.

\[ \text{CA} = 2 \times \text{CL} = 2 \times 60{,}000 \]\[ \text{CA} = 1{,}20{,}000 \]

Rs 60,000 is both the working capital and the current liabilities, not the current assets. Rs 1,00,000 and Rs 1,80,000 would imply working capital of Rs 50,000 and Rs 90,000 at a 2 : 1 ratio, so they do not fit.

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17.

Consider the following :

(i) Basic defensive and interval ratio
(ii) Current ratio
(iii) Superquick ratio
(iv) Quick ratio

Arrange these ratios in sequence to reflect the liquidity in descending order.

Exam Year(s)

UGC NET - 2012,

Answer: A

The keyed answer is (A), the order current ratio, quick ratio, superquick ratio, basic defensive interval ratio. The current ratio counts all current assets against current liabilities and is the widest measure. The quick ratio takes out stock and prepaid items. The superquick ratio keeps only cash and marketable securities. The basic defensive interval ratio measures how many days the liquid assets can meet daily operating expenses and is the narrowest. The question asks for the descending order of these measures, and the key follows the width of the assets counted. Options (B), (C) and (D) place the narrowest measure or the quick ratio ahead of the current ratio.

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18.

Match the items of List - I with the items of List - II and select the correct answer using the codes given below the lists :

List - IList - II
(a) Leverage Ratio(i) Short-term solvency
(b) Liquidity Ratio(ii) Earning capacity
(c) Turnover Ratio(iii) Relationship between debt and equity
(d) Profitability Ratio(iv) Efficiency of Asset Management

Exam Year(s)

UGC NET - 2012,

Answer: D

The matching is: the leverage ratio with the relationship between debt and equity (iii), the liquidity ratio with short-term solvency (i), the turnover ratio with the efficiency of asset management (iv), and the profitability ratio with earning capacity (ii), giving iii i iv ii, option D. Leverage ratios compare borrowed funds with owners' funds, liquidity ratios test the ability to meet current obligations, turnover ratios show how well assets are used, and profitability ratios show earning power. Options A, B and C pair at least two ratios with the wrong meaning.

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19.

Which of the following ratios are taken into consideration by a banker before sanctioning the loan ?

Exam Year(s)

UGC NET - 2013,

Answer: C

The official key gives the debt-equity ratio, option (C), as the ratio that a banker looks to before sanctioning a loan. It shows how far the business is financed by borrowing against the owners' funds, and so measures the safety of the money the banker is asked to lend.

The proprietary ratio and the stock turnover ratio also give information about the firm, but the key does not take them as the ratio to consider here, and so the option that says all of the above is also rejected.

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20.

The appropriate ratio for indicating liquidity crisis is

Exam Year(s)

UGC NET - 2013,

Answer: D

The acid test ratio, or quick ratio, is quick assets divided by current liabilities. It leaves out inventory and prepaid items, which cannot readily be turned into cash, so it is the better indicator of a liquidity crisis, a shortage of immediately available funds.

The operating ratio and the sales turnover ratio measure efficiency and profitability, not short term payment ability. The current ratio does show liquidity, but it includes stock, which may be slow to sell, so it can hide a crisis. The acid test is therefore the more appropriate warning sign.

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