Financial Statement Analysis and Ratios Questions and Answers

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

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.

Q: What is the index of conservatism in capital structure ?

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.

Q: 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 ?

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.

11.

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

A.Economic equity ratio
B.Fund based ratio
C.Total asset ratio
D.Liquidity ratio

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 ?

A.Working Capital Ratio
B.Operating Ratio
C.Price Earning Ratio
D.Proprietory Ratio

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 ?

A.5 days
B.500 days
C.160 days
D.80 days

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 ?

A.5 months
B.4 months
C.3 months
D.2 months

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 :

A.I is correct, but II is wrong.
B.Both I and II are correct.
C.I is wrong, but II is correct.
D.Both I and II are wrong.

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 ?

A.₹ 60,000
B.₹ 1,00,000
C.₹ 1,20,000
D.₹ 1,80,000

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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