Accounting Ratios (Class 12 Accountancy)

Practise chapter-wise MCQs for Class 12 Accountancy — Accounting Ratios. Every question comes with the correct answer and an explanation.

Accounting Ratios (Class 12 Accountancy)

Practise chapter-wise MCQs for Class 12 Accountancy — Accounting Ratios. Every question comes with the correct answer and an explanation.

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TL;DR: Practise chapter-wise MCQs for Class 12 Accountancy — Accounting Ratios. Every question comes with the correct answer and an explanation.

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Practise chapter-wise MCQs for Class 12 Accountancy — Accounting Ratios. Every question comes with the correct answer and an explanation.

Accounting Ratios MCQs with Answers & Explanations

Q1. Which study action is most useful before solving questions from "Accounting Ratios"?

  1. Read the key concepts and examples first ✓ (correct)
  2. Skip directly to the answer key
  3. Memorize only the chapter title
  4. Avoid diagrams and formulas

Explanation: Start by reviewing the core ideas of "Accounting Ratios", then solve examples and MCQs.

Q2. Which of the following is a component of the Profitability Ratio?

  1. Debtors Turnover Ratio
  2. Operating Profit Ratio ✓ (correct)
  3. Inventory Turnover Ratio
  4. Current Ratio

Explanation: Operating Profit Ratio measures the operational efficiency of a business by relating operating profit to net sales, thus it is a profitability ratio.

Q3. The primary objective of calculating the Current Ratio is to assess:

  1. The profitability of the company.
  2. The long-term financial stability of the company.
  3. The company's ability to meet its short-term liabilities. ✓ (correct)
  4. The efficiency of inventory management.

Explanation: The Current Ratio is a key liquidity ratio that helps stakeholders understand how well a company can cover its short-term debts using its short-term assets.

Q4. A higher Gross Profit Ratio generally implies:

  1. Lower sales revenue.
  2. Inefficient cost management of goods sold.
  3. Higher operating expenses.
  4. Greater pricing power or efficient production cost control. ✓ (correct)

Explanation: A higher Gross Profit Ratio indicates that the company is effectively managing its cost of goods sold relative to its sales revenue, either through efficient production or strong pricing power.

Q5. A company has a Debt-to-Equity Ratio of 1.2:1. This indicates:

  1. The company relies more on debt than equity for financing. ✓ (correct)
  2. The company relies more on equity than debt for financing.
  3. The company has no long-term liabilities.
  4. The company has a very low risk profile.

Explanation: A Debt-to-Equity Ratio of 1.2:1 signifies that for every ₹1 of equity, the company has ₹1.2 of debt, indicating a greater reliance on debt financing.

Q6. Inventory Turnover Ratio is calculated as:

  1. Net Sales / Inventory
  2. Cost of Goods Sold / Average Inventory ✓ (correct)
  3. Gross Profit / Sales
  4. Net Profit / Sales

Explanation: The Inventory Turnover Ratio measures how many times a company's inventory is sold and replaced over a period. It is calculated as Cost of Goods Sold divided by Average Inventory.

Q7. If the Current Ratio is 2:1 and the Quick Ratio is 1.5:1, what can be inferred about the company's inventory?

  1. Inventory is not a significant asset.
  2. Inventory levels are optimal.
  3. Inventory has decreased significantly. ✓ (correct)
  4. Inventory has increased significantly.

Explanation: A higher current ratio than quick ratio indicates the presence of inventory. A significant difference between the two suggests inventory is a substantial component. A quick ratio lower than the current ratio means that inventory is significant. If quick ratio is close to current ratio it means inventory is not significant. If quick ratio is higher than current ratio it means inventory is not significant and is having negative value which is not possible.

Q8. Which ratio helps in evaluating the efficiency with which a company is utilizing its assets to generate sales?

  1. Operating Profit Ratio
  2. Debt-to-Equity Ratio
  3. Inventory Turnover Ratio
  4. Asset Turnover Ratio ✓ (correct)

Explanation: The Asset Turnover Ratio measures how effectively a company's assets are being used to generate revenue. A higher ratio generally indicates greater efficiency.

Q9. Which of the following is NOT a solvency ratio?

  1. Current Ratio ✓ (correct)
  2. Total Assets to Debt Ratio
  3. Interest Coverage Ratio
  4. Debt-to-Equity Ratio

Explanation: The Current Ratio is a liquidity ratio, assessing short-term solvency. The other options are solvency ratios, which measure a company's ability to meet its long-term obligations.

Q10. If a company's Net Profit Ratio is 5% and its Asset Turnover Ratio is 2 times, then its Return on Assets (ROA) would be:

  1. 20%
  2. 10% ✓ (correct)
  3. 2.5%
  4. 7%

Explanation: Return on Assets (ROA) = Net Profit Ratio × Asset Turnover Ratio = 5% × 2 = 10%.

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