# NCERT Solutions for Class 12 Accountancy Part II Chapter 5 Accounting Ratios / Ratio Analysis

Q. The following groups of ratios are primarily measure risk:

• (a) liquidity, activity and profitability
• (b) liquidity, activity and inventory
• (c) liquidity, activity and debt
• (d) liquidity, debt and profitability
• Ans. (d) liquidity, debt and profitability
Explanation :

Some of the financial ratios that are most commonly used by the investors and analysis to access a company's financial risk level and overall financial health are debt-to-capital ratio, interest coverage ratio, activity ratio, and profitability ratios.

Q. The _______ ratios are primarily measures of return.

• (a) liquidity
• (b) activity
• (c) debt
• (d) profitability
• Ans. (d) profitability
Explanation :

Profitability ratios indicate how efficiently a company generates profit and value for shareholders.

Q. The two basic measures of liquidity are:

• (a) inventory turnover and current ratio
• (b) current ratio and liquid ratio
• (c) gross profit margin and operating ratio
• (d) current ratio and average collection period
• Ans. (b) current ratio and liquid ratio
Explanation :

The Current ratio explains the relationship between current assets and current liabilities. The Liquid Ratio, also known as the quick or acid test ratio, is the ratio between Liquid Assets and Current Liabilities. Current ratio and liquid ratio are two basic measures of liquidity.

Q. The ______ ratios provide the information critical to the long-run operation of the firm.

• (a) liquidity
• (b) activity
• (c) solvency
• (d) profitability
• Ans. (c) solvency
Explanation :

Solvency ratios help to assess a company’s ability to meet its long-term financial obligations.

Q. ABC Co. extends credit terms of 45 days to its customers. Its credit collection would be considered poor if its average collection period was:

• (a) 30 days
• (b) 36 days
• (c) 47 days
• (d) 37 days
• Ans. (c) 47 days
Explanation :

Average collection period refers to the time it takes, on average for the company to receive payments it owed from clients and customers. The credit collection of the company would be considered poor if its average collection period is more than it credit terms.

Q. ______ are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm.

• (a) Customers
• (b) Stockholders
• (c) Lenders and suppliers
• Ans. (c) Lenders and suppliers
Explanation :

Average payment period refers to the average time period taken by an organisation for paying off its dues with respect to purchases of materials that are bought on the credit basis from the suppliers of the company. This provides suppliers and lenders a sense of bill paying patterns of the company.

Q. The _______ of business firm is measured by its ability to satisfy its short-term obligations as they become due.

Ans. liquidity

Q. The ______ is a measure of liquidity which excludes ______, generally the least liquid asset.

Ans. liquid ratio, inventory

Q. ______ ratios are a measure of the speed with which various accounts are converted into revenue from operations or cash.

Ans. Activity

Q. The ______ is useful in evaluating credit and collection policies.

Ans. average collection period

Q. The ______ measures the activity of a firm’s inventory.

Ans. inventory ratio

Q. The only purpose of financial reporting is to keep the managers informed about the progress of operations.

Ans. False

Q. A ratio is always expressed as a quotient of one number divided by another.

Ans. False

Q. Ratios help in comparisons of a firm's results over a number of accounting periods as well as with other business enterprises.

Ans. True

Q. A ratio reflects quantitative and qualitative aspects of results.

Ans. False

Q. Long-term borrowings are concerned about the ability of a firm to discharge its obligations to pay interest and repay the principal amount.

Ans. True

Q. If the net profits earned during the year is ₹50,000 and the amount of debtors in the beginning and the end of the year is ₹10,000 and ₹20,000 respectively, then the cash from operating activities will be equal to__________(₹40,000/₹60,000).

Ans. ₹ 40,000

Q. If the net profits made during the year are ₹50,000 and the bills receivables have decreased by ₹10,000 during the year then the cash flow from operating activities will be equal to __________(₹40,000/₹60,000)

Ans. ₹ 60,000

Q. An increase in accrued income during the particular year is__________the net profit. (added to/deducted from)

Ans. deducted from

Q. For calculating cash flow from operating activities, provision for doubtful debts is__________the profit made during the year (added to/deducted from)