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CHSE Odisha Fundamentals of Management Accounting study materials
CHSE Odisha Fundamentals of Management Accounting study resources

CHSE Odisha Fundamentals of Management Accounting practice questions

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Question 1Nature, Scope and Functions of Management Accounting

Management accounting is best described as the branch of accounting that primarily serves which group of users?

  1. External investors and lenders relying on published statements
  2. Internal management at various levels of the organisation Correct answer.
  3. Statutory auditors forming an opinion on financial statements
  4. Government tax authorities assessing statutory liability

Explanation

Management accounting is oriented towards internal users, supplying information that helps managers plan, control and decide. External reporting to investors, tax authorities and statutory auditors is the concern of financial accounting and auditing.

Question 2Nature, Scope and Functions of Management Accounting

Which characteristic distinguishes management accounting information from financial accounting information?

  1. It records only transactions that can be measured in monetary terms
  2. It is not governed by a prescribed statutory format or mandatory accounting standards Correct answer.
  3. It is always audited by an independent chartered accountant before use
  4. It is prepared annually for shareholders at the year end

Explanation

Management accounting reports are prepared for internal use, so their form, content and frequency are decided by management rather than by law or accounting standards. Financial accounting, by contrast, follows prescribed formats and mandatory standards.

Question 3Nature, Scope and Functions of Management Accounting

The primary objective of management accounting is to provide information that assists management in which of the following?

  1. Formulating policy and planning, controlling operations and making decisions Correct answer.
  2. Determining the market price of the company's equity shares
  3. Complying with the double-entry requirement of the accounting system
  4. Preparing the statement of profit and loss for statutory filing

Explanation

Management accounting exists to support planning, control and decision-making by supplying relevant, timely information to managers. Recording under double entry, share pricing and statutory profit statements belong to other functions.

Question 4Nature, Scope and Functions of Management Accounting

A cost accountant determines the cost of a product for stock valuation under the applicable accounting standards, while a management accountant analyses the same cost data to advise on whether to accept a special order. This illustrates that management accounting:

  1. Uses cost accounting data as one input but extends beyond mere cost ascertainment Correct answer.
  2. Is a synonym for cost accounting with a different job title
  3. Replaces cost accounting entirely within the organisation
  4. Deals only with future data and ignores recorded costs

Explanation

Cost accounting ascertains and controls costs, and management accounting draws on that data together with other information to support decisions. The special-order analysis shows management accounting going beyond cost ascertainment to interpretation and advice.

Question 5Nature, Scope and Functions of Management Accounting

Which of the following is a limitation of management accounting that a candidate should recognise?

  1. It is compulsory for every company registered under the Companies Act
  2. It relies on the double-entry system for every report it produces
  3. It can report only monetary information to management
  4. Its reports are based on data and techniques that involve judgement and estimation Correct answer.

Explanation

Management accounting uses estimates, forecasts and chosen techniques, so its output is affected by personal judgement and may lack the precision of audited financial data. This is a recognised limitation of the discipline.

Question 6Nature, Scope and Functions of Management Accounting

The installation of a management accounting system in an organisation is most likely to require which combination of support?

  1. Only the marketing department because it handles sales data
  2. Top management backing together with cooperation from functional departments Correct answer.
  3. Only the accounts department working in isolation
  4. Only external consultants without internal participation

Explanation

A management accounting system cuts across purchasing, production, marketing and finance, so it needs the authority of top management and the cooperation of all functional departments. Isolated effort by one department cannot supply organisation-wide information.

Question 7Nature, Scope and Functions of Management Accounting

Management accounting information is said to be 'relevant' when it:

  1. Is capable of influencing a decision by differing between the alternatives considered Correct answer.
  2. Is expressed exclusively in monetary units
  3. Is available only after the annual accounts are audited
  4. Is prepared strictly according to statutory formats

Explanation

Relevance means the information can make a difference to the decision at hand, which requires that it differ among the alternatives being compared. Statutory format, audit timing and monetary expression are not tests of relevance.

Question 8Nature, Scope and Functions of Management Accounting

A manager receives a monthly report showing actual sales against budgeted sales with the difference highlighted. Which function of management accounting does this report primarily serve?

  1. Preparation of the balance sheet
  2. Performance evaluation and control Correct answer.
  3. Recording of cash receipts
  4. Determination of income tax liability

Explanation

Comparing actual results with budget and highlighting differences is the essence of budgetary control and performance evaluation. It enables management to investigate deviations and take corrective action.

Question 9Nature, Scope and Functions of Management Accounting

Which of the following best explains why management accounting reports are prepared at frequent and irregular intervals rather than annually?

  1. Accounting standards require monthly publication of management reports
  2. Frequent reporting reduces the cost of maintaining accounting records
  3. Managers need timely information whenever a decision or control point arises Correct answer.
  4. Auditors insist on frequent reports to reduce their workload

Explanation

Because management accounting serves internal decision-making and control, reports are produced whenever needed, such as daily, weekly or for a specific proposal. There is no statutory timetable and frequent reporting does not lower record-keeping cost.

Question 10Nature, Scope and Functions of Management Accounting

Management accounting is often described as interdisciplinary because it draws upon which set of disciplines?

  1. Only mathematics and physics
  2. Only commercial law and company law
  3. Economics, statistics, operations research and behavioural science alongside accounting Correct answer.
  4. Only double-entry book-keeping and auditing

Explanation

Management accounting borrows techniques from economics, statistics, operations research, psychology and other fields to support planning and decisions. This borrowing of methods from several disciplines is what makes it interdisciplinary.

Question 11Nature, Scope and Functions of Management Accounting

A firm's management accountant prepares a report estimating the costs and revenues of two alternative plant locations. This activity falls within which scope area of management accounting?

  1. Decision-making through comparative analysis of alternatives Correct answer.
  2. Recording of day-to-day cash transactions
  3. Compliance with tax deducted at source provisions
  4. Statutory audit of financial statements

Explanation

Evaluating alternatives by comparing their expected costs and revenues is decision analysis, a core scope area of management accounting. It supports the choice of the option that best serves the organisation's objectives.

Question 12Nature, Scope and Functions of Management Accounting

Which statement correctly describes the relationship between financial accounting and management accounting?

  1. They are complementary, with financial accounting supplying recorded data that management accounting reworks for decisions Correct answer.
  2. Financial accounting is a modern outgrowth of management accounting
  3. They are mutually exclusive and cannot operate in the same organisation
  4. Management accounting is a subdivision of financial accounting

Explanation

Financial accounting records transactions and produces statements, while management accounting uses that recorded data along with other information for planning and decisions. The two are complementary rather than competing.

Question 13Nature, Scope and Functions of Management Accounting

The management accountant's role in an organisation is often compared with that of a 'navigator' rather than a 'scorekeeper'. This comparison emphasises that the management accountant:

  1. Collects overdue debts from customers
  2. Records past transactions and prepares final accounts
  3. Guides future direction by interpreting information for decisions Correct answer.
  4. Verifies the accuracy of the books of account

Explanation

The navigator metaphor highlights forward-looking guidance: interpreting data and advising management on future courses of action. Mere recording and verification are scorekeeping tasks of financial accounting and audit.

Question 14Nature, Scope and Functions of Management Accounting

Which of the following is an example of non-financial information that a management accountant would include in a performance report?

  1. Provision for depreciation charged to the profit and loss account
  2. Gross profit margin computed from the trading account
  3. Customer satisfaction ratings and percentage of defective units produced Correct answer.
  4. Bank balance as per the cash book

Explanation

Management accounting goes beyond monetary data and incorporates operational measures such as satisfaction scores and defect rates. These help managers judge quality and efficiency where money values alone are insufficient.

Question 15Nature, Scope and Functions of Management Accounting

An organisation wants management accounting information to be useful. If the cost of producing a report exceeds the benefit it yields, which qualitative consideration is being violated?

  1. Understandability
  2. Cost-benefit consideration Correct answer.
  3. Timeliness
  4. Comparability

Explanation

Information is worth producing only when its benefits exceed the cost of generating it, which is the cost-benefit criterion. Comparability, understandability and timeliness are separate qualities that do not address the cost of the report.

Question 16Nature, Scope and Functions of Management Accounting

Which of the following best explains why management accounting has been described as having a wider scope than financial accounting?

  1. It reports only to shareholders at the annual general meeting
  2. It is compulsory for all business organisations by statute
  3. It covers past and future periods and includes non-monetary and qualitative information Correct answer.
  4. It is governed by more accounting standards than financial accounting

Explanation

Management accounting looks at historical data, budgets and forecasts, and includes physical and qualitative measures, so its canvas is broader than the monetary, past-oriented financial accounts. It is not statute-driven and does not report to shareholders.

Question 17Nature, Scope and Functions of Management Accounting

A company's management accountant uses statistical quality control charts and learning-curve analysis. This reflects which feature of the nature of management accounting?

  1. Its focus on external financial reporting
  2. Its statutory obligation to follow the Companies Act
  3. Its dependence on the double-entry system
  4. Its use of analytical techniques borrowed from other disciplines Correct answer.

Explanation

Techniques such as control charts and learning curves come from statistics and operations management, showing that management accounting applies analytical tools drawn from other fields. It is not tied to double entry, statute or external reporting.

Question 18Nature, Scope and Functions of Management Accounting

Which of the following situations most clearly shows management accounting failing to satisfy the quality of 'timeliness'?

  1. A budget is prepared using estimates rather than actual figures
  2. A report compares this year's costs with last year's costs
  3. A variance report on production delays reaches the works manager after the production cycle has ended Correct answer.
  4. A report presents figures in thousands of rupees

Explanation

Timeliness requires that information reach the decision-maker before it loses its power to influence action. A report arriving after the production cycle is over cannot guide corrective action, so it fails this quality.

Question 19Nature, Scope and Functions of Management Accounting

A newly appointed management accountant is asked to design reports for a decentralised company with separate profit centres. Which principle should guide the design of responsibility reports?

  1. Reports should follow the statutory schedule of the Companies Act
  2. Reports should aggregate all company costs without distinguishing centres
  3. Reported figures should relate to items controllable by the manager of each centre Correct answer.
  4. Reports should be prepared only for the board of directors

Explanation

Responsibility reporting holds each manager accountable only for revenues and costs that the manager can control. Aggregating all costs, restricting reports to the board, or copying statutory schedules would defeat the purpose of decentralised control.

Question 20Nature, Scope and Functions of Management Accounting

Which pair correctly matches a management accounting function with an example of its output?

  1. Decision-making with the fixed asset register
  2. Planning with a cash budget for the coming quarter Correct answer.
  3. Control with the audited statement of profit and loss
  4. Statutory reporting with a variance analysis memo

Explanation

A cash budget for the coming quarter is a forward-looking plan, so it illustrates the planning function. The other pairs mismatch the function with an output belonging to financial accounting or control.

Question 21Financial Statement Analysis: Comparative and Common-Size Statements

In a comparative statement of profit and loss, each item of the current year is normally expressed as a percentage of which base figure?

  1. The corresponding item of the base year
  2. Total assets of the current year
  3. Net sales of the base year Correct answer.
  4. Net profit of the current year

Explanation

In comparative income statements, revenue is conventionally taken as 100 and every expense line is shown as a percentage of revenue of the same year. The percentage change column, by contrast, compares each item with its own base-year value. Mixing the two bases destroys comparability.

Question 22Financial Statement Analysis: Comparative and Common-Size Statements

A comparative balance sheet shows Sundry Debtors of Rs. 2,40,000 in 2023 and Rs. 1,80,000 in 2022. What is the percentage change to be reported?

  1. A decrease of 33.33 per cent
  2. An increase of 25 per cent
  3. An increase of 33.33 per cent
  4. A decrease of 25 per cent Correct answer.

Explanation

Percentage change equals the absolute change divided by the base-year figure, multiplied by 100. Here the change is Rs. 60,000 and the base year is 2022, so 60,000/1,80,000 x 100 gives a 33.33 per cent fall, expressed as a decrease of 33.33 per cent when the base is correctly identified.

Question 23Financial Statement Analysis: Comparative and Common-Size Statements

In a common-size balance sheet, the base figure against which every asset and liability is expressed is:

  1. Net worth or shareholders' funds
  2. Total equity and liabilities, that is, the balance sheet total Correct answer.
  3. Total revenue for the year
  4. Total current assets

Explanation

A common-size balance sheet sets the balance sheet total equal to 100 and expresses each asset, liability and equity item as a percentage of that total. This allows comparison of composition across firms of very different sizes. Revenue is not a balance-sheet figure and cannot serve as the base.

Question 24Financial Statement Analysis: Comparative and Common-Size Statements

Which limitation most directly affects the usefulness of a comparative statement when the base year was abnormal?

  1. The statement can no longer be audited
  2. The base-year figures distort every percentage change shown Correct answer.
  3. The statement must be recast in common-size form first
  4. The percentages become difficult to compute

Explanation

Because each percentage change is measured against the base-year value, an abnormal base year, such as one with a strike or a one-off loss, makes later changes appear misleadingly large or small. Analysts therefore choose a normal base year or use common-size statements instead. The arithmetic itself remains simple.

Question 25Financial Statement Analysis: Comparative and Common-Size Statements

A firm's cost of goods sold is 60 per cent of net sales in the base year and 68 per cent in the current year, while net sales have risen. The most reasonable inference is that:

  1. The gross profit ratio has improved
  2. Operating expenses have been eliminated
  3. Selling prices have increased faster than costs
  4. The gross profit ratio has deteriorated owing to a higher cost ratio Correct answer.

Explanation

Gross profit ratio equals 100 minus the cost of goods sold percentage, so a rise from 60 to 68 per cent in the cost ratio reduces gross margin from 40 to 32 per cent. Rising sales with a falling margin points to cost pressure or price discounting. Common-size statements reveal this trend even when absolute profit grows.

Question 26Financial Statement Analysis: Comparative and Common-Size Statements

Common-size financial statements are particularly useful to an analyst because they:

  1. Eliminate the need for a balance sheet total
  2. Remove the effect of differing scale when comparing firms of different sizes Correct answer.
  3. Guarantee that profitability is similar across firms
  4. Convert accrual figures into cash flows

Explanation

By expressing every item as a percentage of a common base, common-size statements allow a small firm and a large firm to be compared on composition and cost structure. They do not equalise profitability or convert accrual data into cash. Scale effects are neutralised, not removed from the underlying figures.

Question 27Financial Statement Analysis: Comparative and Common-Size Statements

In a comparative income statement, if net sales rise by 20 per cent while cost of goods sold rises by 30 per cent, the correct reading is that:

  1. Absolute gross profit has fallen
  2. The gross margin percentage has risen
  3. Cost of goods sold has fallen in absolute terms
  4. Absolute gross profit has risen but the gross margin percentage has fallen Correct answer.

Explanation

Both sales and cost of goods sold increase in absolute terms, so gross profit in rupees rises whenever the rupee increase in sales exceeds that in cost. However, cost grows faster than sales, so the gross margin percentage declines. Comparative statements show both movements side by side.

Question 28Financial Statement Analysis: Comparative and Common-Size Statements

The percentage-change column in a comparative balance sheet is computed as:

  1. [(Current year amount - Base year amount) / Current year amount] x 100
  2. (Current year amount / Base year amount) x 100
  3. [(Current year amount - Base year amount) / Base year amount] x 100 Correct answer.
  4. (Base year amount / Current year amount) x 100

Explanation

Percentage change measures the absolute increase or decrease relative to the base-year amount, so the base-year figure is the denominator. Dividing by the current-year amount would give a different and non-standard figure. The first option gives an index number rather than a percentage change.

Question 29Financial Statement Analysis: Comparative and Common-Size Statements

A common-size income statement shows salaries at 12 per cent of sales in Year 1 and 15 per cent in Year 2, while sales doubled. What conclusion is best supported?

  1. Salary cost in rupees rose proportionately with sales
  2. Salary cost in rupees fell
  3. Salary cost in rupees remained constant
  4. Salary cost in rupees rose more than proportionately with sales Correct answer.

Explanation

If sales double and the salary ratio rises from 12 to 15 per cent, salaries must have grown by more than 100 per cent, that is, faster than sales. Common-size percentages convert a rupee comparison into a statement about proportionality. The absolute rupee amount therefore increased more than proportionately.

Question 30Financial Statement Analysis: Comparative and Common-Size Statements

Which pair of statements is prepared in common-size form using the same base figure?

  1. Statement of profit and loss and retained earnings statement
  2. Trading account and profit and loss appropriation account
  3. Balance sheet and cash flow statement
  4. Income statement and balance sheet Correct answer.

Explanation

The income statement uses net sales as 100 while the balance sheet uses the balance sheet total as 100, so each has its own base but both follow the common-size technique. The other pairings involve statements with different purposes and no single accepted common base. This is why common-size analysis is described as a technique applied to the two principal statements.

Question 31Financial Statement Analysis: Comparative and Common-Size Statements

Comparative statements are also known as:

  1. Ratio analysis
  2. Vertical analysis
  3. Horizontal analysis Correct answer.
  4. Funds flow analysis

Explanation

Comparative statements examine the same item across successive years, which is why the technique is called horizontal analysis. Common-size statements, by contrast, examine items within a single year as percentages of a base and are called vertical analysis. The two techniques are complementary rather than substitutes.

Question 32Financial Statement Analysis: Comparative and Common-Size Statements

A company reports inventory of Rs. 1,50,000 against a balance sheet total of Rs. 10,00,000 in Year 1, and inventory of Rs. 2,10,000 against a total of Rs. 12,00,000 in Year 2. In common-size terms, inventory has:

  1. Remained constant at 15 per cent of total assets
  2. Risen from 15 per cent to 17.5 per cent of total assets Correct answer.
  3. Fallen from 15 per cent to 17.5 per cent of total assets
  4. Risen from 15 per cent to 21 per cent of total assets

Explanation

Dividing 1,50,000 by 10,00,000 gives 15 per cent and dividing 2,10,000 by 12,00,000 gives 17.5 per cent. The rupee increase of 40 per cent is larger than the 20 per cent growth in total assets, so the common-size share rises. This illustrates how common-size analysis separates composition from absolute growth.

Question 33Financial Statement Analysis: Comparative and Common-Size Statements

Which item would normally be shown as a percentage of net sales in a common-size statement of profit and loss?

  1. Long-term borrowings
  2. Trade payables
  3. Depreciation and finance cost Correct answer.
  4. Reserves and surplus

Explanation

Depreciation and finance cost are income statement charges and are therefore expressed as percentages of net sales. Trade payables, reserves and borrowings are balance sheet items and belong in a common-size balance sheet. Classifying items by statement is the first step in preparing either statement.

Question 34Financial Statement Analysis: Comparative and Common-Size Statements

An analyst wants to compare the cost structure of two firms where one has sales of Rs. 50 lakh and the other Rs. 500 lakh. The most appropriate tool is:

  1. A comparative statement of the two firms for the same year
  2. A common-size statement of profit and loss for each firm Correct answer.
  3. A trend analysis of each firm over ten years
  4. A cash flow statement for each firm

Explanation

Common-size statements remove the effect of size by expressing each expense as a percentage of sales, making the two cost structures directly comparable. Comparative statements work best for one firm across years, not across firms of very different scale. Trend and cash flow analysis answer different questions.

Question 35Financial Statement Analysis: Comparative and Common-Size Statements

In a comparative statement, an item shows a negative percentage change of 40 per cent. This means the item has:

  1. Decreased to 40 per cent of its base-year amount
  2. Increased by 40 per cent over the base year
  3. Decreased to 60 per cent of its base-year amount Correct answer.
  4. Remained unchanged in absolute terms

Explanation

A negative change of 40 per cent means the current amount is the base amount less 40 per cent of it, that is, 60 per cent of the base. The figure describes the movement, not the resulting level. Confusing the percentage fall with the remaining percentage is a common error.

Question 36Financial Statement Analysis: Comparative and Common-Size Statements

Which statement about the preparation of common-size statements is correct?

  1. The statement must cover at least five years
  2. Each item of the current year is divided by the corresponding item of the previous year
  3. The base item is taken as 100 and every other item is expressed relative to it Correct answer.
  4. Only items that have changed are shown as percentages

Explanation

In common-size form, the chosen base, such as net sales or the balance sheet total, is set at 100 and all other items are expressed as a proportion of it. There is no requirement to show only changed items or to cover a fixed number of years. Comparatives across years use a different calculation.

Question 37Financial Statement Analysis: Comparative and Common-Size Statements

A firm's current liabilities are 40 per cent of total liabilities and equity in Year 1 and 55 per cent in Year 2. Which interpretation is most consistent with this common-size result?

  1. The firm has reduced its reliance on short-term funds
  2. The firm's liquidity position has improved
  3. The firm has increased its reliance on short-term funds Correct answer.
  4. Total liabilities and equity have fallen

Explanation

A rising share of current liabilities in the total indicates that short-term obligations are financing a larger part of the balance sheet. This typically raises refinancing and liquidity risk. The common-size percentage says nothing about whether the total itself rose or fell.

Question 38Financial Statement Analysis: Comparative and Common-Size Statements

When preparing a comparative statement of profit and loss, the percentage change for each expense is computed on the basis of:

  1. Net profit of the base year
  2. Net sales of the base year
  3. That expense's own amount in the base year Correct answer.
  4. Total expenses of the base year

Explanation

The comparative technique measures each item's movement against its own base-year value, so each line has its own denominator. Using net sales or total expenses would turn the exercise into a common-size statement. The two techniques therefore answer different questions about the same data.

Question 39Financial Statement Analysis: Comparative and Common-Size Statements

Which of these is a genuine advantage of common-size statements over comparative statements?

  1. They reveal the direction of change over several years
  2. They permit comparison of firms with different levels of sales or total assets Correct answer.
  3. They show the rupee amount of every item
  4. They eliminate the effects of inflation on reported figures

Explanation

Common-size statements scale every item to a common base, so a small firm and a large firm can be compared on structure and cost ratios. Comparative statements are better at showing the direction of change across years. Neither technique adjusts for inflation.

Question 40Financial Statement Analysis: Comparative and Common-Size Statements

If opening inventory, purchases and closing inventory all double while sales remain unchanged in a common-size income statement, the ratio of cost of goods sold to sales will:

  1. Fall by half
  2. Double Correct answer.
  3. Become indeterminate without the rupee amounts
  4. Remain unchanged

Explanation

Cost of goods sold is opening inventory plus purchases less closing inventory, so doubling all three components doubles the cost of goods sold. With sales unchanged, the cost-to-sales percentage therefore doubles. Common-size ratios respond proportionately when only the numerator changes.

Question 41Financial Statement Analysis: Comparative and Common-Size Statements

A comparative balance sheet shows Share Capital unchanged at Rs. 5,00,000 while Reserves rise from Rs. 1,00,000 to Rs. 1,50,000. The percentage change to be reported against Reserves is:

  1. 33.33 per cent
  2. 25 per cent
  3. 10 per cent
  4. 50 per cent Correct answer.

Explanation

The increase is Rs. 50,000 on a base of Rs. 1,00,000, giving 50 per cent. Share capital shows no change and would be reported as nil. Each item is measured against its own base-year amount, not against share capital.

Question 42Financial Statement Analysis: Comparative and Common-Size Statements

The chief reason a common-size statement of profit and loss is preferred when benchmarking against an industry average is that:

  1. It reports figures net of tax
  2. It converts all figures to a single currency
  3. It expresses each expense as a percentage of sales, matching the form in which industry averages are published Correct answer.
  4. It avoids the need for a base year

Explanation

Industry benchmarks are usually published as ratios to sales, so a common-size statement places the firm's figures on the same footing. This makes line-by-line comparison of cost structure possible. The technique does not deal with tax, currency conversion or the absence of a base.

Question 43Financial Statement Analysis: Comparative and Common-Size Statements

Which situation would make a comparative statement least informative?

  1. A firm with a single product line
  2. A firm whose accounting policies changed materially between the two years Correct answer.
  3. A firm with steady sales growth over five years
  4. A firm that reports both gross and net sales

Explanation

Comparative percentages assume the figures are measured on a consistent basis. A change in accounting policy, such as a shift in inventory valuation, breaks comparability and can make the reported change reflect the policy rather than performance. Steady growth, a single product and sales disclosure do not impair comparison.

Question 44Financial Statement Analysis: Comparative and Common-Size Statements

In common-size analysis of a balance sheet, an increase in the percentage of fixed assets from 45 per cent to 52 per cent indicates that:

  1. Total assets have grown faster than fixed assets
  2. Fixed assets have grown faster than total assets Correct answer.
  3. Fixed assets are now fully depreciated
  4. Fixed assets have been sold during the year

Explanation

A rising common-size share means the item grew at a faster rate than the base to which it is related. Here fixed assets outpaced total assets, suggesting capital expenditure or a shift toward a more asset-heavy structure. The percentage alone says nothing about depreciation status.

Question 45Ratio Analysis

In ratio analysis, what does the term 'liquidity' refer to?

  1. The proportion of debt in the total capital structure of a firm
  2. The ability of a firm to meet its short-term obligations as they fall due Correct answer.
  3. The speed with which inventory is converted into finished goods
  4. The ability of a firm to earn a profit from its long-term investments

Explanation

Liquidity measures whether a firm can settle obligations due within one year using current assets such as cash, debtors and inventory. It is assessed through ratios like the current ratio and quick ratio, which compare short-term assets with short-term liabilities.

Question 46Ratio Analysis

Current assets are ₹4,80,000 and current liabilities are ₹2,40,000. What is the current ratio?

  1. 0.5 : 1
  2. 2 : 1 Correct answer.
  3. 1 : 1
  4. 4 : 1

Explanation

The current ratio is current assets divided by current liabilities, so ₹4,80,000 ÷ ₹2,40,000 gives 2. It is expressed as 2 : 1, meaning the firm holds two rupees of current assets for every rupee of current liability.

Question 47Ratio Analysis

Which ratio is computed by dividing quick assets by quick liabilities?

  1. Gross profit ratio
  2. Acid-test ratio Correct answer.
  3. Debt-equity ratio
  4. Proprietary ratio

Explanation

The acid-test or quick ratio divides liquid assets (current assets less stock and prepaid expenses) by quick liabilities. It is a stricter liquidity test because it excludes inventory, which may not be readily convertible into cash.

Question 48Ratio Analysis

A firm has net credit sales of ₹6,00,000 and average trade debtors of ₹1,00,000. What is the debtors turnover ratio?

  1. 12 times
  2. 4 times
  3. 2 times
  4. 6 times Correct answer.

Explanation

Debtors turnover equals net credit sales divided by average debtors, that is ₹6,00,000 ÷ ₹1,00,000 = 6 times. A higher turnover indicates faster collection of receivables and better management of working capital.

Question 49Ratio Analysis

What does the debt-equity ratio primarily measure?

  1. The relative claim of outsiders and owners on the firm's assets Correct answer.
  2. The margin of safety available to creditors in the short run
  3. The proportion of profit retained in the business each year
  4. The efficiency with which fixed assets are used to generate sales

Explanation

The debt-equity ratio expresses long-term outside liabilities as a proportion of shareholders' funds, showing the relative stake of creditors and owners. A high ratio signals greater financial risk because outsiders' claims are large relative to owners' funds.

Question 50Ratio Analysis

Which of the following is classified as a profitability ratio?

  1. Current ratio
  2. Net profit ratio Correct answer.
  3. Interest coverage ratio
  4. Inventory turnover ratio

Explanation

Profitability ratios measure the earning capacity of a firm, and the net profit ratio (net profit after tax divided by net sales) is one of them. It shows how much of each rupee of sales remains as profit after all expenses.