Notes And Questions NCERT Class 12 Accountancy Chapter 5 Accounting Ratios

Please refer to Accounting Ratios Class 12 Accountancy notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Accountancy books for Class 12. You can go through the questions and solutions below which will help you to get better marks in your examinations.

Class 12 Accountancy Accounting Ratios Notes and Questions

ACCOUNTING RATIOS

Meaning:
A ratio is a mathematical number calculated as a reference to relationship of two or more numbers and can be expressed as a fraction, proportion, percentage and a number of times. When the number is calculated by referring to two accounting numbers derived from the financial statements, it is termed as accounting ratio. It needs to be observed that accounting ratios exhibit relationship, if any, between accounting numbers ex-tracted from financial statements. Ratios are essentially derived numbers and their efficacy depends a great deal upon the basic numbers from which they are calculated. Further, a ratio must be calculated using num-bers which are meaningfully correlated.

Objectives of Ratio Analysis:
Ratio analysis is indispensable part of interpretation of results revealed by the financial statements. It pro-vides users with crucial financial information and points out the areas which require investigation. Ratio analysis is a technique which involves regrouping of data by application of arithmetical relationships, though its interpretation is a complex matter. It requires a fine understanding of the way and the rules used for preparing financial statements. Once done effectively, it provides a lot of information which helps the ana-lyst:

1. To know the areas of the business which need more attention;
2. To know about the potential areas which can be improved with the effort in the desired direction;
3. To provide a deeper analysis of the profitability, liquidity, solvency and efficiency levels in the busi-ness;
4. To provide information for making cross-sectional analysis by comparing the performance with the best industry standards; and
5. To provide information derived from financial statements useful for making projections and estimates for the future.

Importance (or Advantages) of Ratio Analysis:
1. Helps to understand efficacy of decisions: The ratio analysis helps you to understand whether the business firm has taken the right kind of operating, investing and financing decisions. It indicates how far they have helped in improving the performance.
2. Simplify complex figures and establish relationships: Ratios help in simplifying the complex ac-counting figures and bring out their relationships. They help summarise the financial information effectively and assess the managerial efficiency, firm’s credit worthiness, earning capacity, etc.
3. Helpful in comparative analysis: The ratios are not be calculated for one year only. When many year figures are kept side by side, they help a great deal in exploring the trends visible in the business. The knowledge of trend helps in making projections about the business which is a very useful feature.
4. Identification of problem areas: Ratios help business in identifying the problem areas as well as the bright areas of the business. Problem areas would need more attention and bright areas will need polishing to have still better results.
5. Enables SWOT analysis: Ratios help a great deal in explaining the changes occurring in the business. The information of change helps the management a great deal in understanding the current threats and opportunities and allows business to do its own SWOT (Strength-Weakness-Opportunity-Threat) analysis.
6. Various comparisons: Ratios help comparisons with certain bench marks to assess as to whether firm’s performance is better or otherwise. For this purpose, the profitability, liquidity, solvency, etc. of a business, may be compared: (i) over a number of accounting periods with itself (Intra-firm Com-parison/Time Series Analysis), (ii) with other business enterprises (Inter-firm Comparison/Crosssec-tional Analysis) and (iii) with standards set for that firm/industry (comparison with standard (or in-dustry expectations).

Types of Ratios

1. Liquidity Ratios: To meet its commitments, business needs liquid funds. The ability of the business to pay the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure it are known as ‘Liquidity Ratios’. These are essentially short-term in nature.
2. Solvency Ratios: Solvency of business is determined by its ability to meet its contractual obligations towards stakeholders, particularly towards external stakeholders, and the ratios calculated to measure solvency position are known as ‘Solvency Ratios’. These are essentially long-term in nature
3. Activity (or Turnover) Ratios: This refers to the ratios that are calculated for measuring the effi-ciency of operations of business based on effective utilisation of resources. Hence, these are also known as ‘Efficiency Ratios’.
4. Profitability Ratios: It refers to the analysis of profits in relation to revenue from operations or funds (or assets) employed in the business and the ratios calculated to meet this objective are known as ‘Profitability Ratios’.

(1) Liquidity Ratios:
(a) Current Ratio Current Ratio = Current Assets : Current Liabilities or Current Assets / Current Liabilities Current assets include current investments, inventories, trade receivables (debtors and bills receivables), cash and cash equivalents, short-term loans and advances and other current assets such as prepaid expenses, ad-vance tax and accrued income, etc. Current liabilities include short-term borrowings, trade payables (creditors and bills payables), other current liabilities and short-term provisions
(b) Quick Ratio/Liquid Ratio
It is the ratio of quick (or liquid) asset to current liabilities. It is expressed as Quick ratio = Quick Assets: Current Liabilities or Quick Assets / Current Liabilities

(2) Solvency Ratios

(a) Debt-Equity Ratio:
Debt-Equity Ratio measures the relationship between long-term debt and equity. If debt component of the total long-term funds employed is small, outsiders feel more secure.
Debt-Equity Ratio = Long term Debts / Shareholders’ Funds
Where:
Shareholders’ Funds (Equity) = Share capital + Reserves and Surplus + Money received against share warrants
Share Capital = Equity share capital + Preference share capital
Or
Shareholders’ Funds (Equity) = Non-current assets + Working capital − Non-current liabilities
Working Capital = Current Assets − Current Liabilities

(b) Total Assets to Debt Ratio
This ratio measures the extent of the coverage of long-term debts by assets
Total assets to Debt Ratio = Total assets/Long-term debts

(c) Proprietary Ratio:
Proprietary ratio expresses relationship of proprietor’s (shareholders) funds to net assets and is calculated as follows:
Proprietary Ratio = Shareholders, Funds / Capital employed (or net assets)
Significance: Higher proportion of shareholders’ funds in financing the assets is a positive feature as it pro-vides security to creditors. This ratio can also be computed in relation to total assets instead of net assets (capital employed)

(d) Interest Coverage Ratio:
It is a ratio which deals with the servicing of interest on loan. It is a measure of security of interest payable on long-term debts. It expresses the relationship between profits available for payment of interest and the amount of interest payable.

It is calculated as follows:
Interest Coverage Ratio = Net Profit before Interest and Tax / Interest on long-term debts
Significance: It reveals the number of times interest on long-term debts is covered by the profits available for interest. A higher ratio ensures safety of interest on debts. (e) The debt-to-capital employed ratio : It is a measurement of a company’s financialleverage. The debt-to-capital ratio is calculated by taking the company’s interest-bearing debt, both short- and long-term liabilities and dividing it by the total capital.
Debt-to-Capital Ratio = Debt / Debt + Shareholder’s Equity

(3) Activity (or Turnover) Ratios

These ratios indicate the speed at which, activities of the business are being performed. The activity ratios express the number of times assets employed. Higher turnover ratio means better utilisation of assets and signifies improved efficiency and profitability, and as such is known as efficiency ratios.
(a) Inventory Turnover Ratio: It determines the number of times inventory is converted into revenue from operations during the accounting period under consideration. It expresses the relationship between the cost of revenue from operations and average inventory
The formula for its calculation is as follows:
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory

(b) Trade Receivables Turnover Ratio:
It expresses the relationship between credit revenue from operations and trade receivable. It is calculated as follows:
Trade Receivable Turnover ratio = Net Credit Revenue from Operations / Average Trade Receivable
Where Average Trade Receivable = (Opening Debtors and Bills Receivable + Closing Debtors and Bills Receivable)/2

(c) Trade Payable Turnover Ratio:
Trade payables turnover ratio indicates the pattern of payment of trade payable. As trade payable arise on account of credit purchases, it expresses relationship between credit purchases and trade payable.
It is calculated as follows:
Trade Payables Turnover ratio = Net Credit purchases / Average trade payable
Where,
Average Trade Payable = (Opening Creditors and Bills Payable + Closing Creditors and Bills Payable)/2

Average Payment Period = No. of days/month in a year ÷Trade Payables Turnover Ratio
(d) Working Capital Turnover Ratio: It reflects relationship between revenue from operations and net assets (capital employed) in the business.
Working capital turnover ratio = Net Revenue from Operation / Working Capital

(e)The Fixed Asset Turnover ratio: It reveals how efficient a company is at generating sales from its existing fixed assets. A higher ratio implies that management is using its fixed assets more effectively. A high FAT ratio does not tell anything about a company’s ability to generate solid profits or cash flows.
Fixed Asset Turnover Ratio = Revenue from operations/ Net Fixed Assets
or
Fixed Asset Turnover =
Revenue from operations/ (Gross Fixed Assets – Accumulated Depreciation) (f) Net Asset Turnover ratio: The asset turnover ratio measures the efficiency of a company’s assets in generating revenue or sales. It shows the efficiency of a company to convert its assets into sales. As asset turnover is calculated as net sales of a percentage of assets, it shows how much sales have been made for each rupee of assets.
Revenue from operations / net Assets or capital employed

4) Profitability Ratios

Profitability ratios are calculated to analyse the earning capacity of the business which is the outcome of utilisation of resources employed in the business. There is a close relationship between the profit and the efficiency with which the resources employed in the business are utilised.

(a) Gross Profit Ratio: Gross profit ratio as a percentage of revenue from operations is computed to have an idea about gross margin. It is computed as follows:
Gross Profit Ratio = Gross Profit / Net Revenue of Operations × 100
(b) Operating Ratio: It is computed to analyse cost of operation in relation to revenue from operations.
It is calculated as follows:
Operating Ratio = (Cost of Revenue from Operations + Operating Expenses)/ Net Revenue from Operations × 100

(b) Operating Profit Ratio
It is calculated to reveal operating margin. It may be computed directly or as a residual of operating ratio. It is calculated as under:
Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100
Where,
Operating Profit = Revenue from Operations − Operating Cost
(d) Net Profit Ratio: It relates revenue from operations to net profit after operational as well as non-opera-tional expenses and incomes.
It is calculated as under:
Net Profit Ratio = Net profit / Revenue from Operations × 100

(e) Return on Capital Employed or Investment: Capital employed means the long-term funds employed in the business and includes shareholders’ funds, debentures and long-term loans.
Capital employed may be taken as the total of non-current assets and working capital. Profit refers to the Profit before Interest and Tax (PBIT) for computation of this ratio.
Thus, it is computed as follows:
Return on Investment (or Capital Employed) = Profit before Interest and Tax / Capital Employed × 100

Question. Ratio of Current Assets (Rs.6,00,000) to Current Liabilities (Rs.4,00,000) is 1.5:1. The ac-countant of the firm is interested in maintaining a Current Ratio of 2:1, by paying a part of the current liabilities. How much amount of current liabilities should be paid so that current ratio at the level of 2:1 may be maintained?
(a) Rs.4,00,000
(b) Rs.3,00,000
(c) Rs.2,00,000
(d) Rs.1,00,000

Question. ‘Return on Investment’ (ROI) is calculated under:
(a) Liquidity Ratio
(b) Solvency Ratio
(c) Profitability Ratio
(d) Activity Ratio

Question. Which of the following item is not included to the current assets while calculating cur-rent ratio?
(a) Cash and Cash Equivalents
(b) Only Loose Tools
(c) Only Stores and Spares
(d) Both Loose Tools and Stores & Spares

Question. Deep Ltd. has a Current Ratio of 3.5:1 and Quick Ratio of 1.5:1. If the excess of current assets over quick assets as represented by stock is Rs.60,000, what will be the value of current as-sets and current liabilities?
(a) Current Assets Rs. 1,20,000 and Current Liabilities Rs.30,000
(b) Current Assets Rs. 1,05,000 and Current Liabilities Rs.30,000
(c) Current Assets Rs. 1,05,000 and Current Liabilities Rs.40,000
(d) Current Assets Rs. 1,20,000 and Current Liabilities Rs.40,000

Question. Cash Balance 15,000; Trade Receivables 35,000; Inventory 40,000;
Trade Payables 24,000 and Bank Overdraft is 6,000. Current Ratio will be:
(a) 3.75: 1
(b) 3:1
(c) 1:3
(d) 1:3.75

Question. A company’s Current Ratio is 2: 1. After cash payment to some of its creditors, Current Ratio will:
(a) Decrease
(b) As before
(c) Increase
(d) None of these

Question. A Company’s Current Assets are 8,00,000 and its current liabilities are 4,00,000. Subsequently, it purchased goods for 1,00,000 on credit. Current ratio will be………….
(a) 2:1
(b) 2.25:1
(c) 1.8:1
(d) 1.6:1

Question. A company’s Current assets are ₹3,00,000 and its current liabilities are 2,00,000. Subse-quently, it paid 50,000 to its trade payables. Current ratiowill be………..
(a) 2:1
(b) 1.67: 1
(c) 1.25:1
(d) 15:1

Question. The Current Ratio of a company is 1.8:1 and its Quick Ratio is 1.6: 1.
From the following transactions, pick out the transaction which involves an increase in both the Current Ratio and Quick Ratio:
(a) Goods worth 10,000 sold at a loss of ₹2,000.
(b) Insurance premium of 3,000 paid in advance.
(c) Plant and Machinery purchased for ₹9,000.
(d) Bills Payable of ₹2,000 honoured on the due date.

Question. Inventory Turnover Ratio is:
(a) Average Inventory/Revenue from Operations
(b) Average Inventory/Cost of Revenue from Operations
(c) Cost of Revenue from Operations/Average Inventory
(d) G.P/Average Inventory

Question. Which of the following is not operating expenses?
(a)office expenses
(b) selling expenses
(c) bad debts
(d) loss by fire

Question. Revenue from Operations 8,00,000; Gross Profit Ratio 25%; Opening Inventory 1,00,000; Closing Inventory 60,000. Inventory Turnover Ratiowill be:
(a) 10 Times
(b) 7.5 Times
(c) 8 Times
(d) 12.5 Times

Question. On the basis of following data, the cost of revenue from operations by acompany will be: Opening Inventory 70,000; Closing Inventory 80,000; Inventory Turnover Ratio 6 Times.
(a) 1,50,000
(b) 90,000
(c) 4,50,000
(d) 4,80,000

Question. Assertion (A): Liquidity Ratios are used to assess the short-term financial obligations of the firm.
Reason (R): Current Ratio and Acid-test Ratio are two liquidity ratios which measure the firm’s ability to meet its current obligations in time.
In the context of the above two statements, which of the following is correct
Codes:
(a) Both (A) and (R) are correct and (R) is the correct reason of (A).
(b) Both (A) and (R) are correct but (R) is not the correct reason of (A)
(c) Only (R) is correct.
(d) Both (A) and (R) are wrong.

Question. Assertion (A): A high Operating Ratio indicates a favourable position.
Reason (R): A high Operating Expenses leaves a high margin to meet Non-operating expenses.
In the context of the above two statements, which of the following is correct?
Codes:
(a) (A) and (R) both are correct and (R) correctly explains (A).
(b) Both (A) and (R) are correct but (R) does not explain (A).
(c) Both (A) and (R) are incorrect.
(d) (A) is correct but (R) is incorrect.

Question. Assertion (A): If Gross Profit Ratio is 20%, goods for 50,000 sold to employees at cost will decrease the ratio.
Reason (R): There will be no change in Gross Profit Ratio, because both Cost of Revenue from Operations and Revenue from Operations will increase by the sameamount
In the context of the above two statements, which of the following is correct?
(a) (A) and (R) both are correct and (R) correctly explains (A).
(b) Both (A) and (R) are correct but (R) does not explain (A).
(c) Both (A) and (R) are incorrect.
(d) (A) is correct but (R) is incorrect.

Read the following case study and answer questions 17 to 21.

FORTUNE Ltd. is a com-pany engaged in textilebusiness having a share capital of Rs. 2,00,000.
Rema, the accountant of the firm is analysingits financial figures and intends to prepare its statement of profit and loss for 2021. The sales of the company during this period were 7,00,000 and sales return were 40,000. Its purchases were 4,95,000, wages amounted to 1,00,000, salaries amounted to 15,000, rent amounted to 9,900, sundry expenses were worth 14,100 and also there was a discount (Cr.) worth 10,000.

Question. What is the amount that will be shown in revenue from operations in the statement of profit and loss?
(a) 7,00,000
(b) 7,40,000
(c) 6,60,000
(d) 28.10,000

Question. What is the amount that will be shownin other income in the statement ofprofit and loss?
(a) 5,000
(b) 10,000
(c) 20,000
(d) None of these

Question. What is the amount that will be shown in employee benefit expenses in the statement of profit and loss?
(a) 71,00,000
(b) 15.000
(c) 1,07,500
(d)1,15,000

Question. What is the amount that will be shownin other expenses in the statement ofprofit and loss?
(a) 24,000
(b) 14,100
(c) 9,900
(d) None of these

Question. Calculate ‘Liquidity Ratio’ from the following information:
Current liabilities = Rs. 50,000
Current assets = Rs. 80,000
Inventories = Rs. 20,000
Advance tax = Rs. 5,000
Prepaid expenses = Rs. 5,000
Answer.
Liquidity Ratio = Liquid Assets/Current Liabilities
Liquidity Assets = Current assets − (Inventories + Prepaid expenses + Advance tax)
= Rs. 80,000 − (Rs. 20,000 + Rs. 5,000 + Rs. 5,000) = Rs. 50,000
Liquidity Ratio = Rs. 50,000 / 50,000 = 1 : 1.

Question. X Ltd., has a current ratio of 3.5 : 1 and quick ratio of 2 : 1. If excess of current assets over quick assets represented by inventories is Rs. 24,000, calculate current assets and current liabilities.
Answer.Current Ratio = 3.5 : 1 Quick Ratio = 2 : 1
Let Current liabilities = x
Current assets = 3.5x and
Quick assets = 2x
Inventories = Current assets − Quick assets
24,000 = 3.5x − 2x
24,000 = 1.5x
Current Liabilities = Rs. 16,000
Current Assets = 3.5x = 3.5 × Rs. 16,000 = Rs. 56,000.
Verification:
Current Ratio = Current assets : Current liabilities
= Rs. 56,000 : Rs. 16,000
= 3.5: 1
Quick Ratio = Quick assets : Current liabilities
= Rs. 32,000 : Rs. 16,000 = 2 : 1

Question. From the following information calculate Debt equity Ratio:-
Share capital: 10,000 shares of 10 eachRs. 1,00,000,
debentures Rs.75,000
General Reserve45000, Long term provision Rs.25,000
Surplus Rs.30,000 Outstanding Expenses Rs.10,000
Answer.Debt to equity ratio = Debt / Equity (shareholder funds) = 1,00,000 / 1,75,000 = 0.57 : 1
Debt = Debentures + Long term provisions = 75,000 + 25,000 = 1,00,000
Equity = Share Capital + General Reserve + Surplus = 1,00,000 + 45,000 + 30,000 = 1,75,000

Question. Shareholders’ funds Rs. 14,00,000
Total Debts (Liabilities) Rs. 18,00,000
Current Liabilities = Rs. 2,00,000.
Calculate total assets to debt ratio.
Answer.Total Assets to debt ratio = Total Assets / Long term Debts
= 32,00,000 / 16,00,000 = 2 : 1
Long term debts = total debts (Liabilities) − Current Liabilities
= 18,00,000 − 2,00,000 = 16,00,000
Total assets = shareholder funds + total debts (liabilities)

Question. From the following details, calculate interest coverage ratio:
Net Profit after tax Rs. 60,000; 15% Long-term debt 10,00,000; and Tax rate 40%.
Answer.Net Profit after Tax = Rs. 60,000
Tax Rate = 40%
Net Profit before tax = Net profit after tax × 100/ (100 − Tax rate)
= Rs. 60,000 × 100/(100 − 40)
= Rs. 1,00,000
Interest on Long-term Debt = 15% of Rs. 10,00,000 = Rs. 1,50,000
Net profit before interest and tax = Net profit before tax + Interest
= Rs. 1,00,000 + Rs. 1,50,000 = Rs. 2,50,000
Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on long-term debt
= Rs. 2,50,000/Rs. 1,50,000
= 1.67 times

Question. From the following information, calculate inventory turnover ratio:
Inventory in the beginning = 18,000
Inventory at the end = 22,000
Net purchases = 46,000
Wages = 14,000
Revenue from operations = 80,000
Carriage inwards = 4,000
Answer.
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Cost of Revenue from Operations = Inventory in the beginning + Net Purchases + Wages + Carriage inwards − Inventory at the end
= Rs. 18,000 + Rs. 46,000 + Rs. 14,000 + Rs. 4,000 − Rs. 22,000 = Rs. 60,000
Average Inventory = Inventory in the beginning + Inventory at the end / 2
= Rs. 18,000 + Rs. 22,000/ 2 = Rs. 20,000
∴ Inventory Turnover Ratio = Rs. 60,000/ Rs. 20,000 = 3 Times

Question. Calculate the Trade receivables turnover ratio from the following information:
Total Revenue from operations 4,00,000
Cash Revenue from operations 20% of Total Revenue from operations
Trade receivables as at 1.4.2020Rs.40,000
Trade receivables as at 31.3.2021Rs.1,20,000
Answer.Trade Receivables Turnover Ratio = Net Credit Revenue from Operations / Average Trade Receivables
Credit Revenue from operations = Total revenue from operations − Cash revenue from operations
Cash Revenue from operations = 20% of Rs. 4,00,000
= Rs. 4,00,000 × 20 / 100 = Rs. 80,000
Credit Revenue from operations = Rs. 4,00,000 − Rs. 80,000 = Rs. 3,20,000
Average Trade Receivables = Opening Trade Receivables + Closing Trade Receivables / 2
= Rs. 40,000 + Rs. 1,20,000 / 2 = Rs. 80,000
= Net Credit Revenue Form Operations / Average Inventory
= Rs. 3,20,000 / Rs. 80,000 = 4 times.

Question. Calculate the Trade payables turnover ratio from the following figures:
Credit purchases during 2020-21 = 12,00,000
Creditors on 1.4.2020 = 3,00,000
Bills Payables on 1.4.2020 = 1,00,000
Creditors on 31.3.2021 = 1,30,000
Bills Payables on 31.3.2021 = 70,000
Answer.Trade Payables Turnover Ratio = Net Credit Purchases / Average Trade Payables
Average Trade Payables = Creditors in the beginning + Bills payables in the beginning + Creditors at the end + Bills payables at the end / 2
= Rs. 3,00,000 + Rs. 1,00,000 + Rs. 1,30,000 + Rs. 70,000 2 = Rs. 3,00,000
∴ Trade Payables Turnover Ratio = Rs. 12,00,000 / Rs. 3,00,000 = 4 times

Question. From the following information, calculate –
Trade receivables turnover ratio
Average collection period
Trade payable turnover ratio
Given:
Revenue from Operations Rs.8,75,000
Creditors Rs.90,000
Bills receivable Rs.48,000
Bills payable Rs.52,000
Purchases Rs.4,20,000
Trade debtors Rs.59,000
Answer.Trade Receivables Turnover Ratio = Net Credit Revenue from operation / Average Trade Receivable
= Rs. 8, 75,000 / (Rs. 59,000 + Rs. 48,000) = 8.18 times
Average Collection Period = 365 / Trade Receivables Turnover Ratio = 365 / 8.18 = 45 days
Trade Payable Turnover Ratio = Purchases / Average Trade Payables
= Purchases / Creditors + Bills payable
= 4,20,000 / 90,000 + 52,000
= 4,20,000 / 1,42,000 = 2.96 times

Question. Following information is available for the year 2020-21, calculate gross profit ratio:
Revenue from Operations: Cash Rs.25,000
Credit Rs.75,000
Purchases: Cash Rs15,000
Credit Rs60,000
Carriage Inwards Rs2,000
Salaries Rs25,000
Decrease in Inventory Rs10,000
Return Outwards Rs2,000
Wages Rs5,000
Answer.Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Op-eration
= Rs.25, 000 + Rs.75, 000 = Rs. 1,00,000
Net Purchases = Cash Purchases + Credit Purchases − Return Outwards
= Rs. 15,000 + Rs. 60,000 − Rs. 2,000 = Rs. 73,000
Cost of Revenue from operations = Purchases + (Opening Inventory − Closing Inven-tory) + Direct Expenses
= Purchases + Decrease in inventory + Direct Expenses
= Rs. 73,000 + Rs. 10,000 + (Rs. 2,000 + Rs. 5,000)
= Rs. 90,000
Gross Profit = Revenue from Operations − Cost of Revenue from Operation 234
= Rs. 1,00,000 − Rs. 90,000 = Rs. 10,000
Gross Profit Ratio = Gross Profit/Net Revenue from Operations × 100
= Rs.10,000/Rs.1,00,000 × 100 = 10%.

Question. Given the following information:
Revenue from Operations 3,40,000
Cost of Revenue from Operations 1,20,000
Selling expenses 80,000
Administrative Expenses 40,000
Calculate Gross profit ratio and Operating ratio.
Answer.Gross Profit = Revenue from Operations − Cost of Revenue from Operations
= Rs. 3,40,000 − Rs. 1,20,000
= Rs. 2,20,000
Gross Profit Ratio = Gross Profit / Revenue from operation × 100
= Rs. 2,20,000 / Rs. 3,40,000 × 100 = 64.71%
Operating Cost = Cost of Revenue from Operations + Selling Expenses + Administrative Expenses
= Rs. 1,20,000 + 80,000 + 40,000 = Rs. 2,40,000
Operating Ratio = Operating Cost / Net Revenue from Operations × 100
= Rs. 2,40,000 / Rs. 3,40,000 x 100 = 70.59%

Question. Net profit after interest but before tax1,40,000; 15% Long-term debts Rs.4,00,000, Share holder’s funds 2,40,000; Tax rate 50%. Calculate Return on Capital employed.
Answer.
Return on Capital Employed/capital employed x100
Calculation of Profit before Interest and Tax
Net Profit after Interest but before Tax Interest =1,40,000
(15% on 4,00,000) =60,000
Net Profit before Interest andTax =2,00,000
Capital Employed
Shareholder’s Funds + Long-term Debts= 2,40,000 +4,00,000 =6,40,000
Return on Capital Employed =2,00,000/6,40,000x 100 =31.25%

Question. Fixed Assets or Non-current Assets (at cost) 7,00,000, Accumulated Depreciation
1,00,000,Revenue from Operations 18,00,000. Calculate Fixed Assets/Non-current Assets turnover Ratio.
Answer.Fixed Assets/Non-current Assets Turnover Ratio=
Revenue from Operations/ Net Fixed Assets
18,00,000/6,00,000=3 Times
“Net Fixed Assets = Fixed Assets (at Cost) – Accumulated Depreciation
=7,00,000-1,00,000=6,00,000.

Question. Based on the following information :
Calculate Net Assets or Capital Employed Turnover Ratio:
Shareholders’ Funds 40,00,000, Equity Share Capital 15,00,000, 7% Preference Share Capital 10,00,000, Reserves and Surplus 15,00,000, 8% Debentures 10,00,000 and Revenue om Oper-ations75,00,000
Answer.
Net Assets or Capital Employed Turnover Ratio =
Revenue from Operations /Net Assets or Capital Employed
= 75,00,000/5000000=1.5 Times
Revenue from Operations= 75,00,000 (Given)
Capital Employed (Note) – Shareholders’ Funds + Long-term Borrowings