1. Which of the following transactions will IMPROVE the "Current Ratio" of a company, if the ratio is currently 1.5:1?
Sale of Fixed Assets for Cash.
Collection from Debtors.
Purchase of Stock on Credit.
Payment of Current Liabilities.
Explanation:
If CR > 1, reducing both Current Assets (Cash) and Current Liabilities (Creditors) by the same amount increases the ratio. E.g., (150-50)/(100-50) = 100/50 = 2:1 (Improved from 1.5:1).
2. A high "Proprietary Ratio" indicates:
High reliance on external debt.
Low risk to creditors and a strong financial position.
High risk to creditors.
Over-trading.
Explanation:
Proprietary Ratio = Shareholders' Funds / Total Assets. A high ratio means a larger portion of assets is funded by owners' equity, providing a greater safety margin for creditors.
3. Which of the following assets is excluded from Current Assets to calculate "Quick Assets" (Liquid Assets)?
Inventories (Stock) and Prepaid Expenses.
Cash and Bank Balance.
Sundry Debtors.
Short-term Investments.
Explanation:
Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities. Inventory is considered less liquid because it takes time to sell.
4. The "Debt Service Coverage Ratio" (DSCR) calculation includes:
Gross Profit / Total Debt.
Net Profit / Interest.
Sales / Debt.
(Net Profit + Depreciation + Interest) / (Interest + Principal Installment).
Explanation:
DSCR measures the ability to pay debt obligations. The numerator represents operating cash flow available for debt service (Profit + Non-cash exp + Interest), and the denominator is the debt obligation.
5. Interest Coverage Ratio is calculated as:
EBIT / Interest
Net Profit / Interest
Total Assets / Interest
Sales / Interest
Explanation:
Earnings Before Interest and Tax (EBIT) represents the profit available to service debt. Dividing this by Interest expense shows how easily a company can pay interest.
6. According to the "DuPont Analysis" model, Return on Equity (ROE) is decomposed into three components. Which of the following is NOT one of them?
Current Ratio
Net Profit Margin
Asset Turnover Ratio
Financial Leverage (Equity Multiplier)
Explanation:
DuPont Analysis breaks ROE down into: 1. Net Profit Margin (Profitability), 2. Asset Turnover (Efficiency), and 3. Financial Leverage (Equity Multiplier). Current Ratio is a liquidity ratio, not part of the DuPont identity.
7. A company has an Interest Coverage Ratio of 8 times. This indicates:
The company has high debt.
The company has insufficient profit to pay interest.
The company has adequate profits to cover its interest obligations comfortably.
The company is making a loss.
Explanation:
Interest Coverage Ratio = EBIT / Interest. A ratio of 8 means the company earns 8 times the amount needed to pay interest, showing high solvency and safety.
8. If the Debt Service Coverage Ratio (DSCR) is less than 1, it implies:
The firm is debt-free.
The firm is not generating enough cash to service its current debt obligations.
The firm has excess cash.
The firm is generating enough cash to pay its debts.
Explanation:
DSCR < 1 is a danger signal. It means Operating Cash Flow is insufficient to cover Interest + Principal repayments. The firm may default unless it borrows more or sells assets.
9. Inventory Turnover Ratio is calculated as:
Cost of Goods Sold / Average Inventory
Gross Profit / Inventory
Purchases / Opening Stock
Sales / Closing Stock
Explanation:
This ratio measures how many times a company sells and replaces its stock of goods during a period. Ideally, COGS is used; if unavailable, Sales can be used.
10. Operating Profit Ratio is calculated as:
(Gross Profit / Sales) * 100
(Sales / Operating Assets) * 100
(Net Profit / Sales) * 100
(Operating Profit / Net Sales) * 100
Explanation:
Operating Profit (EBIT) measures profit from core business operations, excluding non-operating items like interest and tax. The ratio expresses this as a percentage of sales.
11. If Current Ratio is 2:1 and Working Capital is ?60,000, what is the amount of Current Assets?
?30,000
?1,20,000
?1,80,000
?60,000
Explanation:
CA/CL = 2/1. So CA = 2CL. Working Capital = CA - CL = 2CL - CL = CL. Given Working Capital = 60,000, so CL = 60,000. CA = 2 * CL = 1,20,000.