SEBI GRADE A 2020

                                                                   RATIO ANALYSIS

• Among the classification of ratios , Current Ratio is :

1.  Activity Ratio
2. Profitability Ratio
3. Solvency Ratio
4.  Liquidity Ratio

• Answer - (D) Liquidity Ratio
• The liquidity ratios are a result of dividing cash and other liquid assets by the short term borrowings and current liabilities. 

• Among the following ,Quick Assets do not include

1. Bank Balance
2. Prepaid Expenses
3. Short term Marketable Securities
4.  Trade Receivables

Answer - (B) Prepaid Expenses

Quick Assets = Current Assets – Inventory – Prepaid Expenses

• Which of the following transactions will improve the Current Ratio:

1. Credit purchase of Goods
2.  Cash Purchase of goods
3. Payment to Trade Payables
4.  Cash Collected from Trade Receivables

• Answer - (C) Payment to Trade Payables
• When trade payables are paid off it would reduce cash as well as creditors. This will increase the current ratio

• A Company’s current ratio is 2:1. Current liabilities of the firm is Rs. 80,000. The working capital of the company is-

1.    Rs. 1,60,000
2. Rs. 80,000
3. Rs. 2,40,000
4. None of the above

Answer – (B) Rs. 80,000

Explanation – CA/CL = 2/1 CA = 80000 x 2= 1,60,000

Working capital = CA –CL = 1,60,000-80,000 = Rs. 80,000

• Solvency Ratios are also called   -

1.    Liquidity ratios
2. Turnover ratios
3. Leverage ratios
4. None of the above

Answer – (C) Leverage ratios

Explanation –  Solvency ratios also known as leverage ratios determine an entity's ability to service its debt. 

• The Debt equity ratio of a company is     -

1.    Debt/ Equity
2. Long term debt / equity
3. Short + long term debt / Equity
4. None of the above

Answer – (B) Long term debt / equity

Explanation –  Debt  - equity ratio = Long term debt / share holder funds

•   The Debt equity ratio of a company is 2:1. it will increase in which case -

1. Credit purchases
2.  Issue of new shares for cash
3. Issue of Debentures for cash
4.  Redemption of Debentures

Answer – (C) Issue of Debentures for cash

Explanation –  Issue of Debentures for cash would lead to increase in numerator thus increasing the ratio.

• The Shareholder funds in the debt equity ratio includes-

1. Equity share capital+ Reserves & Surplus
2.  Equity share capital+ Preference share capital + Reserves & Surplus
3. Equity share capital +  Reserves & Surplus    + Profit & loss account
4.  Equity share capital +  Reserves & Surplus + Preference share capital   + Profit & loss account

Answer – (D) Equity share capital +  Reserves & Surplus + Preference share capital   + Profit & loss account

Explanation –  The shareholder funds include both equity & preference share capital along with reserves & surplus and profit or loss account. If there is a profit it is added and loss subtracted.

• Which ratio represents the debts being covered by assets-

1. Debt/ Equity Ratio
2.  Total Assets to Debt Ratio
3. Proprietary ratio
4.  Interest Coverage ratio

       Answer –   Total Assets to Debt Ratio

Explanation –  Total-debt-to-total-assets is a measure of the company's assets that are financed by debt rather than equity. This leverage ratio shows how a company has grown and acquired its assets over time. 

• When bonus shares are issued it would lead to what effect in debt-equity ratio-

1. Increase in debt-equity ratio
2.  Decrease in debt-equity Ratio
3. No effect
4.  None of the above

Answer –   c) No effect

Explanation –No effect will be there as equity capital is increased while reserve & surplus decreases. Hence, It would lead to no effect in the numerator or the denominator.

• Which ratio is known as Debt – Service Ratio-

1. Debt/ Equity Ratio
2.  Total Assets to Debt Ratio
3. Proprietary ratio
4.  Interest Coverage ratio

Answer –   (D) Interest Coverage ratio

Explanation –The interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. The ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by the company's interest expenses for the same period.

• Inventory turnover ratios can be expressed in-

1. times
2.  percentage
3. Pure ratio
4.  None of the above

Answer – (A) times

Explanation –  Inventory turnover ratio is given in times.

• If the inventory turnover ratio is divided into 365, it becomes a measure of

1.  Sales efficiency
2.  Average Age of Inventory
3.  Sales Turnover
4. Average Collection Period

Answer – (B) Average Age of Inventory

Explanation –  Average age of inventory – 365/ ITR