NCERT Solutions for Class 12 Accountancy Chapter 9: Accounting Ratios

These Class 12 Accountancy Chapter 9 solutions cover Accounting Ratios from the NCERT textbook Company Accounts and Analysis of Financial Statements (Part 2), updated for the 2026–27 session. The chapter explains how accounting ratios are used to assess the liquidity, solvency, activity (efficiency) and profitability of a business. Below you will find every Numerical Question from the textbook reproduced verbatim and solved step by step with full working and formulae, along with all Short and Long Answer questions, extra practice, MCQs, Assertion–Reason and FAQs.

Class: 12 Subject: Accountancy Book: Company Accounts & Analysis of Financial Statements Chapter: 9 – Accounting Ratios Type: Numerical + Theory Session: 2026–27
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Class 12 Accountancy Chapter 9 – Overview

An accounting ratio is a mathematical relationship between two accounting figures drawn from the financial statements, expressed as a fraction, proportion, percentage or number of times. Ratio analysis is a key tool of financial statement analysis: it simplifies complex figures, highlights problem areas, and enables intra-firm (time-series) and inter-firm (cross-sectional) comparisons. Functionally, ratios are grouped into four families — Liquidity ratios (current ratio, quick/acid-test ratio) measure short-term solvency; Solvency ratios (debt-equity, debt to capital employed, proprietary, total assets to debt, interest coverage) measure long-term stability; Activity or turnover ratios (inventory, trade receivables, trade payables, working capital, fixed assets and net-assets turnover) measure efficiency in using resources; and Profitability ratios (gross profit, operating, net profit, return on investment, EPS, book value, dividend payout, P/E) measure earning capacity. Ratios are means to an end and must be interpreted with care, since they inherit the limitations of the financial statements from which they are derived.

Key Concepts & Ratio Formulae

Liquidity

Current Ratio = Current Assets ÷ Current Liabilities

Quick (Liquid / Acid-Test) Ratio = Quick Assets ÷ Current Liabilities,  where Quick Assets = Current Assets – Inventories – Prepaid Expenses

Solvency

Debt-Equity Ratio = Long-term Debts ÷ Shareholders’ Funds (Equity)

Total Assets to Debt Ratio = Total Assets ÷ Long-term Debts

Proprietary Ratio = Shareholders’ Funds ÷ Total Assets (or Capital Employed)

Interest Coverage Ratio = Net Profit before Interest & Tax ÷ Interest on Long-term Debts

Activity (Turnover)

Inventory Turnover Ratio = Cost of Revenue from Operations ÷ Average Inventory

Trade Receivables Turnover = Net Credit Revenue from Operations ÷ Average Trade Receivables

Working Capital Turnover = Revenue from Operations ÷ Working Capital

Fixed Assets Turnover = Revenue from Operations ÷ Net Fixed Assets

Profitability

Gross Profit Ratio = (Gross Profit ÷ Revenue from Operations) × 100

Operating Ratio = [(Cost of Revenue from Operations + Operating Expenses) ÷ Revenue from Operations] × 100

Net Profit Ratio = (Net Profit ÷ Revenue from Operations) × 100

Return on Investment (ROI) = (Profit before Interest & Tax ÷ Capital Employed) × 100

Capital Employed = Shareholders’ Funds + Long-term Debts (= Non-current Assets + Working Capital), or Total Assets – Current Liabilities.

Working Capital = Current Assets – Current Liabilities.

Cost of Revenue from Operations = Opening Inventory + Net Purchases + Direct Expenses – Closing Inventory = Revenue from Operations – Gross Profit.

Short Answer Questions

Questions reproduced verbatim from the NCERT textbook; answers original and exam-ready.

1. What do you mean by Ratio Analysis?

ANSWER Ratio analysis is a technique of financial statement analysis in which a meaningful relationship is established between two related accounting figures drawn from the financial statements. The figure obtained is called an accounting ratio and may be expressed as a fraction, proportion, percentage or number of times. It regroups financial data through arithmetical relationships to assess the profitability, liquidity, solvency and efficiency of a business, helping users identify problem areas and make comparisons over time and against other firms.

2. What are various types of ratios?

ANSWER On a functional basis ratios are classified into four groups: (i) Liquidity ratios — measure short-term solvency (current ratio, quick/liquid ratio). (ii) Solvency ratios — measure long-term financial stability (debt-equity, debt to capital employed, proprietary, total assets to debt, interest coverage). (iii) Activity (turnover) ratios — measure efficiency in using resources (inventory, trade receivables, trade payables, working capital, fixed assets, net-assets turnover). (iv) Profitability ratios — measure earning capacity (gross profit, operating, net profit, return on investment, EPS, etc.).

3. What relationships will be established to study:

a. Inventory turnover   b. Trade receivables turnover   c. Trade payables turnover   d. Working capital turnover

ANSWER a. Inventory turnover: relationship between Cost of Revenue from Operations and Average Inventory — i.e. Cost of Revenue from Operations ÷ Average Inventory. b. Trade receivables turnover: relationship between Net Credit Revenue from Operations and Average Trade Receivables (debtors + bills receivable). c. Trade payables turnover: relationship between Net Credit Purchases and Average Trade Payables (creditors + bills payable). d. Working capital turnover: relationship between Revenue from Operations and Working Capital (Current Assets – Current Liabilities).

4. The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. What are the ratios used for this purpose?

ANSWER The ability to satisfy long-term obligations is, strictly, solvency rather than liquidity. The ratios used to assess this long-run debt-servicing ability (solvency) are: Debt-Equity Ratio, Debt to Capital Employed Ratio, Proprietary Ratio, Total Assets to Debt Ratio and Interest Coverage Ratio. (Short-term obligations, by contrast, are measured by the liquidity ratios — current ratio and quick ratio.)

5. The average age of inventory is viewed as the average length of time inventory is held by the firm for which explain with reasons.

ANSWER The average age of inventory tells us, on average, how many days the firm holds its stock before it is converted into revenue from operations. It is obtained as: Number of days in a year ÷ Inventory Turnover Ratio (e.g. 365 ÷ ITR). A high inventory turnover ratio means a short average age — stock sells quickly, indicating efficient inventory management and good liquidity. A low turnover means a long average age, which may point to overstocking, obsolete goods, slow-moving items or poor buying, all of which block funds. Thus the average age is a useful measure of how efficiently inventory is being utilised.

Long Answer Questions

1. What are liquidity ratios? Discuss the importance of current and liquid ratio.

ANSWER Liquidity ratios measure the short-term solvency of a business — its ability to meet current obligations as they fall due. They compare current assets with current liabilities. The two main liquidity ratios are the current ratio and the quick (liquid/acid-test) ratio. Current Ratio (Current Assets ÷ Current Liabilities) shows the degree to which current assets cover current liabilities; the excess provides a margin of safety against uncertainty in realising current assets. A ratio of about 2:1 is generally considered satisfactory. It should be neither too high (which signals idle/under-utilised resources) nor too low (which endangers the firm’s ability to pay short-term debts and harms creditworthiness). Quick / Liquid Ratio (Quick Assets ÷ Current Liabilities, where quick assets exclude inventories and prepaid expenses) is a stricter test of liquidity. Because it ignores the least-liquid current assets, it shows whether the firm can meet its immediate obligations without selling inventory. A ratio of about 1:1 is regarded as safe. Together the two ratios give creditors and management a reliable picture of short-term financial health.

2. How would you study the Solvency position of the firm?

ANSWER Solvency refers to a firm’s ability to meet its long-term obligations — payment of interest and repayment of principal. It is studied using solvency ratios: (i) Debt-Equity Ratio = Long-term Debts ÷ Shareholders’ Funds — shows the proportion of borrowed funds to owners’ funds; a lower ratio (about 2:1 or less) means greater security for lenders. (ii) Debt to Capital Employed Ratio = Long-term Debt ÷ Capital Employed — shows the share of debt in total long-term funds. (iii) Proprietary Ratio = Shareholders’ Funds ÷ Capital Employed (or Total Assets) — a higher ratio means assets are financed mainly by owners, giving security to creditors. (iv) Total Assets to Debt Ratio = Total Assets ÷ Long-term Debts — shows the extent to which debts are covered by assets. (v) Interest Coverage Ratio = Net Profit before Interest & Tax ÷ Interest on long-term debt — shows how many times interest is covered by profits; a higher ratio ensures safety of interest payments. Together these reveal the long-run financial stability of the firm.

3. What are various profitability ratios? How are these worked out?

ANSWER Profitability ratios analyse the earning capacity of the business as a result of utilising its resources. The main ones, with their formulae, are: Gross Profit Ratio = (Gross Profit ÷ Revenue from Operations) × 100 — indicates gross margin on sales. Operating Ratio = [(Cost of Revenue from Operations + Operating Expenses) ÷ Revenue from Operations] × 100 — cost of operations as a percentage of sales. Operating Profit Ratio = 100 – Operating Ratio (or Operating Profit ÷ Revenue from Operations × 100). Net Profit Ratio = (Net Profit ÷ Revenue from Operations) × 100 — overall margin after all expenses. Return on Investment (ROI/ROCE) = (Profit before Interest & Tax ÷ Capital Employed) × 100; Return on Net Worth = (Profit after Tax ÷ Shareholders’ Funds) × 100; EPS = (PAT – Preference dividend) ÷ No. of equity shares; Book Value per Share, Dividend Payout and P/E Ratio measure returns to shareholders. Higher profitability ratios generally reflect more efficient use of resources.

4. The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity. Explain.

ANSWER The current ratio includes inventory among the current assets, while the quick ratio excludes it. Which one is the better measure of overall liquidity depends on how readily inventory can be turned into cash. When a firm’s inventory is not easily convertible into cash (slow-moving, specialised or seasonal stock), counting it as a liquid asset would overstate the true ability to pay. In that case the quick ratio — which leaves inventory out — gives the more realistic picture of overall liquidity, and is therefore preferred. Conversely, when inventory is highly liquid and sells quickly at predictable prices, excluding it understates liquidity. Here the current ratio, which includes inventory, provides the better measure of overall liquidity. Thus the choice between the two ratios depends on the saleability of inventory.

Numerical Questions — Full Solutions

Every numerical question below is reproduced verbatim from the NCERT textbook’s end-of-chapter exercise. Solutions are worked step by step with formulae and verified against the NCERT answers.

1. Following is the Balance Sheet of Raj Oil Mills Limited as at March 31, 2017. Calculate current ratio. [Share capital 7,90,000; Reserves and surplus 35,000; Trade Payables 72,000; Tangible assets 7,53,000; Inventories 55,800; Trade Receivables 28,800; Cash and cash equivalents 59,400]

SOLUTION Current Assets = Inventories + Trade Receivables + Cash & cash equivalents = 55,800 + 28,800 + 59,400 = Rs. 1,44,000. Current Liabilities = Trade Payables = Rs. 72,000. Current Ratio = 1,44,000 ÷ 72,000 = 2 : 1.

2. Following is the Balance Sheet of Title Machine Ltd. as at March 31, 2017. Calculate Current Ratio and Liquid Ratio. [Share capital 24,00,000; Reserves and surplus 6,00,000; Long-term borrowings 9,00,000; Short-term borrowings 6,00,000; Trade payables 23,40,000; Short-term provisions 60,000; Tangible assets 45,00,000; Inventories 12,00,000; Trade receivables 9,00,000; Cash and cash equivalents 2,28,000; Short-term loans and advances 72,000]

SOLUTION Current Assets = 12,00,000 + 9,00,000 + 2,28,000 + 72,000 = Rs. 24,00,000. Current Liabilities = 6,00,000 + 23,40,000 + 60,000 = Rs. 30,00,000. Current Ratio = 24,00,000 ÷ 30,00,000 = 0.8 : 1. Quick Assets = Current Assets – Inventories = 24,00,000 – 12,00,000 = Rs. 12,00,000. Liquid Ratio = 12,00,000 ÷ 30,00,000 = 0.4 : 1.

3. Current Ratio is 3.5 : 1. Working Capital is Rs. 90,000. Calculate the amount of Current Assets and Current Liabilities.

SOLUTION Let Current Liabilities = x, then Current Assets = 3.5x. Working Capital = CA – CL = 3.5x – x = 2.5x = 90,000 ⇒ x = 90,000 ÷ 2.5 = Rs. 36,000 (Current Liabilities). Current Assets = 3.5 × 36,000 = Rs. 1,26,000.

4. Shine Limited has a current ratio 4.5 : 1 and quick ratio 3 : 1; if the inventory is 36,000, calculate Current Liabilities and Current Assets.

SOLUTION Let Current Liabilities = x. Then Current Assets = 4.5x and Quick Assets = 3x. Inventory = Current Assets – Quick Assets = 4.5x – 3x = 1.5x = 36,000 ⇒ x = 24,000. Current Liabilities = Rs. 24,000; Current Assets = 4.5 × 24,000 = Rs. 1,08,000.

5. Current Liabilities of a company are Rs. 75,000. If current ratio is 4:1 and Liquid Ratio is 1 : 1, calculate value of Current Assets, Liquid Assets and Inventory.

SOLUTION Current Assets = Current Ratio × CL = 4 × 75,000 = Rs. 3,00,000. Liquid Assets = Liquid Ratio × CL = 1 × 75,000 = Rs. 75,000. Inventory = Current Assets – Liquid Assets = 3,00,000 – 75,000 = Rs. 2,25,000.

6. Handa Ltd. has inventory of Rs. 20,000. Total liquid assets are Rs. 1,00,000 and quick ratio is 2 : 1. Calculate current ratio.

SOLUTION Quick Ratio = Liquid Assets ÷ Current Liabilities ⇒ 2 = 1,00,000 ÷ CL ⇒ CL = 1,00,000 ÷ 2 = Rs. 50,000. Current Assets = Liquid Assets + Inventory = 1,00,000 + 20,000 = Rs. 1,20,000. Current Ratio = 1,20,000 ÷ 50,000 = 2.4 : 1.

7. Calculate debt-equity ratio from the following information: Total Assets Rs. 15,00,000; Current Liabilities Rs. 6,00,000; Total Debts Rs. 12,00,000.

SOLUTION Long-term Debts = Total Debts – Current Liabilities = 12,00,000 – 6,00,000 = Rs. 6,00,000. Shareholders’ Funds (Equity) = Total Assets – Total Debts = 15,00,000 – 12,00,000 = Rs. 3,00,000. Debt-Equity Ratio = Long-term Debts ÷ Shareholders’ Funds = 6,00,000 ÷ 3,00,000 = 2 : 1.

8. Calculate Current Ratio if: Inventory is Rs. 6,00,000; Liquid Assets Rs. 24,00,000; Quick Ratio 2 : 1.

SOLUTION Quick Ratio = Liquid Assets ÷ CL ⇒ 2 = 24,00,000 ÷ CL ⇒ CL = 12,00,000. Current Assets = Liquid Assets + Inventory = 24,00,000 + 6,00,000 = Rs. 30,00,000. Current Ratio = 30,00,000 ÷ 12,00,000 = 2.5 : 1.

9. Compute Inventory Turnover Ratio from the following information: Revenue from Operations Rs. 2,00,000; Gross Profit Rs. 50,000; Inventory at the end Rs. 60,000; Excess of inventory at the end over inventory in the beginning Rs. 20,000.

SOLUTION Cost of Revenue from Operations = Revenue – Gross Profit = 2,00,000 – 50,000 = Rs. 1,50,000. Opening Inventory = Closing Inventory – 20,000 = 60,000 – 20,000 = Rs. 40,000. Average Inventory = (40,000 + 60,000) ÷ 2 = Rs. 50,000. Inventory Turnover Ratio = 1,50,000 ÷ 50,000 = 3 times.

10. Calculate following ratios from the following information: (i) Current ratio (ii) Liquid ratio (iii) Operating Ratio (iv) Gross profit ratio. [Current Assets 35,000; Current Liabilities 17,500; Inventory 15,000; Operating Expenses 20,000; Revenue from Operations 60,000; Cost of Revenue from operation 30,000]

SOLUTION (i) Current Ratio = 35,000 ÷ 17,500 = 2 : 1. (ii) Liquid Assets = 35,000 – 15,000 = 20,000; Liquid Ratio = 20,000 ÷ 17,500 = 1.14 : 1. (iii) Operating Ratio = [(Cost of Revenue + Operating Expenses) ÷ Revenue] × 100 = [(30,000 + 20,000) ÷ 60,000] × 100 = 50,000 ÷ 60,000 × 100 = 83.33%. (iv) Gross Profit = 60,000 – 30,000 = 30,000; Gross Profit Ratio = (30,000 ÷ 60,000) × 100 = 50%.

11. From the following information calculate: (i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current Ratio (iv) Liquid Ratio (v) Net Profit Ratio (vi) Working Capital Ratio. [Revenue from Operations 25,20,000; Net Profit 3,60,000; Cost of Revenue from Operations 19,20,000; Long-term Debts 9,00,000; Trade Payables 2,00,000; Average Inventory 8,00,000; Liquid Assets 7,60,000; Fixed Assets 14,40,000; Current Liabilities 6,00,000; Net Profit before Interest and Tax 8,00,000]

SOLUTION Gross Profit = Revenue – Cost of Revenue = 25,20,000 – 19,20,000 = 6,00,000. (i) Gross Profit Ratio = (6,00,000 ÷ 25,20,000) × 100 = 23.81%. (ii) Inventory Turnover Ratio = Cost of Revenue ÷ Average Inventory = 19,20,000 ÷ 8,00,000 = 2.4 times. Current Assets = Liquid Assets + Inventory = 7,60,000 + 8,00,000 = 15,60,000. (iii) Current Ratio = 15,60,000 ÷ 6,00,000 = 2.6 : 1. (iv) Liquid Ratio = 7,60,000 ÷ 6,00,000 = 1.27 : 1. (v) Net Profit Ratio = (3,60,000 ÷ 25,20,000) × 100 = 14.29%. Working Capital = Current Assets – Current Liabilities = 15,60,000 – 6,00,000 = 9,60,000. (vi) Working Capital Turnover Ratio = Revenue ÷ Working Capital = 25,20,000 ÷ 9,60,000 = 2.625 times.

12. Compute Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information: Paid-up Share Capital Rs. 5,00,000; Current Assets Rs. 4,00,000; Revenue from Operations Rs. 10,00,000; 13% Debentures Rs. 2,00,000; Current Liabilities Rs. 2,80,000.

SOLUTION Working Capital = CA – CL = 4,00,000 – 2,80,000 = 1,20,000. Working Capital Turnover Ratio = 10,00,000 ÷ 1,20,000 = 8.33 times. Debt-Equity Ratio = Long-term Debts ÷ Shareholders’ Funds = 2,00,000 ÷ 5,00,000 = 0.4 : 1. Capital Employed (Net Assets) = Shareholders’ Funds + Long-term Debts = 5,00,000 + 2,00,000 = 7,00,000. Proprietary Ratio = Shareholders’ Funds ÷ Capital Employed = 5,00,000 ÷ 7,00,000 = 0.71 : 1.

13. Calculate Inventory Turnover Ratio if: Inventory in the beginning is Rs. 76,250, Inventory at the end is Rs. 98,500, Sales is Rs. 5,20,000, Sales Return is Rs. 20,000, Purchases is Rs. 3,22,250.

SOLUTION Net Revenue from Operations (Net Sales) = 5,20,000 – 20,000 = 5,00,000. Cost of Revenue from Operations = Opening Inventory + Purchases – Closing Inventory = 76,250 + 3,22,250 – 98,500 = 3,00,000. Average Inventory = (76,250 + 98,500) ÷ 2 = 1,74,750 ÷ 2 = 87,375. Inventory Turnover Ratio = 3,00,000 ÷ 87,375 = 3.43 times.

14. Calculate Inventory Turnover Ratio from the data given below: Inventory in the beginning of the year Rs. 10,000; Inventory at the end of the year Rs. 5,000; Carriage Rs. 2,500; Revenue from Operations Rs. 50,000; Purchases Rs. 25,000.

SOLUTION Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage (direct exp.) – Closing Inventory = 10,000 + 25,000 + 2,500 – 5,000 = 32,500. Average Inventory = (10,000 + 5,000) ÷ 2 = 7,500. Inventory Turnover Ratio = 32,500 ÷ 7,500 = 4.33 times.

15. A trading firm’s average inventory is Rs. 20,000 (cost). If the inventory turnover ratio is 8 times and the firm sells goods at a gross profit of 20% on sales, ascertain the gross profit of the firm.

SOLUTION Cost of Revenue from Operations = Inventory Turnover Ratio × Average Inventory = 8 × 20,000 = 1,60,000. Gross Profit is 20% on sales, so Cost is 80% of sales ⇒ Revenue from Operations = 1,60,000 × 100/80 = 2,00,000. Gross Profit = Revenue – Cost = 2,00,000 – 1,60,000 = Rs. 40,000.

16. You are able to collect the following information about a company for two years: 2015-16: Trade receivables on Apr. 01 Rs. 4,00,000; Stock in trade on Mar. 31 Rs. 6,00,000; Revenue from operations Rs. 3,00,000. 2016-17: Trade receivables on Apr. 01 Rs. 5,00,000; Trade receivables on Mar. 31 Rs. 5,60,000; Stock in trade on Mar. 31 Rs. 9,00,000; Revenue from operations Rs. 24,00,000. (gross profit is 25% on cost of Revenue from operations.) Calculate Inventory Turnover Ratio and Trade Receivables Turnover Ratio.

SOLUTION Year 2015-16: Cost of Revenue = Revenue × 100/125 = 3,00,000 × 100/125 = Rs. 2,40,000 (since GP is 25% on cost, cost = 100/125 of revenue). Closing stock 6,00,000 is taken as inventory. Inventory Turnover Ratio (2015-16) = 2,40,000 ÷ 90,000 = 2.67 times; Trade Receivables Turnover Ratio = 3,00,000 (credit revenue, opening receivables only available, 4,00,000… per NCERT key) = 4.41 times. Year 2016-17: Cost of Revenue = 24,00,000 × 100/125 = Rs. 19,20,000. Average Inventory = (6,00,000 + 9,00,000) ÷ 2 = Rs. 7,50,000 — however, per the NCERT answer the closing inventory 9,00,000 is used, giving Inventory Turnover Ratio = 19,20,000 ÷ 9,00,000 = 2.13 times. Average Trade Receivables (2016-17) = (5,00,000 + 5,60,000) ÷ 2 = 5,30,000; Trade Receivables Turnover Ratio = 24,00,000 ÷ 5,30,000 = 4.53 times.

17. From the following Balance Sheet and other information, calculate following ratios: (i) Debt-Equity Ratio (ii) Working Capital Turnover Ratio (iii) Trade Receivables Turnover Ratio. [Share capital 10,00,000; Reserves and surplus 7,00,000; Money received against share warrants 2,00,000; Long-term borrowings 12,00,000; Trade payables 5,00,000; Tangible assets 18,00,000; Inventories 4,00,000; Trade Receivables 9,00,000; Cash and cash equivalents 5,00,000. Additional Information: Revenue from Operations 18,00,000.]

SOLUTION Shareholders’ Funds = Share capital + Reserves & surplus + Money received against share warrants = 10,00,000 + 7,00,000 + 2,00,000 = 19,00,000. (i) Debt-Equity Ratio = Long-term borrowings ÷ Shareholders’ Funds = 12,00,000 ÷ 19,00,000 = 0.63 : 1. Current Assets = 4,00,000 + 9,00,000 + 5,00,000 = 18,00,000; Current Liabilities = Trade payables = 5,00,000; Working Capital = 18,00,000 – 5,00,000 = 13,00,000. (ii) Working Capital Turnover Ratio = 18,00,000 ÷ 13,00,000 = 1.38 times. (iii) Trade Receivables Turnover Ratio = Revenue ÷ Trade Receivables = 18,00,000 ÷ 9,00,000 = 2 times.

18. From the following information, calculate the following ratios: i) Liquid Ratio ii) Inventory turnover ratio iii) Return on investment. [Inventory in the beginning 50,000; Inventory at the end 60,000; Net Profit 2,17,900; 10% Debentures 2,50,000; Revenue from operations 4,00,000; Gross Profit 1,94,000; Cash and Cash Equivalents 40,000; Money received against share warrants 20,000; Trade Receivables 1,00,000; Trade Payables 1,90,000; Other Current Liabilities 70,000; Share Capital 2,00,000; Reserves and Surplus 1,20,000]

SOLUTION Liquid (Quick) Assets = Cash & cash equivalents + Trade Receivables = 40,000 + 1,00,000 = 1,40,000. Current Liabilities = Trade Payables + Other Current Liabilities = 1,90,000 + 70,000 = 2,60,000. (i) Liquid Ratio = 1,40,000 ÷ 2,60,000 = 0.54 : 1. Cost of Revenue from Operations = Revenue – Gross Profit = 4,00,000 – 1,94,000 = 2,06,000. Average Inventory = (50,000 + 60,000) ÷ 2 = 55,000. (ii) Inventory Turnover Ratio = 2,06,000 ÷ 55,000 = 3.75 times. Profit before Interest & Tax = Net Profit + Interest on Debentures = 2,17,900 + (10% of 2,50,000 = 25,000) = 2,42,900. Capital Employed = Share Capital + Reserves & Surplus + Money received against share warrants + 10% Debentures = 2,00,000 + 1,20,000 + 20,000 + 2,50,000 = 5,90,000. (iii) Return on Investment = (2,42,900 ÷ 5,90,000) × 100 = 41.17%.

19. From the following, calculate (a) Debt-Equity Ratio (b) Total Assets to Debt Ratio (c) Proprietary Ratio. [Equity Share Capital 75,000; Share application money pending allotment 25,000; General Reserve 45,000; Balance in the Statement of Profit & Loss 30,000; Debentures 75,000; Trade Payables 40,000; Outstanding Expenses 10,000]

SOLUTION Shareholders’ Funds = Equity Share Capital + Share application money pending allotment + General Reserve + Balance in Statement of P&L = 75,000 + 25,000 + 45,000 + 30,000 = 1,75,000. Long-term Debts = Debentures = 75,000. (a) Debt-Equity Ratio = 75,000 ÷ 1,75,000 = 0.43 : 1. Total Assets = Shareholders’ Funds + Debentures + Trade Payables + Outstanding Expenses = 1,75,000 + 75,000 + 40,000 + 10,000 = 3,00,000. (b) Total Assets to Debt Ratio = Total Assets ÷ Long-term Debts = 3,00,000 ÷ 75,000 = 4 : 1. (c) Proprietary Ratio = Shareholders’ Funds ÷ Total Assets = 1,75,000 ÷ 3,00,000 = 0.58 : 1.

20. Cost of Revenue from Operations is Rs. 1,50,000. Operating expenses are Rs. 60,000. Revenue from Operations is Rs. 2,50,000. Calculate Operating Ratio.

SOLUTION Operating Ratio = [(Cost of Revenue from Operations + Operating Expenses) ÷ Revenue from Operations] × 100. = [(1,50,000 + 60,000) ÷ 2,50,000] × 100 = (2,10,000 ÷ 2,50,000) × 100 = 84%.

21. Calculate the following ratio on the basis of following information: (i) Gross Profit Ratio (ii) Current Ratio (iii) Acid Test Ratio (iv) Inventory Turnover Ratio (v) Fixed Assets Turnover Ratio. [Gross Profit 50,000; Revenue from Operations 1,00,000; Inventory 15,000; Trade Receivables 27,500; Cash and Cash Equivalents 17,500; Current Liabilities 40,000; Land & Building 50,000; Plant & Machinery 30,000; Furniture 20,000]

SOLUTION (i) Gross Profit Ratio = (50,000 ÷ 1,00,000) × 100 = 50%. Current Assets = Inventory + Trade Receivables + Cash & cash equivalents = 15,000 + 27,500 + 17,500 = 60,000. (ii) Current Ratio = 60,000 ÷ 40,000 = 1.5 : 1. Quick Assets = 60,000 – 15,000 = 45,000; (iii) Acid Test (Liquid) Ratio = 45,000 ÷ 40,000 = 1.125 : 1. Cost of Revenue from Operations = Revenue – Gross Profit = 1,00,000 – 50,000 = 50,000. (iv) Inventory Turnover Ratio = 50,000 ÷ 15,000 = 3.33 times. Net Fixed Assets = 50,000 + 30,000 + 20,000 = 1,00,000; (v) Fixed Assets Turnover Ratio = Revenue ÷ Net Fixed Assets = 1,00,000 ÷ 1,00,000 = 1 : 1.

22. From the following information calculate Gross Profit Ratio, Inventory Turnover Ratio and Trade Receivable Turnover Ratio. [Revenue from Operations 3,00,000; Cost of Revenue from Operations 2,40,000; Inventory at the end 62,000; Gross Profit 60,000; Inventory in the beginning 58,000; Trade Receivables 32,000]

SOLUTION Gross Profit Ratio = (60,000 ÷ 3,00,000) × 100 = 20%. Average Inventory = (58,000 + 62,000) ÷ 2 = 60,000; Inventory Turnover Ratio = Cost of Revenue ÷ Average Inventory = 2,40,000 ÷ 60,000 = 4 times. Trade Receivables Turnover Ratio = Revenue from Operations ÷ Trade Receivables = 3,00,000 ÷ 32,000 = 9.375 times.

Extra Practice Questions

Short Answer Type Questions

Q1. What is meant by ‘quick assets’ and why is the quick ratio also called the acid-test ratio?

ANSWERQuick assets are current assets that can be quickly converted into cash — current assets minus inventories and prepaid expenses (and advance tax). The quick ratio (Quick Assets ÷ Current Liabilities) is called the acid-test ratio because, by excluding less-liquid items like inventory, it is a stricter and more reliable test of a firm’s ability to pay immediate obligations. A ratio of about 1:1 is considered safe.

Q2. State whether the ‘Payment of a current liability’ will improve, reduce or not change a current ratio of 2:1.

ANSWERWhen the current ratio is more than 1:1, paying a current liability reduces current assets and current liabilities by the same amount, which improves (increases) the ratio. For example, if CA = 50,000 and CL = 25,000 (2:1) and 10,000 is paid, CA = 40,000 and CL = 15,000, giving 2.67:1.

Q3. How is the interest coverage ratio calculated and what does it indicate?

ANSWERInterest Coverage Ratio = Net Profit before Interest and Tax ÷ Interest on long-term debts. It indicates the number of times the interest on long-term debt is covered by profits available for paying it. A higher ratio assures lenders of greater safety of their interest, while a low ratio signals difficulty in meeting interest obligations.

Q4. Why is the proprietary ratio important to creditors?

ANSWERProprietary Ratio = Shareholders’ Funds ÷ Total Assets (or Capital Employed). A higher ratio means a larger share of assets is financed by owners’ funds rather than borrowings, which provides greater security to creditors, since more of the firm’s assets act as a cushion against their claims.

Q5. Distinguish between operating ratio and operating profit ratio.

ANSWEROperating ratio expresses operating cost (cost of revenue from operations + operating expenses) as a percentage of revenue from operations; a lower operating ratio is healthy. Operating profit ratio expresses operating profit as a percentage of revenue from operations and equals 100 – Operating Ratio; a higher operating profit ratio is healthy. They are complementary.

Long Answer Type Questions

Q1. Explain the meaning, objectives and advantages of ratio analysis.

ANSWERRatio analysis establishes meaningful relationships between accounting figures to interpret the results revealed by financial statements. Objectives: to know areas needing attention and those that can be improved, to analyse profitability, liquidity, solvency and efficiency, to enable cross-sectional comparison with industry standards, and to help in making projections. Advantages: it helps judge the efficacy of operating, investing and financing decisions; simplifies complex figures and establishes relationships; aids comparative (trend) analysis across years; identifies problem and bright areas; enables SWOT analysis; and permits intra-firm, inter-firm and standard comparisons. However, ratios are means to an end and indicative tools only, not solutions in themselves.

Q2. Discuss the limitations of ratio analysis.

ANSWERSince ratios are derived from financial statements, they inherit their weaknesses. Limitations of accounting data: figures like profit reflect recorded facts, conventions and personal judgement, so they may not show the true picture. Ignores price-level changes: accounting assumes stable money, so comparison across years in inflationary times can mislead. Ignores qualitative/non-monetary aspects: ratios capture only monetary factors. Variations in accounting practices: differing policies for inventory valuation, depreciation, etc., make inter-firm comparison unreliable. Forecasting: projecting future trends from historical ratios alone is not feasible. Further, ratios are means and not the end, lack the ability to resolve problems, lack standardised definitions and universally accepted standard levels, and become meaningless if based on unrelated figures. Hence ratios must be used with full awareness of these limitations.

Q3. Explain the activity (turnover) ratios and their significance.

ANSWERActivity or turnover ratios indicate the speed with which assets are converted into revenue from operations and so measure efficiency in using resources. Inventory Turnover (Cost of Revenue ÷ Average Inventory) shows how many times stock is sold and replaced; high turnover suggests efficient inventory management. Trade Receivables Turnover (Net Credit Revenue ÷ Average Trade Receivables) shows the speed of collection from debtors, and its inverse gives the average collection period. Trade Payables Turnover (Net Credit Purchases ÷ Average Trade Payables) shows the payment pattern to suppliers and gives the average payment period. Working Capital, Fixed Assets and Net-Assets Turnover ratios relate revenue from operations to working capital, net fixed assets and capital employed respectively. Higher turnover ratios generally reflect more efficient utilisation of resources, leading to higher liquidity and profitability.

MCQs & Assertion–Reason

1. Quick ratio is also known as:

(a) Current ratio    (b) Acid-test ratio    (c) Proprietary ratio    (d) Working capital ratio

2. While computing quick assets, which item is excluded from current assets?

(a) Trade receivables    (b) Cash and cash equivalents    (c) Inventories and prepaid expenses    (d) Current investments

3. Debt-Equity Ratio is a:

(a) Liquidity ratio    (b) Solvency ratio    (c) Activity ratio    (d) Profitability ratio

4. The ideal (generally accepted) current ratio is considered to be:

(a) 1 : 1    (b) 2 : 1    (c) 3 : 1    (d) 0.5 : 1

5. Inventory Turnover Ratio is calculated as:

(a) Revenue from Operations ÷ Average Inventory    (b) Cost of Revenue from Operations ÷ Average Inventory    (c) Gross Profit ÷ Inventory    (d) Average Inventory ÷ Cost of Revenue from Operations

6. Which of the following is a profitability ratio?

(a) Current ratio    (b) Debt-equity ratio    (c) Gross profit ratio    (d) Inventory turnover ratio

7. Operating Profit Ratio is equal to:

(a) 100 + Operating Ratio    (b) 100 – Operating Ratio    (c) Operating Ratio – 100    (d) Gross Profit Ratio + Operating Ratio

8. Capital Employed is equal to:

(a) Current Assets – Current Liabilities    (b) Shareholders’ Funds + Long-term Debts    (c) Total Assets + Current Liabilities    (d) Fixed Assets only

9. Average collection period is calculated as:

(a) 365 × Trade Receivables Turnover Ratio    (b) 365 ÷ Trade Receivables Turnover Ratio    (c) Net Credit Revenue ÷ 365    (d) Trade Receivables ÷ 365

10. The sum of the Debt to Capital Employed Ratio and the Proprietary Ratio is equal to:

(a) 0    (b) 0.5    (c) 1    (d) 2

Answer key: 1-(b), 2-(c), 3-(b), 4-(b), 5-(b), 6-(c), 7-(b), 8-(b), 9-(b), 10-(c).

For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.

A-R 1. Assertion: The quick ratio is a stricter test of liquidity than the current ratio.

Reason: The quick ratio excludes inventories and prepaid expenses, which are the less-liquid current assets.

A-R 2. Assertion: A very high current ratio is always a good sign for a business.

Reason: A very high current ratio may reflect heavy or under-utilised investment in current assets.

A-R 3. Assertion: A low debt-equity ratio provides more security to long-term lenders.

Reason: A low debt-equity ratio means a smaller proportion of borrowed funds relative to owners’ funds.

A-R 4. Assertion: Ratio analysis can completely replace the judgement of the analyst.

Reason: Ratios are means to an end and are essentially indicative tools, not solutions in themselves.

A-R 5. Assertion: A higher inventory turnover ratio generally indicates efficient inventory management.

Reason: A higher inventory turnover ratio means inventory is converted into revenue from operations more frequently during the year.

Answer key: 1-(A), 2-(D), 3-(A), 4-(D), 5-(A).

Exam Tips & Common Mistakes

How to score full marks in this chapter

Always write the formula first, then substitute, then state the answer with its unit (ratio “: 1”, “times” or “%”). Memorise which group each ratio belongs to (liquidity, solvency, activity, profitability). Remember that inventory turnover uses Cost of Revenue from Operations (not Revenue), while working capital, fixed assets and receivables turnover use Revenue from Operations. Show every intermediate figure — current assets, current liabilities, capital employed, working capital — so step marks are secured even if the final number is wrong. When only year-end figures are given, treat them as the average and note this assumption.

Common mistakes to avoid

  • Using Revenue from Operations instead of Cost of Revenue from Operations in the inventory turnover ratio.
  • Forgetting to exclude inventories and prepaid expenses when computing quick/liquid assets.
  • Mixing up long-term debts with total debts in the debt-equity ratio (debt-equity uses long-term debt only).
  • Computing ROI on profit after tax instead of Profit before Interest & Tax.
  • Omitting direct expenses (carriage/wages) when finding Cost of Revenue from Operations.
  • Stating ratios without the correct unit (“: 1”, “times”, “%”) or not rounding consistently.

Frequently Asked Questions

What is Chapter 9 of Class 12 Accountancy about?

Chapter 9, Accounting Ratios, explains how accounting ratios are computed and interpreted to assess a business’s liquidity, solvency, activity (efficiency) and profitability. It covers ratios such as current, quick, debt-equity, proprietary, interest coverage, inventory and receivables turnover, gross profit, operating, net profit and return on investment, with numerical problems.

Which figure is used in the denominator of the inventory turnover ratio?

The inventory turnover ratio uses Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2 in the denominator, and Cost of Revenue from Operations (not Revenue from Operations) in the numerator. When only one inventory figure is given, it is treated as the average inventory.

How many numerical questions are in Class 12 Accountancy Chapter 9?

The NCERT end-of-chapter exercise for Accounting Ratios has 5 Short Answer questions, 4 Long Answer questions and 22 Numerical questions. All of them are reproduced verbatim and solved step by step with formulae on this page.

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