Important Accounting Ratios and Their Formulas for Exams
Accounting ratios are relationships expressed in mathematical terms between figures found in financial statements. They are essential for analyzing a company’s financial position, performance, and making informed decisions. Learning about accounting ratios is vital for school and competitive exams, and also benefits students in real business scenarios.
| Ratio Name | Formula | Category |
|---|---|---|
| Current Ratio | Current Assets ÷ Current Liabilities | Liquidity |
| Quick Ratio | (Current Assets – Inventory) ÷ Current Liabilities | Liquidity |
| Debt-Equity Ratio | Total Debt ÷ Shareholder’s Equity | Solvency |
| Gross Profit Ratio | (Gross Profit ÷ Net Sales) × 100 | Profitability |
| Inventory Turnover Ratio | Cost of Goods Sold ÷ Average Inventory | Activity |
Importance of Accounting Ratios
Accounting ratios help users quickly interpret a company’s strengths and weaknesses. They guide bankers, investors, and management in making important financial decisions. For students, mastering accounting ratios aids in better exam preparation, especially in ratio analysis and related topics.
Types of Accounting Ratios
Accounting ratios are classified according to the aspects of business they evaluate. Understanding each type helps students apply the right ratio in exam questions and practical scenarios.
| Type | Description | Examples |
|---|---|---|
| Liquidity Ratios | Measure a firm’s short-term ability to meet obligations. | Current Ratio, Quick Ratio |
| Solvency Ratios | Judge long-term financial stability and debt-paying ability. | Debt-Equity Ratio, Interest Coverage Ratio |
| Profitability Ratios | Evaluate profit generation from sales and overall operations. | Gross Profit Ratio, Net Profit Ratio, Return on Investment |
| Activity Ratios | Assess efficiency in using resources. | Inventory Turnover Ratio, Debtors Turnover Ratio |
MCQs on Accounting Ratios
Practicing multiple choice questions on accounting ratios improves concept clarity and exam readiness. Below are sample MCQs with options:
-
Which of the following is a liquidity ratio?
A) Debt-Equity Ratio
B) Current Ratio
C) Gross Profit Ratio
D) Inventory Turnover Ratio -
Quick Ratio is also known as:
A) Acid Test Ratio
B) Debt Ratio
C) Proprietary Ratio
D) Solvency Ratio -
The formula for Gross Profit Ratio is:
A) (Net Profit ÷ Net Sales) × 100
B) (Gross Profit ÷ Net Sales) × 100
C) (Operating Profit ÷ Net Sales) × 100
D) (Gross Profit ÷ Cost of Sales) × 100 -
If a firm's current assets are ₹1,00,000 and current liabilities are ₹50,000, the current ratio is:
A) 1:1
B) 2:1
C) 0.5:1
D) 3:1 -
Which ratio reflects long-term financial stability?
A) Quick Ratio
B) Debt-Equity Ratio
C) Inventory Turnover Ratio
D) Current Ratio
Solved MCQ Examples on Accounting Ratios
Let's see stepwise solutions for two common accounting ratio MCQs:
Example 1
Question: If a company’s Gross Profit is ₹40,000 and Net Sales are ₹2,00,000, what is the Gross Profit Ratio?
Solution: Gross Profit Ratio = (Gross Profit ÷ Net Sales) × 100 = (₹40,000 ÷ ₹2,00,000) × 100 = 20%
Example 2
Question: A firm’s current assets are ₹60,000, and current liabilities are ₹30,000. What is its current ratio?
Solution: Current Ratio = Current Assets ÷ Current Liabilities = ₹60,000 ÷ ₹30,000 = 2:1
How Accounting Ratios Help Students
Accounting ratios frequently appear in CBSE Class 12 and other board exams. They also form a core part of competitive accountancy exams and interviews. Mastery of these concepts allows students to analyze financial health, answer MCQs accurately, and strengthen their business knowledge.
Further Learning and Internal Links
To learn more, explore these vital concepts on Vedantu:
- Accounting Ratios
- Types of Ratio
- Analysis of Financial Statements
- Profitability Ratios
- Final Accounts
At Vedantu, we break down commerce subjects into easy and practical lessons. Regular practice of MCQs on accounting ratios helps students build strong exam skills and real-world analytical ability.
In summary, accounting ratios provide a clear picture of any organization’s liquidity, profitability, efficiency, and solvency. Knowing these ratios, their formulas, and application methods is essential for academic achievement and sound business decision-making.
FAQs on Accounting Ratios MCQs: Questions, Answers & Practice
1. What are the main types of accounting ratios?
Accounting ratios are classified into several categories to analyze different aspects of a business's financial health. Key types include:
- Liquidity ratios (e.g., current ratio, quick ratio): Measure a company's ability to meet its short-term obligations.
- Solvency ratios (e.g., debt-to-equity ratio): Assess a company's long-term financial stability and ability to pay off its debts.
- Profitability ratios (e.g., gross profit margin, net profit margin): Show how efficiently a company generates profit from its operations.
- Activity ratios (e.g., inventory turnover ratio): Indicate how effectively a company manages its assets and resources.
2. How do I calculate the current ratio in a MCQ?
The current ratio is a key liquidity ratio. It's calculated by dividing current assets by current liabilities. For example, if a company has current assets of $100,000 and current liabilities of $50,000, the current ratio is 2:1 (100,000/50,000). Remember to identify the relevant figures from the information provided in the MCQ. Mastering this calculation is essential for acing MCQs on accounting ratios and understanding financial ratios.
3. Which ratios are most important for exams?
The most important ratios for exams often depend on the specific syllabus and exam board. However, liquidity ratios (current ratio, quick ratio), solvency ratios (debt-to-equity ratio), and profitability ratios (gross profit margin, net profit margin) are frequently tested. Focus on understanding their formulas, calculations, and interpretations. Practicing MCQs on accounting ratios will help you master these key concepts.
4. How can I download accounting ratios MCQs PDF?
Many educational websites and resources offer downloadable MCQs on accounting ratios in PDF format. Search online for 'accounting ratios MCQs PDF' or 'ratio analysis questions and answers PDF' to find suitable materials aligned with your syllabus. Make sure the source is credible and relevant to your curriculum for effective exam preparation.
5. Are accounting ratio MCQs asked in Class 12 board exams?
Yes, MCQs on accounting ratios are frequently included in Class 12 board exams, particularly those focused on commerce and accountancy. These questions test your understanding of key financial ratios, their calculations, and their applications in analyzing a company's financial performance. Thorough practice with class 12 accounting ratios MCQs is vital for success.
6. What is accounting ratios MCQ?
An accounting ratios MCQ (Multiple Choice Question) is an objective-type question testing your understanding of accounting ratios. These questions typically present a scenario or data set and require you to select the correct calculation or interpretation of a specific ratio, such as the current ratio or profitability ratios. Solving MCQs on accounting ratios is a valuable way to prepare for exams.
7. What are common examples of accounting ratio questions?
Common examples of accounting ratio questions include calculating the current ratio, quick ratio, debt-to-equity ratio, gross profit margin, and net profit margin. Questions might involve interpreting these ratios in various business contexts, comparing ratios across different companies, or analyzing the impact of specific transactions on key ratios. Practicing diverse MCQs on accounting ratios improves your understanding of these concepts.
8. What is the current ratio MCQ?
A current ratio MCQ tests your understanding of the current ratio, a key liquidity ratio. The question typically provides data on a company's current assets and current liabilities, requiring you to calculate the ratio (current assets / current liabilities) and interpret the result in terms of the company's short-term financial health. Regular practice with MCQs on accounting ratios, including those focused on the current ratio, is crucial for exam success.
9. How do you calculate quick ratio MCQ?
The quick ratio MCQ assesses your understanding of the quick ratio, another important liquidity ratio. Unlike the current ratio, the quick ratio excludes inventory from current assets. The formula is (current assets - inventory) / current liabilities. The question will provide the necessary figures; your task is to perform the calculation correctly and interpret the outcome. Effective preparation involves solving various MCQs on accounting ratios, including those related to the quick ratio.
10. What is the difference between the current ratio and the quick ratio?
Both the current ratio and the quick ratio are liquidity ratios measuring a company's ability to meet short-term obligations. However, the quick ratio is a more stringent measure because it excludes inventory from current assets. The current ratio includes inventory, which might not be easily converted to cash. Understanding this difference is essential for accurately interpreting MCQs on accounting ratios and for thorough ratio analysis.
