Q.If revenue from operations is ₹ 10,00,000 and gross profit is 25% on cost, cost of revenue from operations will be : (A) ₹ 2,50,000 (B) ₹ 12,50,000 (C) ₹ 2,00,000 (D) ₹ 8,00,000
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🔒 Start your 14-day free trial to unlock the full solution →Part (a)Concept understanding — Ratio Analysis
Let’s start with something you already know. Suppose you and a friend both run small shops. You each put in ₹1,00,000. At the end of the year, your shop made a profit of ₹20,000; your friend’s shop made ₹30,000. Which shop is doing better? The obvious answer is your friend’s — more profit. But what if your friend had to borrow ₹2,00,000 to earn that ₹30,000, while you used only your own ₹1,00,000? Suddenly, your shop looks more efficient. You are now thinking in ratios: profit relative to the money used.
That is the core of Ratio Analysis. It is not about raw numbers; it is about relationships between numbers. A ratio is simply one figure divided by another. In accounting, we use ratios to judge a business’s performance, financial health, and efficiency — without being misled by size.
What the NCERT textbook says
The NCERT Class 12 Accountancy textbook (Part II, Chapter 5) defines Ratio Analysis as:
“Ratio Analysis is a technique of analysis of financial statements to assess the profitability, liquidity, solvency and efficiency of a business enterprise.”
It is a tool, not a separate account. You do not “debit” or “credit” a ratio. Ratios are calculated from the figures already recorded in the Trading and Profit & Loss Account and the Balance Sheet.
Why does it matter?
Three big reasons:
- Comparison – You can compare a small firm with a large one, or the same firm over different years, because ratios cancel out size.
- Decision-making – A bank deciding whether to give a loan looks at liquidity ratios. An investor looks at profitability ratios.
- Early warning – A falling current ratio may signal trouble paying bills, even if profits look fine.
Accounting treatment: No debit/credit
This is a common confusion. Ratio Analysis is not a journal entry. You never write:
“Debit Ratio Analysis, Credit Profit & Loss Account”
That would be wrong. Ratios are computed after the final accounts are prepared. They are presented in a separate statement called a Comparative Statement or Common Size Statement, or simply listed in a report.
Where a format/proforma is given
The NCERT textbook gives a format for Comparative Balance Sheet and Comparative Statement of Profit & Loss. These are the main vehicles for ratio analysis. Here is the proforma for a Comparative Balance Sheet as per NCERT:
| Particulars | Note No. | Previous Year (₹) | Current Year (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||||
| 1. Shareholders’ Funds | |||||
| (a) Share Capital | |||||
| (b) Reserves and Surplus | |||||
| 2. Non-Current Liabilities | |||||
| (a) Long-term Borrowings | |||||
| 3. Current Liabilities | |||||
| (a) Trade Payables | |||||
| (b) Short-term Provisions | |||||
| Total | |||||
| II. ASSETS | |||||
| 1. Non-Current Assets | |||||
| (a) Fixed Assets | |||||
| (b) Non-Current Investments | |||||
| 2. Current Assets | |||||
| (a) Inventories | |||||
| (b) Trade Receivables | |||||
| (c) Cash and Cash Equivalents | |||||
| Total |
Part (b)Concept understanding — Operating Ratio Calculation
Operating Ratio — A First Look
Think of a shopkeeper who earns ₹100 from sales. She spends ₹70 on buying goods, ₹15 on salaries and rent, and ₹5 on electricity. That leaves her with ₹10 as profit. Now ask: how much of every ₹100 sale is eaten up by her normal business operations? The answer is ₹90 (₹70 + ₹15 + ₹5). That 90% is her Operating Ratio.
In everyday language, the Operating Ratio tells you: "Out of every rupee of revenue from operations, how many paise go toward running the business?" The lower this ratio, the more efficient the business — because a smaller share of revenue is consumed by operating costs.
Precise Meaning (NCERT Definition)
The Operating Ratio is a profitability ratio that measures the proportion of Operating Cost to Revenue from Operations (Net Sales).
Operating Ratio=Revenue from OperationsOperating Cost×100
Where:
- Revenue from Operations = Net Sales (Gross Sales − Sales Returns)
- Operating Cost = Cost of Revenue from Operations + Operating Expenses
Cost of Revenue from Operations = Opening Inventory + Purchases + Direct Expenses − Closing Inventory
(For a trading firm, this is simply Cost of Goods Sold.)
Operating Expenses include:
- Office and administrative expenses (rent, salaries, insurance)
- Selling and distribution expenses (advertising, commission, carriage outward)
- Depreciation on fixed assets used in operations
Non-operating items are excluded. Do NOT include:
- Interest on loans (financial cost)
- Loss on sale of fixed assets
- Donations or charity
- Dividend paid
- Income tax
Why It Matters
A high Operating Ratio (say, above 90%) means the business has very thin margins from its core operations. A low ratio (say, 70%) indicates strong operational efficiency — more revenue is left as operating profit.
Managers use it to:
- Compare efficiency over time (trend analysis)
- Benchmark against competitors
- Identify where costs are rising out of control
Investors and creditors watch it because a rising Operating Ratio often signals trouble before net profit falls.
Accounting Treatment — Which Account is Debited/Credited?
The Operating Ratio is not a journal entry. It is a ratio computed from the Profit & Loss Statement. No account is debited or credited for the ratio itself.
However, the components that go into the ratio are recorded in the usual way:
| Component | Journal Entry (Debit/Credit) |
|---|---|
| Purchases | Debit Purchases A/c, Credit Cash/Supplier A/c |
| Salaries | Debit Salaries A/c, Credit Cash/Bank A/c |
| Depreciation | Debit Depreciation A/c, Credit Accumulated Depreciation A/c |
| Revenue from Operations | Debit Cash/Bank/Debtors A/c, Credit Revenue from Operations A/c |
All these expenses and revenues are then transferred to the Profit & Loss Account at the end of the year. The Operating Ratio is simply a mathematical relationship between two figures already sitting in that account.
Proforma / Format (as per NCERT) …
Part (a) — Cost of Revenue from Operations
Gross profit is 25% on cost, so Revenue from Operations = Cost + 25% of Cost = 125% of Cost.
Cost = Revenue ÷ 1.25 = ₹10,00,000 ÷ 1.25 = ₹8,00,000. …
Part (a): Cost of Revenue from Operations = ₹8,00,000 — option (D).
Part (b): Operating Profit Ratio = 40% — option (C).
Part (a) — Cost of Revenue from Operations
"Gross profit is 25% on cost" means the base of the percentage is cost: for every ₹100 of cost, gross profit is ₹25, so Revenue from Operations = ₹125. Therefore Revenue = 125% of Cost.
Cost of Revenue from Operations = Revenue ÷ 1.25 = ₹10,00,000 ÷ 1.25 = ₹8,00,000.
Verification: Gross profit = 25% of ₹8,00,000 = ₹2,00,000; Cost (₹8,00,000) + Gross profit (₹2,00,000) = ₹10,00,000 = Revenue from Operations. ✓ …
Showing the 12 most recent of 67 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.For which of the following items the ratio is computed in days?(a) For total purchase(b) For credit sales(c) For credit purchase(d) Both (B) and (C)
›Reveal solutionSolution
Ratios computed in days apply to both credit sales and credit purchases, so the answer is (d).
Certain activity ratios are stated as a number of days:
Ratio Based on Expressed in Debtors / Receivables collection period Credit sales Days Creditors / Payables payment period Credit purchases Days … - CBSE 2026Set MARCH1 markMCQQ.Which of the following is correct for accounting ratios?(a) Comparison with ratios developed by the firm(b) Comparison with ratios of industry(c) Comparison with ratios of competitors(d) All of the above
›Reveal solutionSolution
Accounting ratios can be compared with the firm's own, industry and competitors' ratios, so the answer is (d).
Ratio analysis is a comparative tool. A ratio is judged good or bad only against a benchmark, which may be:
- the firm's own ratios of earlier years (intra-firm/trend comparison),
- the average ratios of the industry, and …
- CBSE 2026Set MARCH1 markQ.Expand R.O.I.
›Reveal solutionSolution
R.O.I. stands for Return on Investment.
Return on Investment (also called Return on Capital Employed) is a profitability ratio that shows how efficiently the capital employed in the business has been used to generate profit.
…
- CBSE 2026Set ANNUAL1 markMCQQ.If the market price of a company is ₹ 16 per share and earning per share is ₹ 3.2, then the price earning ratio will be A) ₹ 0.20 B) ₹ 5 C) ₹ 16 D) Cannot be determined
›Reveal solutionSolution
The price-earning ratio is 5 - option (B).
Price-Earning (P/E) Ratio = Market Price per Share / Earnings per Share (EPS)
= 16 / 3.2
= 5 times.
…
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: Operating ratio + __________? = 100
›Reveal solutionSolution
Operating ratio + Operating profit ratio = 100.
The operating ratio expresses operating cost (cost of revenue from operations + operating expenses) as a percentage of net sales, while the operating profit ratio expresses operating profit as a percentage of net sales. Since operating cost + operating profit together make up the whole of net sales (100%), the two ratios are compleme …
- CBSE 2026Set ANNUAL1 markMCQQ.“Higher the ratio, the more favourable it is.” This does not apply to,(a) Operating ratio(b) Net profit ratio(c) Stock Turnover ratio(d) All of these
›Reveal solutionSolution
'Higher is more favourable' does not apply to the operating ratio - option (a).
The operating ratio = (Cost of goods sold + Operating expenses) / Net sales x 100. It shows the proportion of sales absorbed by operating costs, so a lower operating ratio is favourable (it leaves a higher operating profit). Thus, unlike the net profit or stock turnover ratios (where …
- CBSE 2026Set ANNUAL1 markMCQQ.Assertion(A) : Accounting ratio is a mathematical expression of relationship between different items of the group of items in the Financial Statements for two consecutive years. Reason (R) : Accounting ratio is a mathematical expression of relation between two items of the group of items in the Financial Statement. In the context of the above statements, which of the following is correct?(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A)(c) Assertion (A) is true but Reason (R) is false(d) Assertion (A) is false but Reason (R) is true(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A)(c) Assertion (A) is true but Reason (R) is false(d) Assertion (A) is false but Reason (R) is true
›Reveal solutionSolution
Assertion (A) is false but Reason (R) is true (Option D).
An accounting ratio is simply a mathematical expression of the relationship between two related items (or groups of items) taken from the financial statements of the SAME accounting period — for example, Current Assets to Current Liabilities, or Net Profit to Revenue from Operations, both for the same year. It does not require, and is not defined using, figures 'for two consecutive years' as stated in Assertion (A); ratios for two different years are only needed when doing trend/comparative analysis of the SAME ratio across years, which is a separate exercise from the basic defini …
- CBSE 2026Set ANNUAL1 markQ.Profit from sale of Land is ₹ 3,00,000. Will it increase operating profit? Give reason.
›Reveal solutionSolution
No, profit from sale of land will NOT increase operating profit.
Operating Profit is the profit earned from a company's normal, regular business/trading operations alone. Profit (or loss) on sale of a fixed asset such as land is a capital transaction, unrelated to the day-to-day operating activities of the business, and is non-recurring in nature. Hence, while computing Operating Profit from Net Profit, such non-operating gains are specifically EXCLUDED (deducted back out, since they were included in net profit but do not relate to operations). Including it …
- CBSE 2026Set ANNUAL1 markMCQQ.Or. When a firm's total asset turnover ratio increases, it indicates(a) assets are being used more efficiently to generate sales(b) assets are being underutilized(c) sales have decreased(d) fixed assets have increased
›Reveal solutionSolution
A rising Total Asset Turnover Ratio shows the firm is generating more sales per rupee of assets employed — a sign of improving efficiency, not a decline.
Total Asset Turnover Ratio = Net Sales (Revenue from Operations) ÷ Total Assets
This ratio is an efficiency/activity ratio that reveals how effectively a company is using its entire base of assets (both fixed and current) to generate sales revenue. A higher (or increasing) ratio means the company is generating more sales for every rupee tied up in its assets — i.e., its asset base is being put to more productive, efficient use. This could result from growing sales without a proportionate rise in assets, or from the company trimming down unproductive/idle assets while maintaining its sales level.
Conversely, a falling ratio would suggest assets are becoming underutilized relative to the sales they generate — the opposite of what this question describes.
The other options are incorrect because: …
- CBSE 2025Set 67/6/11 markMCQQ.The Current Ratio of Magnum Ltd. is 2·5 : 1. Which of the following transactions will result in decrease in this ratio ? (A) Purchased goods for cash ₹ 73,000 (B) Cash collected from debtors ₹ 41,000 (C) Outstanding salaries paid ₹ 62,000 (D) Repayment of long term loan ₹ 8,00,000
›Reveal solutionSolution
The Current Ratio will decrease only in transaction (D) Repayment of long-term loan ₹8,00,000. Transactions (A), (B), and (C) either keep the ratio unchanged or increase it.
The Current Ratio is Current Assets divided by Current Liabilities. A ratio of 2.5:1 means for every ₹1 of current liability, the firm has ₹2.5 of current assets. To see whether a transaction decreases this ratio, you must check what happens to both the numerator (current assets) and the denominator (current liabilities). The ratio falls when current assets decrease more than current liabilities, or when current liabilities increase more than current assets.
Let's examine each option one by one.
(A) Purchased goods for cash ₹73,000
Cash (a current asset) goes down by ₹73,000. Goods purchased become inventory (also a current asset), which goes up by ₹73,000. One current asset replaces another — total current assets remain unchanged. Current liabilities are not affected. So the ratio stays exactly the same.
(B) Cash collected from debtors ₹41,000
Cash (current asset) increases by ₹41,000. Debtors (current asset) decrease by ₹41,000. Again, one current asset replaces another. Total current assets are unchanged. Current liabilities are untouched. The ratio does not change.
(C) Outstanding salaries paid ₹62,000
Outstanding salaries are a current liability. When you pay them, cash (current asset) decreases by ₹62,000, and the liability (outstanding salaries) also decreases by ₹62,000. Both numerator and denominator fall by the same amount. For a ratio greater than 1 (here 2.5), reducing both by the same rupee amount actually increases the ratio. Let's test with assumed numbers: suppose current assets were ₹2,50,000 and current liabilities ₹1,00,000 (ratio 2.5). After paying ₹62,000, current assets become ₹1,88,000 and current liabilities become ₹38,000. New ratio = 1,88,000 ÷ 38,000 = 4.95 (approx). So the ratio increases, not decreases.
(D) Repayment of long-term loan ₹8,00,000 …
- CBSE 2025Set MARCH1 markMCQQ.Which of the following is not included in operating expense?(a) Loss on sale of asset(b) Loss due to fire(c) Interest paid(d) All of the above
›Reveal solutionSolution
Loss on sale of asset, loss due to fire and interest paid are all non-operating/financial items, so none is an operating expense. Correct option: (d).
In GSEB Class-12 Commerce Accountancy (Accounting Ratios):
- Operating expenses = office/administrative, selling and distribution expenses tied to normal operations. …
- CBSE 2025Set MARCH1 markQ.What is ratio?
›Reveal solutionSolution
A ratio is the mathematical relationship between two related accounting figures, expressed as a pure number (times), a proportion, or a percentage, used to analyse and interpret financial statements.
In GSEB Class-12 Commerce Accountancy (Accounting Ratios):
- A ratio shows how one figure relates to another (e.g., current assets to current liabilities).
- It can be expressed as a pure ratio (2 : 1), a quotient/times (2 times), or a percentage (25%). …
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