(a) From the following information, calculate 'Interest — CBSE Class 12 Accountancy 2026 PYQ

Question

Q. (a) From the following information, calculate 'Interest Coverage Ratio' : Shareholders' funds | ₹ 30,00,000 8% Long-term debt | ₹ 10,00,000 Net profit after tax | ₹ 2,40,000 Tax Rate | 40%

(OR)

(b) From the following information, calculate 'Inventory Turnover Ratio' : Revenue from operations | ₹ 15,00,000 Opening inventory | ₹ 2,00,000 Gross profit is 25% of cost of revenue from operations. Closing inventory was 2 times the opening inventory.

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Part (a)Concept understanding — Financial Ratio Analysis

Financial Ratio Analysis — A First Look

Think of a friend who runs a small shop. You want to know: Is the shop doing well? You could ask, "How much profit did you make?" But that single number doesn't tell you much. A profit of ₹50,000 sounds good — but what if the shop owner invested ₹10,00,000 of their own money? Suddenly that profit looks small. What if the shop owes ₹8,00,000 to suppliers? That changes the picture too.

This is where ratio analysis comes in. It takes two numbers from the financial statements and compares them. A ratio is simply one number divided by another. That comparison gives you a relative measure — not just "how much profit" but "profit relative to investment" or "profit relative to sales."

What Exactly Is Financial Ratio Analysis?

Financial ratio analysis is the process of calculating and interpreting ratios using data from the Balance Sheet and Statement of Profit and Loss (the P&L). These ratios help you evaluate a business's performance, financial health, and efficiency.

The NCERT Class 12 Accountancy textbook (Part II, Chapter 5) defines it as: "the process of establishing meaningful relationship between items of the financial statements."

There are four main categories of ratios you will study:

Category	What it measures	Example
Liquidity ratios	Ability to pay short-term debts	Current ratio
Solvency ratios	Ability to pay long-term debts	Debt-equity ratio
Activity ratios	How efficiently assets are used	Inventory turnover ratio
Profitability ratios	How much profit relative to sales/investment	Gross profit ratio

Why Does It Matter?

A single absolute number — say, Net Profit of ₹2,00,000 — is almost meaningless without context. Ratio analysis gives you that context. It lets you:

Compare performance across years (trend analysis)
Compare one company with another in the same industry
Judge whether the business can meet its obligations
Identify strengths and weaknesses before they become crises

For example, if Current Assets are ₹5,00,000 and Current Liabilities are ₹2,50,000, the Current Ratio is 2:1. That is considered healthy. But if Current Liabilities were ₹5,00,000, the ratio would be 1:1 — a warning sign.

Accounting Treatment — What Gets Debited and Credited?

Here is a critical point: Ratio analysis itself does not involve any journal entry. You are not recording a transaction. You are analysing existing data. No account is debited or credited when you calculate a ratio.

However, the data used in ratio analysis comes from accounts that were debited and credited when transactions occurred. For instance:

Gross Profit Ratio uses Gross Profit (from the P&L) and Revenue from Operations (Net Sales). Gross Profit itself is the result of closing entries — debit Trading Account, credit P&L.
Current Ratio uses Current Assets (like Cash, Debtors) and Current Liabilities (like Creditors, Bills Payable). These balances exist because of past journal entries.

So while ratio analysis has no direct debit/credit, it draws entirely from the ledger balances that do.

Formats and Proformas You Need to Know

The NCERT textbook provides specific formats for the financial statements from which ratios are calculated. Here is the Statement of Profit and Loss format (as per Schedule III of the Companies Act, 2013) that you will use:

Particulars	Note No.	Amount (₹)
I. Revenue from Operations		xxx
II. Other Income		xxx
III. Total Revenue (I + II)		xxx
IV. Expenses:
Cost of Materials Consumed		xxx
Purchases of Stock-in-Trade		xxx
Changes in Inventories		xxx
Employee Benefit Expenses		xxx
Finance Costs		xxx
Depreciation and Amortisation		xxx
Other Expenses		xxx
Total Expenses		xxx
V. Profit before Tax (III – IV)		xxx
VI. Tax Expense		xxx
VII. Profit for the Period (V – VI)		xxx

And the Balance Sheet format (abbreviated):

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital		xxx
(b) Reserves and Surplus		xxx
2. Non-Current Liabilities		xxx
3. Current Liabilities		xxx
Total		xxx
ASSETS

Part (b)Concept understanding — Inventory Turnover Ratio

Inventory Turnover Ratio – A First Look

Think of a kirana shop. The owner buys a carton of biscuits, keeps it on the shelf, and sells it. If that carton sits unsold for six months, the money used to buy it is stuck — it's not earning anything. But if the same carton sells out in a week and is replaced by a new one, the owner's money is working hard, turning over again and again.

That's the core idea: how fast does inventory sell? The Inventory Turnover Ratio measures exactly this speed.

The Precise Meaning

The ratio tells you how many times a business sells and replaces its entire stock of inventory during an accounting period (usually a year).

\text{Inventory Turnover Ratio} = \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}

Where:

Cost of Revenue from Operations = Opening Inventory + Purchases + Direct Expenses – Closing Inventory (this is the cost of goods sold, not the selling price)
Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2

A high ratio means inventory moves quickly — good for cash flow. A low ratio means goods sit idle — money is locked up, and there's risk of obsolescence or spoilage.

Why It Matters (The "So What?")

For a Class 12 student, this ratio is part of Turnover Ratios under Accounting Ratios (NCERT Class 12, Part B, Chapter 5). It helps answer three questions:

Efficiency – Is the company managing its stock well? A ratio of 8 means inventory is sold and replaced 8 times a year (roughly every 45 days).
Liquidity – Slow-moving inventory can signal poor sales or overstocking, which strains cash.
Comparison – Compare with past years or with competitors in the same industry. A textile firm and a vegetable vendor will have very different ideal ratios — context matters.

Watch out

A very high ratio isn't always good. It could mean the company keeps too little stock and risks running out (stockouts), losing customers. A very low ratio could mean obsolete goods no one wants.

Accounting Treatment – What Gets Debited/Credited?

The ratio itself is a calculation, not a journal entry. But the numbers that feed into it come from real accounts:

Cost of Revenue from Operations is the Trading Account's debit side (the cost of goods sold). It is not a separate ledger account — it's a derived figure.
Inventory appears in the Balance Sheet under Current Assets. When inventory is sold, the journal entry is:

Particulars	Debit (₹)	Credit (₹)
Cost of Revenue from Operations A/c (or Trading A/c) Dr.	XXX
To Inventory A/c		XXX
(Being cost of inventory sold transferred)

This entry reduces Inventory (credit) and increases the cost side of the Trading Account (debit). The ratio then uses the average of opening and closing Inventory balances.

Format / Proforma (as per NCERT)

The ratio is presented in the Comparative Statement or Common Size Statement format. Here's the standard proforma for calculating it:

Important

Format for Computing Inventory Turnover Ratio

Particulars	Amount (₹)
1. Cost of Revenue from Operations
Opening Inventory	XXX
Add: Purchases	XXX
Add: Direct Expenses (e.g., carriage, wages)	XXX
Less: Closing Inventory	(XXX)

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Part (a): Interest Coverage Ratio = 6 times.

Part (b): Inventory Turnover Ratio = 4 times.

Part (a)

The Interest Coverage Ratio shows how many times EBIT covers the fixed interest charge; a higher value means a greater safety margin for lenders.

Interest Coverage Ratio = EBIT / Interest on long-term debt

Working Notes

Interest on 8% long-term debt = 8% x Rs 10,00,000 = Rs 80,000.
NPAT = Rs 2,40,000 at a 40% tax rate, so NPAT is 60% of PBT. PBT = 2,40,000 / 0.60 = Rs 4,00,000.
EBIT = PBT + Interest = 4,00,000 + 80,000 = Rs 4,80,000.

Particulars	Amount (Rs)
Profit before Tax	4,00,000
Add: Interest	80,000
EBIT	4,80,000

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 44 on this concept.

CBSE 2026Set 67/4/11 markMCQ
$Q. The Debt-Equity Ratio of a company is 2 : 1. Which of the following transactions will increase the Debt-Equity Ratio ? (A) Issue of Shares ₹ 2,00,000 (B) Issue of 8% Debentures ₹ 5,00,000 (C) Issue of Bonus shares ₹ 4,00,000 (D) Payment to Creditors ₹ 1,00,000$
›Reveal solutionSolution
Option (B) — Issue of 8% Debentures ₹5,00,000 — will increase the Debt-Equity Ratio from 2:1.

Concept: Debt-Equity Ratio

The Debt-Equity Ratio measures the relationship between a company's external liabilities (debt) and shareholders' funds (equity):
$\text{Debt-Equity Ratio} = \frac{\text{Total Debt (External Liabilities)}}{\text{Shareholders' Funds (Equity)}}$
A ratio of 2:1 means for every ₹1 of equity, the company has ₹2 of debt.

To increase this ratio, we need a transaction that either:

Increases debt while keeping equity constant, or

Decreases equity while keeping debt constant, or

Increases debt proportionately more than equity increases.

Let us assume the company currently has Debt = ₹2,00,000 and Equity = ₹1,00,000 (giving the 2:1 ratio). We will test each option.

Analysis of Each Transaction

(A) Issue of Shares ₹2,00,000

Accounting Treatment:

When shares are issued, Bank/Cash A/c is debited and Share Capital A/c (part of equity) is credited.

Effect:

Debt remains ₹2,00,000

Equity increases to ₹1,00,000 + ₹2,00,000 = ₹3,00,000

New Ratio:
$\frac{2,00,000}{3,00,000} = \frac{2}{3} = 0.67:1$
The ratio decreases from 2:1 to 0.67:1.

(B) Issue of 8% Debentures ₹5,00,000

Accounting Treatment:

When debentures are issued, Bank/Cash A/c is debited and Debentures A/c (a long-term liability, part of debt) is credited.

Effect:

Debt increases to ₹2,00,000 + ₹5,00,000 = ₹7,00,000

Equity remains ₹1,00,000

New Ratio:
$\frac{7,00,000}{1,00,000} = 7:1$
The ratio increases from 2:1 to 7:1.

Tip

Any issue of debentures, bonds, or long-term loans increases debt without affecting equity, thereby raising the Debt-Equity Ratio.

(C) Issue of Bonus Shares ₹4,00,000

Accounting Treatment:

Bonus shares are issued by capitalising reserves. General Reserve/Profit & Loss A/c is debited and Share Capital A/c is credited. Both accounts are part of shareholders' funds (equity).

Effect:

Debt remains ₹2,00,000

Equity remains ₹1,00,000 (internal transfer within equity — reserves decrease, share capital increases by the same amount)

New Ratio:
$\frac{2,00,000}{1,00,000} = 2:1$
The ratio remains unchanged at 2:1.

Watch out

Bonus shares do NOT bring in fresh capital. They merely convert one component of equity (reserves) into another (share capital). Total equity is unaffected, so the Debt-Equity Ratio does not change.

--- …
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CBSE 2026Set ANNUAL1 markMCQ
$Q. Profit before Interest and Tax is ₹ 3,00,000 and Interest ₹ 75,000. The Interest coverage Ratio is _______.$
(a) 4 : 1
(b) 3 : 1
(c) 2 : 1
(d) 1 : 1
(a) 4 : 1
(b) 3 : 1
(c) 2 : 1
(d) 1 : 1
›Reveal solutionSolution

Interest Coverage Ratio = 4 : 1 (Option A).

Interest Coverage Ratio = Profit before Interest and Tax (PBIT) ÷ Interest on Long-term Debt

= 3,00,000 / 75,000 = 4 times, i.e. 4 : 1

…

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CBSE 2026Set ANNUAL1 mark
$Q. Mention the formula to calculate Inventory Turnover Ratio.$
›Reveal solutionSolution

Inventory (Stock) Turnover Ratio = Cost of Goods Sold (Cost of Revenue from Operations) ÷ Average Inventory.

The Inventory Turnover Ratio is an activity/efficiency ratio that shows how many times a firm's average stock is sold and replenished during an accounting period. A higher ratio generally indicates efficient inventory management (fast-moving stock, less money blocked in inventory), while a very low ratio may indicate slow-moving or obsolete stock.

Formula:

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

where:

Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2

Cost of Revenue from Operations (Cost of Goods Sold) itself is computed as:

= Opening Stock + Net Purchases + Direct Expenses − Closing Stock …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Creditors turnover ratio includes (A) Total credit purchase (B) Total credit sales (C) Total cash sales (D) Total cash purchase$
›Reveal solutionSolution
Creditors (payables) turnover ratio uses total credit purchases, so the answer is (A).

Creditors Turnover Ratio = Net Credit Purchases / Average Accounts Payable (creditors plus bills payable). It tells us how many times, on average, the firm pays off its trade creditors during the year.

Credit sales (B) belong to the debtors/trade receivables turnover ratio, not creditors.

Cash sales (C) and cash purchases (D) create no creditors at all, so they are irrelevant to this ratio. …
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CBSE 2025Set ANNUAL1 markMCQ
$Q. If Sales Rs. 4,00,000, Gross profit 25%, Closing stock Rs. 50,000, what will be the stock turnover ratio? (A) 6 times (B) 7 times (C) 8 times (D) 10 times.$
›Reveal solutionSolution

Stock turnover ratio is 6 times — option (A).

Stock (inventory) Turnover Ratio = Cost of Goods Sold / Average Stock.

Step 1 - Cost of Goods Sold (COGS):

Gross Profit = 25% of Sales = 25% of 4,00,000 = Rs. 1,00,000.

COGS = Sales - Gross Profit = 4,00,000 - 1,00,000 = Rs. 3,00,000.

Step 2 - Stock: …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Average stock is Rs. 75,000 and stock turnover is 12. If profit on sales is 20%, then the amount of profit will be (A) Rs. 1,80,000 (B) Rs. 2,25,000 (C) Rs. 3,75,000 (D) None of these.$
›Reveal solutionSolution

The amount of profit is Rs. 2,25,000 — option (B).

Step 1 - Cost of Goods Sold (COGS):

Stock Turnover Ratio = COGS / Average Stock, so

COGS = 12 x 75,000 = Rs. 9,00,000.

Step 2 - Sales:

Profit is 20% of sales, so cost is the remaining 80% of sales. …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Total sales and cash sales of a concern are Rs. 6,00,000 and Rs. 40,000 respectively. Amount of average debtors is Rs. 1,40,000. Debtors turnover ratio will be (A) 3 times (B) 5 times (C) 4 times (D) None of these.$
›Reveal solutionSolution

The debtors turnover ratio is 4 times — option (C).

Debtors (Receivables) Turnover Ratio = Net Credit Sales / Average Debtors.

Step 1 - Net Credit Sales: …

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CBSE 2025Set ANNUAL1 mark
$Q. Write the formula of creditors turnover ratio.$
(OR)
$Give one example of solvency ratio.$
›Reveal solutionSolution

Creditors Turnover Ratio = Net Credit Purchases / Average Creditors; a solvency ratio example is the Debt-Equity Ratio.

Formula of Creditors Turnover Ratio:

Creditors (Accounts Payable) Turnover Ratio = Net Credit Purchases / Average Creditors,

where Average Creditors = (Opening Creditors + Closing Creditors) / 2, and creditors include bills payable. It measures how many times, on average, a firm pays off its trade payables during the year.

OR - One example of a solvency ratio: …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Satisfactory Ratio between Long-term Debts and Shareholder's Fund is ________. (A) 1 : 1 (B) 1 : 2 (C) 2 : 1 (D) 3 : 1$
›Reveal solutionSolution

A Debt-Equity Ratio of 2:1 is conventionally regarded as safe/satisfactory, meaning debt should not exceed twice the shareholders' funds, giving lenders an adequate margin of safety.

The Debt-Equity Ratio measures the relationship between a company's long-term debts (borrowed funds) and its Shareholders' Funds (owners' funds), and indicates the long-term solvency/financial stability of the firm. A 2:1 ratio is generally considered satisfactory because it means that for every Rs. 2 of debt, the company has Rs. 1 of owners' funds backing it — i.e., debt is …

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CBSE 2025Set ANNUAL1 mark
$Q. Give the formula of Working Capital Turnover Ratio.$
›Reveal solutionSolution

The ratio relates net sales to the working capital employed to generate them, showing how efficiently working capital is being used.

Working Capital Turnover Ratio measures the efficiency with which a firm's working capital is being utilised to generate sales/revenue. It is computed as:

Working Capital Turnover Ratio = Net Revenue from Operations ÷ Working Capital

where Working Capital = Current Assets − Current Liabilities.

…

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CBSE 2025Set ANNUAL1 markMCQ
$Q. Solvency of the business can be measured by -$
(a) Comparing fixed assets and liabilities
(b) Comparing current assets with current liabilities
(c) Comparing liquid assets with current assets
(d) All of these
›Reveal solutionSolution

Solvency (long-term financial soundness) is judged by comparing fixed assets with liabilities; liquidity (short-term paying ability) is judged by current-asset/current-liability or quick-asset comparisons — these are two different questions.

'Solvency' refers to a firm's ability to meet its LONG-TERM debts and obligations as they fall due, i.e., whether the business has enough resources overall to survive and discharge its liabilities over time — distinct from 'liquidity', which asks whether the firm can pay its IMMEDIATE, short-term bills.

…

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CBSE 2024Set MARCH1 mark
$Q. Expand EPS.$
›Reveal solutionSolution

EPS = Earnings Per Share.

Earnings Per Share (EPS) is a profitability ratio that shows the amount of net profit (after tax and preference dividend) earned on each equity share. It is calculated as: EPS = (Net profit after tax − Preference dividend) ÷ Number of equity shares. It is …

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Q.(a) From the following information, calculate 'Interest Coverage Ratio' : Shareholders' funds | ₹ 30,00,000 8% Long-term debt | ₹ 10,00,000 Net profit after tax | ₹ 2,40,000 Tax Rate | 40%

Part (a)

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