(a) ‘Net Asset Turnover ratio’ of a company is 2 times. State with reason whether the following transactions will increase, decrease or not affect the ratio :
- Cash sales ₹ 3,00,000
- Issue of equity shares ₹ 10,00,000
- Issue of 9% debentures ₹ 5,00,000
- Credit purchase of goods ₹ 50,000 OR (b) From the following information, calculate ‘Proprietary Ratio’ and ‘Debt-to-Equity Ratio’ :
| Particulars | ₹ |
|---|---|
| Equity Share Capital | 3,00,000 |
| Preference Share Capital | 1,00,000 |
| Reserves and Surplus | 1,00,000 |
| Plant and Machinery | 3,50,000 |
| Non-Current Investments | 1,00,000 |
| Current Assets | 2,00,000 |
| Long-term Borrowings | 1,50,000 |
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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 — 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 (a)
Net Asset (Capital Employed) Turnover Ratio = Revenue from Operations ÷ Capital Employed (Net Assets). Currently 2 times.
| Transaction | Effect | Reason |
|---|---|---|
| (i) Cash sales ₹3,00,000 | Increase | Revenue (numerator) rises by the full sale, more than the small rise in net assets from profit ⇒ ratio increases |
| (ii) Issue of equity shares ₹10,00,000 | Decrease | Capital employed (denominator) rises; revenue unchanged |
| (iii) Issue of 9% debentures ₹5,00,000 | Decrease | Debentures are part of capital employed ⇒ denominator rises; revenue unchanged |
(a) Effect on Net Asset Turnover Ratio: (i) Increase, (ii) Decrease, (iii) Decrease, (iv) No effect.
(b) Proprietary Ratio = 0.77 : 1 (76.92%); Debt-to-Equity Ratio = 0.3 : 1.
Part (a)
The Net Asset / Capital Employed Turnover Ratio = Revenue from Operations ÷ Capital Employed, where Capital Employed (Net Assets) = Total Assets − Current Liabilities = Shareholders' Funds + Non-Current Liabilities.
| Transaction | Effect | Reason |
|---|---|---|
| (i) Cash sales ₹3,00,000 | Increase | Revenue from operations (numerator) rises by ₹3,00,000; net assets rise only by the profit element, so the ratio increases |
| (ii) Issue of equity shares ₹10,00,000 | Decrease | Shareholders' funds (part of capital employed) rise; revenue unchanged, so the denominator grows and the ratio falls |
| (iii) Issue of 9% debentures ₹5,00,000 | Decrease | Debentures are a non-current liability included in capital employed; the denominator rises with revenue unchanged |
Showing the 12 most recent of 80 on this concept.
- CBSE 2026Set 67/4/11 markMCQQ.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):
Debt-Equity Ratio=Shareholders’ Funds (Equity)Total Debt (External Liabilities)
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:
3,00,0002,00,000=32=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:
1,00,0007,00,000=7:1
The ratio increases from 2:1 to 7:1.
TipAny 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:
1,00,0002,00,000=2:1
The ratio remains unchanged at 2:1.
Watch outBonus 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.
--- …
- 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 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 markMCQQ.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
…
- 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 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%). …
- CBSE 2025Set MARCH1 markQ.Expand RONW.
›Reveal solutionSolution
RONW stands for Return On Net Worth.
Return on Net Worth (also called Return on Shareholders' Funds/Equity) is a profitability ratio computed as (Net Profit after tax and preference dividend ÷ Shareholders' Funds) × 100. It tells the equity owners how much profit the firm earned on every r …
- CBSE 2025Set ANNUAL1 markMCQQ.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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