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Activity (or turnover) ratios - class-XII

Description: activity (or turnover) ratios
Number of Questions: 37
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Tags: accountancy accounting ratios ratio analysis accounting ratio and analysis analysis of financial statements elements of accounts
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A higher accounts receivable turnover ratio means _______________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Lower debt collection period

  2. Higher debt collection period

  3. Lower sales

  4. Higher sales

Show answer
Correct Option: B
Explanation:

Accounts receivable turnover is the number of times per year that a business collects its average accounts receivables.

A high turnover ratio indicates a combination of a conservative credit policy and an aggressive collections department, as well as a number of high-quality customers.

Inventory turnover ratio $=$ Cost of __________ during the period $\div$ Cost of average inventory held during the period.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Inventory consumed

  2. Minimum inventory

  3. Maximum inventory

  4. None of these

Show answer
Correct Option: A
Explanation:

Inventory turnover ratio determines the number of times stock is turned into sales during the accounting period under consideration. It expresses the relationship between the cost of goods sold and stock of goods. The formula for its calculation is as follows:


Stock Turnover Ratio = Cost of Goods Sold/Average Stock


Where average stock refers to arithmetic average of opening and closing stock, and the cost of goods sold means sales less gross profit
It studies the frequency of conversion of stock of finished goods into sales. It is also a measure of liquidity. It determines how many times stock is purchased and replaced during a year. Low turnover of stock may be due to bad buying, obsolete stock, etc. and is a danger signal. High turnover is goods but is must be carefully interpreted as it may be due to buying into small lots or selling quickly at low margin to realize cash. Thus, it throws light on utilization of stock of goods.

Inventory turnover measures the relationship of inventory with _______.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Average sales

  2. Cost of goods sold

  3. Total purchases

  4. Total assets

Show answer
Correct Option: B
Explanation:

Inventory turnover ratio shows how many times a company's inventory is sold and replaced over a period of time. It is an efficiency ratio. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.

If the closing balance of receivables is less than the opening balance for a month then which one is true out of __________________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Collections > Current Purchases

  2. Collections > Current Sales

  3. Collections < Current Purchases

  4. Collections < Current Sales

Show answer
Correct Option: B
Explanation:

Collection is more than the current sales, In such situation closing balance of receivables will be less than the opening balance. As credit is more than the debit.

80% of sales of  10,00,000 of a firm are on credit. It has a receivable turnover of 8. What is the average collection period (360 days a year) and average debtors of the firm?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 45 days and 1,00,000

  2. 360 days and 1,00,000

  3. 45 days and 8,00,000

  4. 360 days and 1,25,000

Show answer
Correct Option: A
Explanation:

Debtors turnover ratios is an activity ratio measuring how efficiently a firm uses it assets. This can be calculated as:

Debtors Turnover Ratio=Credit sales/Average accounts receivables

In the given information:
Total Sales      Rs.1000000
Credit Sales    Rs.800000 (80% of sales)
Debtors T/O ratio- 8
Therefore
8=800000/Average receivables
Average Receivables are Rs.100000

Average Collection period=No of days in a year/debtors turnover ratio
=360/8
Average collection period is 45 days.

The turnover ratio indicates ________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. the number of times the capital has been rotated in the process of doing business

  2. the efficiency with which the capital employed is rotated in the business

  3. Both (A) and (B)

  4. Financial position of the company

Show answer
Correct Option: C
Explanation:

Turnover ratio is a measurement of the number of times a company's inventory is replaced during a given period of time. It is calculated by dividing cost of goods sold by average inventory during a given period of time. It indicates the number of times the capital has been rotated in the process of doing business as well as the efficiency with which the capital employed is totated in the business.

If the average balance of debtors has increased, which of the following might not show a change in general?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Total Sales

  2. Average Payables

  3. Current Ratio

  4. Bad Debt loss

Show answer
Correct Option: B
Explanation:

Change in average balance of debtors does not have any relation with average payable. 

State the formula for turnover ratio.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $\dfrac {\text {Current assets}}{\text {Current liabilities}}$

  2. $\dfrac {Sales}{\text {Capital employed}}$

  3. $\dfrac {\text {Fixed assets}}{\text {Long-term funds}}$

  4. $\dfrac {\text {Current assets}}{Sales}$

Show answer
Correct Option: B
Explanation:

Turnover ratio is a measurement of the number of times a company's inventory is replaced during a given period of time. It is calculated by dividing cost of goods sold by capital employed during a given period of time. 

When the Debt Turnover Ratio is $4$, what is the average collection period?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $5$ months

  2. $4$ months

  3. $3$ months

  4. $2$ months

Show answer
Correct Option: C
Explanation:

Debt Turnover ratio = Net credit sales/ Average trade receivables = $4$

Average collection period = $12$ months / Debt turnover ratio
                                             = $12$ months / $4$
                                              = $3$ months

If the inventory turnover is high, the working capital requirements will be ___________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. High

  2. Low

  3. Equal

  4. None of the above

Show answer
Correct Option: B
Explanation:

Inventory Turnover = [Cost of goods sold/Sales] / Average inventory.

A high inventory turnover is good from the point of liquidity position and vice versa. If the inventory turnover is high it means that the inventory is being used or sold in a short time, which means that the funds of the company are not being blocked and so the working capital requirements would be low.

The ______ measures the activity of a firm's inventory.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Average payment period

  2. Inventory turnover

  3. Average collection period

  4. Current ratio

Show answer
Correct Option: B
Explanation:

Inventory turnover ratio measures the activity of a firm's inventory i.e. the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.

The _____ ratio may indicate the firm is experiencing stock outs and lost sales. 

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Average payment period

  2. Inventory turnover

  3. Average collection period

  4. Quick

Show answer
Correct Option: A
Explanation:

The average payment period (APP) is defined as the number of days a company takes to pay off credit purchases. It is calculated as accounts payable/ (total annual purchases/360).  As the average payment period increases, cash should increases as well, but working capital remains the same. APP ratio may indicate the firm is experiencing stock outs and lost sales.

ABC co. extends credit term of 45 days to its customers. Its credit collection would be considered poor if its average collection period was ____________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 30 days

  2. 36 days

  3. 47 days

  4. 42 days

Show answer
Correct Option: C
Explanation:

By monitoring average collection policy, the firm can see if its term are generally being met. ABC company's credit collection would be considered poor if collection period is more than 45 days i.e. Customers on average are significantly slower in paying than company policies allow.

Calculate debtor turnover ratio from the following information:
Total sales = Rs. 4,00,000
Cash sales = 20% of total sales
Debtor beginning of the year = Rs. 40,000
Debtors end of the year =  Rs. 1,20,000

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 3 times

  2. 4 times

  3. 6 times

  4. 5 times

Show answer
Correct Option: B
Explanation:

Average debtors = (Rs. 40,000 + Rs. 1,20,000)/2 = Rs. 80,000

Cash sales = 20% of total sales
                   = Rs. 4,00,000 x 20%
                   = Rs. 80,000
Net credit sales = Total sales - Cash sales

                           = Rs. 4,00,000 -  Rs. 80,000

                           = Rs. 3,20,000
Debtors turnover ratio = Net credit sales/Average debtors
                                      = Rs. 3,20,000/Rs. 80,000
                                      = 4 Times

Low assets turnover may indicate                .

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Low assets

  2. High cost of maintenance

  3. Idle assets

  4. Higher sales

  5. Both (B) and (C) above

Show answer
Correct Option: C
Explanation:

Net Asset Turnover ratio = Sales/ Net Asset

Asset turnover highlights the amount of assets that the firm used to produce its total sales. Therefore a low asset turnover would indicate that the firm has idle or improperly use assets.

Stock Turnover ratio is a                    .

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Liquidity ratio

  2. Profitability ratio

  3. Solvency ratio

  4. Activity ratio

Show answer
Correct Option: D
Explanation:
Stock (Inventory) Turnover ratio is a activity ratio as it shows how much times the stock is being used or sold with respect to the turnover or cost of goods sold.
Let Cost of goods sold = $Rs. 100000$ , Opening inventory = $Rs. 55000$ and Closing Inventory = $Rs. 45000$
Stock turnover ratio = Cost of goods sold/ Average Inventory
Average Inventory = [Opening Inventory + Closing Inventory] /$2$
                                 =[ $55000 + 45000$]/$2$
                                  =$Rs. 50000$
Stock turnover ratio = $100000/ 50000$
                                   = $2$ times                       

Sale of inventory on account will cause the inventory turnover ratio to                    .

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. increase

  2. decrease

  3. remain unchanged

  4. none of these

Show answer
Correct Option: A
Explanation:

Inventory turnover ratio = Cost of goods sold(COGS) / Average inventory

Let Cost of goods sold be $Rs. 80000$ , Opening inventory = $Rs. 20000$ and Closing Inventory = $Rs.30000$
Average Inventory = [Opening Inventory + Closing Inventory] / 2
                                = $[20000 + 30000] / 2 $
                                 $Rs. 25000$
Inventory turnover ratio = $80000/ 25000$
                                         = $3.2 $ times
If inventory of $Rs. 10000$ is sold on credit then COGS = $Rs. 90000$ and the Closing Inventory = $Rs. 20000$
Revised Average Inventory = $[20000 +20000] /2$
                                               = $Rs. 20000$

Revised Inventory turnover ratio = 90000/2000080000/25000
                                         = 4.53.2 times

So sale of Inventory on account will cause the inventory turnover ratio to Increase.

The turnover ratio helps management for                        .

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Managing resources

  2. Managing debt

  3. Evaluating performance

  4. None of these

Show answer
Correct Option: C
Explanation:

Turnover ratios are used by management to evaluate the efficiency with which the firm manages and utilizes its assets. For example Fixed asset turnover ratio measures how efficiently the assets are used to generate sales.

Falling demand for the product in the market indicated by ________________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Finished goods turnover ratio

  2. Work in progress turnover ratio

  3. Net profit ratio

  4. Gross profit ratio

Show answer
Correct Option: A

Capacity ratio  X  Efficiency ratio =                             .

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Activity Ratio

  2. Capacity Ratio

  3. Efficiency Ratio

  4. None of these

Show answer
Correct Option: A
Explanation:

Capacity ratio X Efficiency ratio = Activity ratio

If Capacity ratio = $90\%$ , Efficiency ratio = $85\%$ , then
Activity ratio = $90/100$ x $85/100$
                      = $76.5\%$

Large inventory accumulation is anticipation of price rise in future.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Inventory turnover ratio

  2. Fixed charge coverage ratio

  3. Debt to Equity ratio

  4. None of these

Show answer
Correct Option: A

If gross profit ratio is $25\%$ on cost, it is _________ $\%$ on sales.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $33.33\%$

  2. $20\%$

  3. $25\%$

  4. $50\%$

Show answer
Correct Option: B
Explanation:

Cost + Gross profit = Sales

Let cost = $100$ and Gross profit ratio = $25\%$ on cost
Therefore Gross profit = $25\%$ x $100$ = $25$
So, $100 + 25$ = Sales
Sales = $125$
Gross profit as percentage on sales = [Gross profit/Sales] x $100$
                                                             = [$25/125$] x $100$
                                                              = $20\%$.

Borrowing from short term and investing in long term assets indicated by _________________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Current assets to fixed assets ratio

  2. Current ratio

  3. Fixed assets turnover ratio

  4. Inventory turnover ratio

Show answer
Correct Option: A

If gross profit ratio is $33.33\%$ sales, it is ____________$\%$ on cost.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $33.33\%$

  2. $20\%$

  3. $25\%$

  4. $50\%$

Show answer
Correct Option: D
Explanation:

Assume Sale = $300$ and Gross profit = $33.33\% $ on sales = $100$

Cost + Gross profit = Sales
Cost + $100$ = $300$
Cost = $200$
Now, Gross profit % on Cost = Gross Profit  x $100$ 
                                                      Cost
                                               = [$100/200$ ] x $100$
                                               = $50\%$.                                        

If gross profit ratio is $25\%$ sales, it is __________$\%$ on cost.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $33.33\%$

  2. $20\%$

  3. $25\%$

  4. $50\%$

Show answer
Correct Option: A
Explanation:

Assume Sale = $200$ and Gross profit = $25\% $ on sales = $50$

Cost + Gross profit = Sales
Cost + $50$ = $200$
Cost = $150$
Now, Gross profit % on Cost = Gross Profit  x $100$ 
                                                      Cost
                                               = [$50/150$ ] x $100$
                                               = $33.33\%$.                                      

If gross profit ratio is $50\%$ on cost, it is __________$\%$ on sales.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $33.33\%$

  2. $20\%$

  3. $25\%$

  4. $50\%$

Show answer
Correct Option: A
Explanation:

Assume Cost = $200$ and Gross profit = $50\% $ on cost = $100$

Cost + Gross profit = Sales
$200$ + $100$ = Sales
Sales = $300$
Now, Gross profit % on Sales = Gross Profit  x $100$ 
                                                      Sales
                                               = [$100/300$ ] x $100$
                                               = $33.33\%$.                                    

The stock turnover ratio is a/an _______ ratio.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Insolvency

  2. Activity Ratio

  3. Liquidity

  4. Total Investment

Show answer
Correct Option: B
Explanation:
Stock turnover ratio indicates how efficiently the firm’s investment in inventories is converted to sales and thus depicts the inventory management skills of the organization. It is considered an activity ratio as it measures the efficiency of the company in using its resources. So, the correct option is 'Activity ratio'.

From the following data, calculate Inventory Turnover Ratio:
Total Sales Rs. 5,00,000; Sales Return Rs. 50,000; 
Gross Profit Rs. 90,000; Closing Inventory Rs. 1,00,000; Excess of Closing Inventory over opening inventory Rs. 20,000.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 6 times

  2. 3 times

  3. 4 times

  4. 5 times

Show answer
Correct Option: C
Explanation:
Inventory turnover ratio = Cost of goods sold ( WN 1)
                                          ----------------------------------------
                                               Average inventory (WN 2)
                                          = 3,60,000
                                           -----------------
                                             90,000 
                                         = 4 Times

Working notes:-
1) Cost of goods sold = Gross sales - (Sales return + gross profit)
                                    = 5,00,000 - (50,000 + 90,000)
                                    = 3,60,000.
2) Average Inventory = 1,00,000 + 80,000
                                      -------------------------------
                                                      2
                                    = 90,000. 
Closing inventory is 20,000 more than opening inventory hence opening inventory is 1,00,000 - 20,000 = 80,000.
                                         

Credit Revenue from Operations, i.e.,
Net credit sales for the year - 1,20,000
Debtors - 12,000
Bills Receivable - 8,000
Calculate Trade Receivable or Debtors' Turnover Ratio.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 4 times

  2. 3 times

  3. 6 times

  4. 5 times

Show answer
Correct Option: C
Explanation:
Debtor's turnover ratio =             Credit sales
                                               -------------------------------
                                               Average receivables 
                                    
                                       =         1,20,000
                                                -----------------
                                                    20,000                              
                                       =       6 times.

There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. That the capital employed has reduced

  2. That the profitability has gone up

  3. That debtors collection period has increased

  4. That sales has decreased

Show answer
Correct Option: C
Explanation:

Debtor collection period is the time that it takes to convert balances from account receivables back into cash flow. This can apply to an individual transaction or to the business's overall transaction history for a period of time. The lower the debtor collection period the more efficient is the company in collecting payment from its customers.

In response to market expectations, the credit period has been increased from 45 days to 60 days. This would result in a _____________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Decrease in sales

  2. Decrease in debtors

  3. Increase in bad debts

  4. Increase in average collection period

Show answer
Correct Option: D
Explanation:

Credit policy of an organization consists of various elements like cash discount, collection period etc. Collection period means the period of credit allowed to the customer by the organization against the credit sales.


If the credit period is increased from 45 days to 60 days, this will result more blockage of funds and will increase in average collection period.

Securitization is related to conversion of _____________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. Receivables

  2. Stock

  3. Investments

  4. Creditors

Show answer
Correct Option: A
Explanation:

Accounts receivables represents the amount due from the customers to whom organization has done sales. Recovery of money from receivables can take a larger time which depends on the credit policy. 


Organization can convert the receivable in cash by doing the securitization. In such case, receivables are converted in to securities and sold to an investor who will provide immediate cash to the organization.
Securitization allows company to get immediate cash rather than waiting for payment from the customers. By this organization can pass the risk of non payment to investors. 

When opening stock is $Rs.50,000$, closing stock is $Rs 60,000$ and the cost of goods sold is $Rs.2,20,000$, the stock turnover ratio is _________.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 2 times

  2. 3 times

  3. 4 times

  4. 5 times

Show answer
Correct Option: C
Explanation:

Stock turnover ratio = Cost of goods sold/ average inventory

Cost of goods sold = $Rs.2,20,000$
Average Inventory= [Opening inventory + Closing Inventory]/$2$
                               = [$50000 + 60000$] / $2$
                               = $Rs. 55000$
Now,
Stock turnover ratio = $220000/ 55000$
                                  = $4$ times.

If stock turnover ratio = $6$ times; Average stock = $Rs.8,000$; Selling price = $25$% above cost. What is the amount of gross profit?

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $Rs.2,000$

  2. $Rs.4,000$

  3. $Rs.10,000$

  4. $Rs.12,000$

Show answer
Correct Option: D
Explanation:

Stock turnover ratio = Cost of goods sold/Average inventory

                   $6$    = Cost of goods sold/ $8000$
Cost of goods sold  = $Rs. 48000$
Selling price = $25$ % above cost
Therefore Gross profit = Cost of goods sold x $25$%
                                      = $ 48000$ x $25$%
                                      = $Rs. 12000$

Given below are two statements, identify the correctness of the following:
I. Activity ratios show where the company is going.
II. Balance sheet ratios show how the company stands.

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. I is correct, but II is wrong

  2. Both I and II are correct

  3. I is wrong, but II is correct

  4. Both I and II are wrong

Show answer
Correct Option: B
Explanation:

Activity ratios are used to assess the efficiency with which the firm manages and utilises  its assets. These ratios usually compare the revenue growth with respect to the asset deployed giving an idea of where the company is headed, towards growth or decline.

Balance sheet ratios are those in which the variables used are those which are present in the balance sheet. A balance sheet is a statement which shows a picture of how the company stands as on a particular date and so the balance sheet ratios carry out the same task.

Calculate the creditor's turnover ratio from the following data:
Credit purchase during the year = $Rs. 12,00,000$
(Creditor + bills payables) in the beginning of year = $Rs. 4,00,000$
(Creditor + bills parables) at the end of year = $Rs. 2,00,000$

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. 6 times

  2. 4 times

  3. 2 times

  4. 5 times

Show answer
Correct Option: B
Explanation:

Average accounts payable = (Rs. 4,00,000 + Rs. 2,00,000)/2

                                              = Rs. 3,00,000
Credit turnover ratio = Net credit purchases/Average accounts payable
                                   = Rs. 12,00,000/Rs. 3,00,000
                                   = 4 Times

Given information is as follows:
Total assets turnover = $3$ times
Net profit margin = $10\%$
Total assets  = $Rs.2,00,000$
The Net profit is                      .

elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

  1. $Rs.20,000$

  2. $Rs.30,000$

  3. $Rs.50,000$

  4. $Rs.60,000$

Show answer
Correct Option: D
Explanation:

Total assets turnover ratio = Sales / Total assets

                                 $3$ = Sales / $200000$
Therefore, Sales = $Rs. 600000$
Net profit margin = [Net profit / Sales] x $100$
               $10/100$ = [Net profit / $600000$] x $100$
Therfore Net profit = $Rs. 60000$

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