Chapter 20: Ratio Analysis (JAIIB – Paper 3)

1. What is the primary purpose of accounting ratios?

• A. To prepare financial statements
• B. To analyze financial performance and position of a business
• C. To record daily transactions
• D. To calculate tax liability only

Accounting ratios help in understanding the financial health, performance, and efficiency of a business by comparing different items from financial statements.

2. Which of the following best defines accounting ratios?

• A. Monetary values recorded in the balance sheet
• B. Detailed ledger accounts
• C. Relationships between financial statement items expressed numerically
• D. Bank account balances only

Accounting ratios express numerical relationships between items of financial statements to help analyze performance and position.

3. Which of the following is a **classification of accounting ratios** based on profitability?

• A. Profitability ratios
• B. Liquidity ratios
• C. Leverage ratios
• D. Activity ratios

Profitability ratios measure a company’s ability to generate profit relative to sales, assets, or equity.

4. Which ratio indicates a bank's ability to meet its short-term obligations?

• A. Debt-Equity Ratio
• B. Capital Adequacy Ratio
• C. Return on Assets
• D. Liquidity Ratio

Liquidity ratios measure the bank’s ability to pay off its short-term liabilities with short-term assets.

5. Which of the following is an example of an activity (turnover) ratio?

• A. Debt-Equity Ratio
• B. Inventory Turnover Ratio
• C. Current Ratio
• D. Net Profit Margin

Activity or turnover ratios measure the efficiency of asset utilization, like inventory turnover, debtor turnover, etc.

6. A high debt-equity ratio indicates which of the following?

• A. High liquidity
• B. Low profitability
• C. Higher financial risk due to more debt
• D. Low operational efficiency

A high debt-equity ratio shows that a company is relying heavily on debt, increasing its financial risk.

7. Which of the following is a major use of accounting ratios for management?

• A. To evaluate performance and take corrective measures
• B. To record transactions in the journal
• C. To determine tax liability only
• D. To decide the company’s dividend payout solely

Management uses accounting ratios to assess financial performance, identify weaknesses, and make informed decisions for improvement.

8. How do creditors benefit from accounting ratios?

• A. By calculating sales tax
• B. By preparing internal audit reports
• C. By recording depreciation
• D. By assessing the company’s ability to meet debt obligations

Creditors use ratios, especially liquidity and solvency ratios, to evaluate whether a company can repay its debts on time.

9. Investors use accounting ratios primarily to:

• A. Compute tax deductions
• B. Assess profitability and make investment decisions
• C. Record journal entries
• D. Prepare payroll

Investors analyze profitability, return on investment, and risk through ratios before deciding to invest in a company.

10. Which of the following is a limitation of accounting ratios?

• A. They provide a perfect measure of performance
• B. They eliminate the need for other financial analysis
• C. They are based on historical data and may not reflect current conditions
• D. They automatically predict future performance accurately

Accounting ratios rely on historical financial statements, so they may not always represent the current or future financial position of a company.

11. Why is comparison between companies using ratios sometimes misleading?

• A. Different companies may follow different accounting policies and standards
• B. Ratios are always uniform and comparable
• C. Accounting ratios ignore financial statements
• D. Investors do not use ratios for comparison

Differences in accounting methods, valuation of assets, and financial policies can make inter-company ratio comparison less accurate.

12. Which of the following is a limitation of ratio analysis concerning qualitative factors?

• A. Ratios are always forward-looking
• B. Ratios consider market sentiment only
• C. Ratios automatically adjust for inflation
• D. Ratios ignore non-financial factors like employee skill, brand value, and management quality

Accounting ratios focus on numerical data and ignore qualitative factors such as human resources, market reputation, and managerial skills.

13. How is the Current Ratio calculated?

• A. Current Assets ÷ Total Assets
• B. Current Assets ÷ Current Liabilities
• C. Total Liabilities ÷ Current Liabilities
• D. Current Liabilities ÷ Equity

The Current Ratio measures liquidity by comparing current assets with current liabilities to assess short-term solvency.

14. Which ratio indicates how efficiently a company uses its assets to generate sales?

• A. Debt-Equity Ratio
• B. Current Ratio
• C. Asset Turnover Ratio
• D. Gross Profit Ratio

Asset Turnover Ratio measures how efficiently the company uses its assets to generate revenue.

15. If a company has a Net Profit of ₹5,00,000 and Sales of ₹25,00,000, what is the Net Profit Margin?

• A. 20%
• B. 25%
• C. 15%
• D. 10%

Net Profit Margin = (Net Profit ÷ Sales) × 100 = (5,00,000 ÷ 25,00,000) × 100 = 20%.

16. The Debt-Equity Ratio of a company is 2:1. This indicates:

• A. The company has more equity than debt
• B. The company is not using leverage
• C. The company has equal debt and equity
• D. The company has double the debt compared to equity, indicating higher financial risk

A Debt-Equity Ratio of 2:1 shows the company relies heavily on debt financing, increasing financial risk.

17. Which ratio measures the proportion of profits earned for every unit of shareholder’s equity?

• A. Current Ratio
• B. Asset Turnover Ratio
• C. Return on Equity (ROE)
• D. Debt-Equity Ratio

ROE indicates how effectively the company generates profit from shareholders’ funds.

18. A company’s Inventory Turnover Ratio is very low. This may indicate:

• A. Excessive sales
• B. Slow-moving or obsolete inventory
• C. High liquidity
• D. Strong profitability

A low Inventory Turnover Ratio shows inventory is not sold quickly, indicating inefficiency or excess stock.

19. Which of the following is true about interpreting ratios?

• A. Ratios must be compared with industry norms or past performance for meaningful interpretation
• B. Ratios alone can always determine company’s value
• C. Higher ratio always means better performance
• D. Lower ratio always indicates financial distress

Ratios are meaningful only when compared with previous years or industry averages; context matters for interpretation.

20. If a bank has a Capital Adequacy Ratio (CAR) of 12%, what does this indicate?

• A. Bank’s liquidity is below norm
• B. Bank is over-leveraged
• C. Bank’s operational efficiency is low
• D. Bank has sufficient capital to cover risk-weighted assets as per regulatory requirements

CAR measures a bank’s capital in relation to its risk-weighted assets; 12% indicates compliance with RBI norms for capital adequacy.

21. How do management teams use accounting ratios?

• A. To audit external companies
• B. To calculate tax liabilities only
• C. To monitor performance and plan strategic decisions
• D. To comply with stock exchange regulations only

Management uses ratios to evaluate efficiency, profitability, liquidity, and to make informed strategic and operational decisions.

22. Which ratios are most useful for creditors when assessing a company?

• A. Profitability ratios
• B. Liquidity and solvency ratios
• C. Activity ratios
• D. Market valuation ratios

Creditors focus on liquidity and solvency ratios to determine whether a company can meet its short-term and long-term obligations.

23. How do investors primarily use accounting ratios?

• A. To measure employee performance
• B. To audit financial statements
• C. To calculate depreciation
• D. To assess profitability, growth, and investment potential

Investors analyze profitability, return on equity, and growth trends to make informed investment decisions.

24. Which ratios help government agencies evaluate compliance and taxation matters?

• A. Profitability and liquidity ratios
• B. Market valuation ratios
• C. Activity ratios only
• D. Debt-Equity ratio only

Government agencies use ratios to understand profitability and liquidity for taxation, monitoring, and regulatory purposes.

25. Why are financial ratios important for employees of a company?

• A. To calculate company tax
• B. To assess job security and prospects of salary increments or bonuses
• C. To audit competitors
• D. To determine the company’s market share

Employees analyze ratios to gauge the company’s profitability and stability, which can impact job security and rewards.

26. Shareholders primarily rely on which ratios to monitor their investment performance?

• A. Liquidity ratios only
• B. Activity ratios only
• C. Profitability and return ratios like ROE and EPS
• D. Debt-Equity ratio only

Shareholders use profitability and return ratios such as ROE and EPS to evaluate their investment returns and the company's growth potential.

27. How do analysts and researchers use accounting ratios?

• A. To manage day-to-day operations
• B. To pay salaries
• C. To invest directly in the company
• D. To compare companies, assess trends, and provide recommendations

Analysts and researchers analyze ratios to study financial performance, compare industry players, and give investment or policy recommendations.

28. Which users are primarily concerned with liquidity ratios?

• A. Shareholders only
• B. Creditors and short-term lenders
• C. Government agencies only
• D. Employees only

Liquidity ratios help creditors and short-term lenders assess whether the company can meet its immediate obligations.

29. Which ratio would a prospective investor look at to assess risk before investing?

• A. Inventory Turnover Ratio
• B. Current Ratio only
• C. Leverage and solvency ratios
• D. Operating Cycle Ratio

Investors analyze leverage and solvency ratios to understand the financial risk before making investment decisions.

30. How do suppliers use accounting ratios?

• A. To calculate company’s tax liability
• B. To determine employee bonuses
• C. To invest in company shares
• D. To assess financial stability and creditworthiness of the company

Suppliers use ratios like current and liquidity ratios to evaluate whether a company can pay for goods or services supplied on credit.

31. How does a Core Banking System (CBS) help in calculation of liquidity ratios for banks?

• A. By generating annual profit statements only
• B. By providing real-time data of cash, deposits, and short-term liabilities
• C. By maintaining only customer demographic details
• D. By recording only fixed assets

CBS enables banks to retrieve real-time data for cash, deposits, and short-term obligations, which are essential for computing liquidity ratios.

32. A bank manager wants to assess the NPA impact on profitability using CBS. Which ratio will be most relevant?

• A. Current Ratio
• B. Debt-Equity Ratio
• C. Inventory Turnover Ratio
• D. Return on Assets (ROA)

ROA measures bank profitability relative to its total assets; NPA affects income and therefore impacts ROA calculations.

33. Which feature of CBS helps in automated calculation of Capital Adequacy Ratio (CAR)?

• A. Customer relationship management module
• B. Loan origination system
• C. Risk and regulatory reporting module
• D. ATM transaction module

The CBS risk and regulatory reporting module aggregates risk-weighted assets and capital components to calculate CAR automatically.

34. A bank notices that its Current Ratio has fallen below the standard threshold. How can CBS assist the manager?

• A. By preparing payroll statements
• B. By identifying short-term funding gaps and real-time deposit data
• C. By printing cheque books
• D. By conducting staff appraisals

CBS provides up-to-date information on cash, deposits, and liabilities, helping managers plan liquidity management.

35. Using CBS, a bank wants to analyze profitability by product segments. Which ratio is most appropriate?

• A. Current Ratio
• B. Debt-Equity Ratio
• C. Inventory Turnover Ratio
• D. Return on Assets (ROA) or Product-wise Profitability Ratios

CBS enables detailed segment reporting; ROA or profit ratios by product help analyze which segments are most profitable.

36. A sudden increase in NPAs affects liquidity ratios. How can CBS help in this scenario?

• A. By predicting market trends
• B. By managing employee payroll
• C. By providing real-time NPA data and cash flow positions
• D. By preparing tax returns

CBS tracks all advances and NPAs, allowing banks to adjust liquidity management and plan fund requirements effectively.

37. Which CBS report helps in evaluating asset quality for ratio analysis?

• A. Customer deposit report only
• B. NPA classification and aging report
• C. ATM transaction report
• D. Employee performance report

Asset quality ratios depend on NPAs and loan performance; CBS NPA and aging reports provide the necessary data for analysis.

38. A branch manager wants to compare ROA across branches using CBS. What type of ratio is being analyzed?

• A. Liquidity Ratio
• B. Leverage Ratio
• C. Profitability Ratio
• D. Activity Ratio

ROA is a profitability ratio measuring earnings relative to assets; CBS allows comparison across branches.

39. Scenario: A bank branch notices rising short-term liabilities. Using CBS, which ratio should the manager monitor closely?

• A. Debt-Equity Ratio
• B. Return on Equity
• C. Asset Turnover Ratio
• D. Current Ratio

Current Ratio measures the ability to meet short-term liabilities with current assets; CBS provides data to calculate it in real time.

40. Scenario: A bank wants to evaluate branch performance for loan recovery efficiency. Which ratios can CBS help calculate?

• A. Current and Quick Ratios
• B. Debt-Equity Ratio only
• C. NPA ratios and Recovery Ratios
• D. Inventory Turnover Ratio

CBS tracks advances and recoveries, enabling calculation of NPA ratios and recovery ratios to evaluate loan performance at branch level.