CIE Accounting Paper-2: Specimen Questions 64 - 66 of 103

Passage

The following information is provided by Micromax Ltd:

Net Sales £100000; Cost of goods sold £60000; operating expenses £15000; Current assets £30000; Current liabilities £15000; Capital employed 120000; Long term debts £80000

Question number: 64 (2 of 6 Based on Passage) Show Passage

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How can Micromax classify the various ratios based on the requirements of various users?

Explanation

Classification of ratios is done by Micromax Ltd based on the requirement of its users such as given below:

(i) Liquidity ratios – This is helpful for short term creditors.

(ii) Solvency ratios – this is helpful for long term creditors.

(iii) Activity ratios – This is helpful to the management.

(iv) Profitability ratios – These are helpful for the investors.

Question number: 65 (3 of 6 Based on Passage) Show Passage

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What is the difference between current ratio and quick ratio?

Explanation

The difference between current ratio and quick ratio is as follows:

(i) In the computation of current ratio, the value of inventory is taken into consideration, while in quick ratio the value of inventory is not required.

(ii) For any firm, the benchmark current ratio is 2: 1, while quick ratio is 1: 1.

Question number: 66 (4 of 6 Based on Passage) Show Passage

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Why does Micromax Ltd need to know its debt equity ratio?

Explanation

The debt equity ratio shows the relationship between the long term debt and shareholder s funds. It is important for Micromax Ltd to calculate this ratio, as it will enable the firm to know the measure of debt and equity utilized to finance the assets for the firm. The benchmark debt equity ratio for any firm is 2: 1

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