IGCSE Accounting Paper-2: Specimen Questions with Answers 63 - 65 of 103

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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

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What is meant by Current ratio? What is the current ratio of Micromax Ltd?

Explanation

Current ratio is the relationship between the current assets and current liabilities of a firm. This ratio shows the ability of the firm to meet its short term obligations. The current ratio of Micromax Ltd is calculated to be 2: 1 which is the benchmark ratio of liquidity in any industry.

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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.

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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