PROFITABILITY RATIOS MCQs PDF

ACCOUNTING
RATIOS |
PROFITABILITY
RATIOS
BY- ANUJ JINDAL

PROFITABILITY RATIOS
• A company's ability to generate profits from its operations

• A company's return on investment in inventory and other
assets
• Profitability ratios can be used to judge whether companies
are making enough operational profit from their assets
PROFITABILITY RATIOS
1. Gross Profit Ratio

2. Operating Ratio
3. Operating Profit Ratio
4. Net Profit Ratio
5. Return On Investment
GROSS PROFIT RATIO
Gross Profit ratio = Gross Profit/ Net sales
Cost of goods sold = Opening stock + Purchases + Direct expenses – Closing stock
Net sales = Gross sales minus any Returns or Refunds.
Gross Profit = Net sales - Cost of goods sold

OPERATING RATIO
Operating Ratio = (Cost of Goods Sold + Operating Expenses – Operating Income) *

100 / Net Sales
Relationship between operating costs and net sales

Operating cost includes “direct cost of goods sold, administrative, selling and
distribution expenses, interest on working capital loans, discounts, bad
debts”.
It excludes incomes and expenses, which have no relation with production or
sales.
OPERATING PROFIT RATIO
Operating Profit Ratio = (Operating Profit /Revenue from Operations) * 100
Operating profit = Gross profit - Other Operating Expenses + Other Operating Incomes
Or
Net profit (before tax) + Non-operating expenses/ losses - Non-
Operating Incomes
Other Operating Expenses = Employee Benefit Expenses + Depreciation and Amortization
Expenses + Other expenses (i.e. Office and Administration Expenses + Selling and Distribution
Expenses + Discount + Bad debts + Interest on short term loans)
Other Operating Income = Trading commission received, Cash discount received
Non Operating Expenses = Loss on sale of non current assets, loss from fire, income tax,
charity and donations, finance charges relating to interest on long term debt, interest on
debentures.
OPERATING PROFIT RATIO
Operating Ratio and Operating Profit Ratio are inter-related.

Total of both these ratios will be 100. A rise in ‘Operating
Ratio’ will lead to a similar amount of decline in ‘Operating
Profit Ratio’ and vice versa.
NET PROFIT RATIO
Net Profit Ratio = (Net Profit after Tax/ Net sales)* 100
Net profit = Gross profit - Indirect Expenses & Losses + Other
incomes - Tax
Indirect expenses & losses = Office exp. + Selling exp. + Interest on

Long term Borrowings + Accidental Losses
RETURN ON INVESTMENT
Also known as ‘Rate of Return’ or ‘Return on Capital Employed’ or ‘Yield on Capital’
Return on Investment = (Net Profit before Interest, Tax and Dividends)/Capital

Employed * 100
Liabilities side approach:

Capital Employed = Shareholder’s Funds + Non-Current Liabilities – Fictitious Assets –
Non Trading Assets (long term investments)
Assets side approach:
Capital Employed = Net Assets *** – Current Liabilities
** Excluding Non-trading assets and Fictitious Assets
RETURN ON INVESTMENT
DuPont Formula:
Return on Investments
= Net Profit Margin × Assets Turnover × Equity Multiplier
= Net Profit/ Sales × Sales/Assets × Assets/Equity

QUESTIONS ON PROFITABILITY RATIOS
Q) From the following calculate Operating Profit Ratio:

Opening Stock 10,000; Purchases 120,000; Revenue from
Operations 400,000; Purchase Returns 5000; Return from Revenue
from operations 15,000; Selling expenses 70,000; Administrative
expenses 40,000; Closing stock 60,000.
[a] 56.81%
[b] 54.55%
[c] 45.45%
[d] 58.54%
[b] 54.55%
Q) Which one of the following will result in decrease of a company’s gross profit
ratio when the sales are increasing?
[a] Decision to increase the quantity of inventory held

[b] Adverse change in the sales mix i.e. lower sales of more profitable lines
[c] Increase in advertising costs and expenses of delivering to customers
[d] Decision to extend credit period allowed to customers
[b] Adverse change in the sales mix i.e. lower sales of more profitable lines
Q) Net operating profit ratio determines……………. while net profit ratio

determines……………
[a] Overall efficiency of the business, working efficiency of the management
[b] Overall efficiency of the management, working efficiency of the business
[c] Overall efficiency of the external market, working efficiency of the internal
management
[d] None of the above
[a] Overall efficiency of the business, working efficiency of the management

Q.93) Which of the following ratios is not favourable when it is high?

[a] Operating ratio
[b] Liquidity ratio
[c] Net Profit ratio
[d] Stock Turnover Ratio
[a] Operating ratio

Q) The DuPont Analysis uses the following ratios except:

[a] Total Asset Turnover
[b] Profit Margin
[c] Debt Ratio
[d] Financial leverage
[d] Financial leverage

Q) Cost of goods sold Rs.220,000

Selling Expenses Rs.12,000
Office Expenses Rs.8000
Depreciation Rs.6000
Sales Rs. 3,20,000
Calculate Operating Ratio.
[a] 80.15%
[b] 82.15%
[c] 76.87%
[d] 78.45%
[c] 76.87%
[Hint: Operating expenses = Selling expenses + Office expenses + Depreciation]
Q) Return on Investment measures a relationship between which of the

following?
[a] Net Profit before Interest and Tax and Capital employed
[b] Net Profit after Interest and Tax and Capital employed
[c] Net Profit before Interest and Tax and Total Assets
[d] None of the above
[a] Net Profit before Interest and Tax and Capital employed
Q) Net Profit before interest and tax Rs.80,000; Equity share capital (12000 shares of Rs.10
each) 1,20,000; 10% Preference Share Capital Rs.50,000; 12% Debentures Rs.1,00,000;
Reserves and Surplus Rs.130,000; Tax rate 50%; Calculate Return on Investment.
[a] 20%
[b] 25%
[c] 30%
[d] 35%
[Hint: Assumed that Reserves and Surplus include the Current Year’s profit]
[a] 20%
Q) From the following information, calculate operating ratio.
Net profit amounted to Rs.94,000. Goods sold at cost plus 50%.
[a] 79.81% Particulars Amount (Rs)

[b] 84.31% Dividend received from investments 5,000
[c] 77.41% Depreciation on Fixed Assets 15,000
Contribution to PM’s Drought Relief Fund 10,000
[d] 82.81%
Loss on sale of fixed assets 10,000
Administration and selling expenses 56,000
[a] 79.81%
Calculate the return on capital employed (ROI) from the following

information:
Capital employed 1,00,000

Operating profit on sales 6%
Gross Profit Margin 90,000 (15%)
[a] 20%
[b] 36%
[c] 30%
[d] 25%
[b] 36%

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ACCOUNTING

BY- ANUJ JINDAL

• A company's ability to generate profits from its operations

1. Gross Profit Ratio

Gross Profit ratio = Gross Profit/ Net sales

Net sales = Gross sales minus any Returns or Refunds.

Gross Profit = Net sales - Cost of goods sold

Operating Ratio = (Cost of Goods Sold + Operating Expenses – Operating Income) *

Relationship between operating costs and net sales

Operating Profit Ratio = (Operating Profit /Revenue from Operations) * 100

Operating Ratio and Operating Profit Ratio are inter-related.

Indirect expenses & losses = Office exp. + Selling exp. + Interest on

Also known as ‘Rate of Return’ or ‘Return on Capital Employed’ or ‘Yield on Capital’

Return on Investment = (Net Profit before Interest, Tax and Dividends)/Capital

Liabilities side approach:

= Net Profit/ Sales × Sales/Assets × Assets/Equity

Q) From the following calculate Operating Profit Ratio:

[a] Decision to increase the quantity of inventory held

Q) Net operating profit ratio determines……………. while net profit ratio

[a] Overall efficiency of the business, working efficiency of the management

Q.93) Which of the following ratios is not favourable when it is high?

[a] Operating ratio

Q) The DuPont Analysis uses the following ratios except:

[d] Financial leverage

Q) Cost of goods sold Rs.220,000

Q) Return on Investment measures a relationship between which of the

Q) From the following information, calculate operating ratio.

Net profit amounted to Rs.94,000. Goods sold at cost plus 50%.

[a] 79.81% Particulars Amount (Rs)

Calculate the return on capital employed (ROI) from the following

Capital employed 1,00,000

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