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You are on page 1of 44

SECTION A

1. A Ratio is a _______

a) Journal Entry b) Business Transaction

c) Relationship between two items d) Published document

a) 5 :1 b) 4:1

c) 3 :1 d) 2:1

a) 0.50 b) 1

c) 2 d) 3

a) Funds b) Assets

c) Sales d) Liabilities

5. Operating Ratio is a ______ Ratio

a) Liquidity b) Profitability

c) Solvency d) Activity

6. A Ratio is expressed in

a) Rupees b) Weights

c) Proportion d) Numbers

a) Ability to meet short term b) Efficiency of Management

Obligations

c) Solvency Position d) Profitability

8. Liquid Ratio is otherwise called as_______ Ratio

a) Acid Test b) Profitability

c) Solvency d) Turnover

9. solvency ratios indicate

a) Profitability b) Activity

c) Credit worthiness d) Capital

(a) Debtors (b) Bills receivables

SECTION – B

REASONING QUESTIONS

Current Ratio 2.8 Liquidity Ratio 1.5; Working Capital Rs.1,62, 000

Soultion:

a) CURRENT LIABILITY

Let us take CL as x

WC=CA-CL

162000=2.8x-1.0x

1 62000=1.8x

X=162000/1.8

= 90000

=LIQUID ASSET/CL

1.5=LA/90000

= 90000*1.5

=1,35,000

2. . Following are the ratios to the trading activates of ABC limited, for the year ended

31.12.2014

Gross profit ratio - 25 % Creditors velocity– 2 months

Gross profit - Rs. 4, 00,000 Bills receivable – Rs.25, 000

Bills Payable – Rs.10,000

Closing stock of the year isRs. 10,000 above the opening stock.

Determine (a) sales (b)Purchases (c) sundry creditors d) sundry debtors e) Closing

stock

Soultion:

25%=400000/SALES

SALES = 400000*100/25

=1600000

b) SUNDARY debtors

=400000

=400000-25000

= 375000

c) CLOSING STOCK

AVG STOCK=1200000*6/12

= 600000

AVG STOCK=OPENING STOCK +CLOSING STOCK /2

= 595000

=605000

3. The Directors of General Cloth Mills Limited are concerned at the persistent decline in their

gross profit rates for the last three years .You are required to list the possible reasons for the

decline.

Soultion:

The type of industry and market segments have a major impact on the gross profit margin of

businesses. The competitive environment within an industry segments influence the selling

price, cost of factors of production and the cost structure of businesses as discussed below.

Selling price is influenced by a number of factors such as:

Product differentiation

Number of competitors

Pricing strategies

Cost of factors of production can vary due to several reasons such as:

Inflation

Replacement of fixed assets causing an increase in depreciation or amortization

Economies of scale

Lower proportion of fixed costs and overheads in the organization's cost structure

Minimization of waste

Automation

Debt to equity ratio The level of gearing directly affects the proportion of interest expense

deducted from profits. Taxation Tax expense is affected by the following factors:

Non-recurring

gains and losses GP Margin of specific accounting periods can be affected by non-recurring

gains and losses such as:

development costs may improve future profitability at the expense however of the current

period's NP margin. Accounting policies Variations in the accounting policies used by different

companies (e.g. historical cost vs. revaluation basis) can affect their respective NP margins. -

See more at: http://accounting-simplified.com/financial/ratio-analysis/net-profit-margin-

percentage.html#sthash.REQWG0DK.dpuf

4. Opening stock Rs.29, 000; Closing stock Rs.31000;Purchases Rs.2,42,000. Calculate Stock

Turnover Ratio

Soultion:

29000+31000/2

= 30000

=29000+242000-31000

=240000/30000

= 8 TIMES

Debtors Rs.2,500

Bills Receivable Rs.3,000

Soultion:

ACCOUNTS RECEIVABLES

=30000/5500

= 5.45 DAYS

__________

= 67 DAYS

DESCRIPTIVE QUESTIONS

1. What is Ratio Analysis? Explain the steps involved in Ratio Analysis?

statements. Ratio analysis is based on line items in financial statements like the balance

sheet, income statement and cash flow statement; the ratios of one item – or a combination of

items - to another item or combination are then calculated. Ratio analysis is used to evaluate

various aspects of a company’s operating and financial performance such as its

efficiency, liquidity, profitability and solvency

The first task of the financial analysis is to select the information relevant to the decision under

consideration from the statements and calculates appropriate ratios. To compare the calculated

ratios with the ratios of the same firm relating to the pas6t or with the industry ratios. It

facilitates in assessing success or failure of the firm. Third step is to interpretation, drawing of

inferences and report writing conclusions are drawn after comparison in the shape of report or

recommended courses of action.

Ratios are tools of quantitative analysis, which ignore qualitative points of view.

3. Ratios give false result, if they are calculated from incorrect accounting data.

4. Ratios are calculated on the basis of past data. Therefore, they do not

provide complete information for future forecasting.

information

3. From the following information calculate

Solution:

90000 = 2.5-1

90000 = 1.5

=150000

=60000

4. Ram & co supplies you the following information regarding the year ended 31 st

December2015 Find out Debtors collection period.

Cash sales …..Rs.80, 000

Debtors ……… Rs.85, 000

Bills receivable… Rs. 5,000

Provision for bad Debts… Rs.6, 000

Solution:

Drs+B/R

days

= 90000

90000

500000

= >66 days

5. Aruna Ltd. Furnish the following details for the year 2015. Calculate Gross profit ratio:

Particulars Rs.

Sales 2,00,000

Cost of production 80,000

Opening stock 50,000

Closing stock 31,000

Sales return 20,000

Solution:

Sales = 200000

= 200000

CGS = OS+P-C

= 50000+80000-31000

CGS = 99000

99000

G/P = X 100

180000

G/P = 55

6. From the following information to find out a) Gross Profit Ratio andb) Operating Profit

Ratio:

Sales: Rs .8 crores;

Cost of goods sold : Rs.4 crores;

Selling and administrative overhead expenses: Rs.2crores

Solution:

Elastration of G/P(Rs in crores )

8 -4

G/P =>4

G/p

Net sales

4/8

operating profit

Net sales

8 -(4+2)

8 -6

2 = operating profit

=>25%

7. Calculate current ratio, when inventory is Rs.80, 000, prepaid expenses are Rs.2, 000; quick

ratio is 2.5 to 1 and current liabilities are Rs.50,000

Solution:

QR= QA/CL

QR= QA/50,000

2.5= QA/50,000

QA= 1,25,000

1,25,000 = CA – 82,000

1,25,000 + 82,000 = CA

2,07,000 = CA

CR = CA/CL

CR= 2,07,000/50,000

CR = 4.14

8. Current liability of a company is Rs. 3,00,000. If current ratio is 3: 1 and quick ratio is 1:1

calculate the value of stock in trade.

Solution:

CR = CA/CL

3 = CA/30,000

CA = 30,000 x 3

CA = 90,000

QR = QA/CL

1 = QA/30,000

QA = 30,000 x 1

QA = 30,000

QA = CA – Stock

Stock = 60,000

Particulars Rs.

Total Sales 1,00,000

Cash Sales (included in total sales) 20,000

Sales Returns 7,000

Total Debtors at the end of the year 11,000

Bills Receivable 4,000

Bad debts provision 1,000

Creditors 10,000

Solution:

80000

Drs + B/R

11000+4000

______________ X 365

73000

10. From the following information calculate creditors’ turnover ratio and average payment period:

Particulars Rs.

Total Purchase 4,00,000

Cash purchases (included in above) 50,000

Purchase Returns 20,000

Creditors at the end 60,000

Bills Payable at the end 20,000

Reserve for discount on Creditors 5,000

Take 365 days in a year 5,000

Solution:

Calculation of net purchase

330000

80000

= X No of working days

80000

= X 365

330000

APP = 88 days

SECTION – C

REASONING QUESTIONS

1. The following information is given about M/s. S.P. Ltd for the year ending Dec. 31, 2014

________________________________________________________________________

i. Stock Turnover ratio = 6 times

ii. Gross Profit Ratio = Rs.20% on sales

iii. Sales for 2014 = Rs. 3,00,000

iv. Closing stock is Rs. 10,000 more than the opening stock

v. Opening Creditors = Rs. 20,000

vi. Closing Creditors = Rs.30,000

vii. Trade Debtors at the end = Rs. 60,000

viii. Net working Capital = Rs.50,000

Find out the following:

(a) Average Stock (b) Purchases (b) Creditors Turnover Ratio (d) Average

Payment Period (e) Average Collection Period (f) Working Capital Turnover Ratio

Soultion:

1)

300000-(20%OF SALES )

= 300000-60000

=240000

a)AVERAGE STOCK

6 =240000/AVERAGE STOCK

=40000

b) PURCHASE

OPENING STOCK =70000/2

= 35000

=45000

PURCHASES= 240000+45000-35000

=250000

TRADERS CREDITORS

=10 TIMES

D) AVG PAYMENT PERIOD =AVG TRADE CREDITORS * N0: OF WORKING DAYS /NET ANNUAL

PURCHASE

=25000/250000*365

=36.5 OR 37 DAYS

E)AVERAGE COLLECTION PERIOD = AVG TRADE DEBTORS *NO: OF WORKING DAYS /NET

ANNUAL SALES

60000*365/300000

=73 DAYS

F) WORKING CAPITAL

=240000/50000=4.8 TIMES

2. With the following ratios and further information given below, prepare a Trading Account

Profit and Loss A/c and Balance sheet of Shree &co

Gross profit Ratio : 25% Fixed Assets /Total current Assets :5/7

Fixed Assets :Rs.10, 00,000 Closing Stock :1,00,000

Net profit /Sales :20% Stock turnover Ratio: 10

Net profit / Capital : 1/5 Capital to Total liabilities: 1/2

Fixed Assets / Capital :5/4

Soultion:

100000/TOTAL CA =/7

5 TOTAL CA=7*1000000

TOTAL CA =7000000/5

=1400000-100000

OTHER CA = 1300000

ii) FIXED ASSET/CAPITAL=5/4

1000000/CAPITAL=5/4

5 CPITAL= 4*1000000

CAPITAL= 4000000/5

CAPITAL=800000

iii) CAPITAL TO TOTAL LAIBILITIES=1/2

800000/TOTAL LAIBILITY=1/2

TOTAL LAIBILITY=800000*2

TOTAL LAIBILITY =1600000

iv) NET PROFIT/CAPITAL =1/5

NET PROFIT /800000=1/5

800000=5*NET PROFIT

NET PROFIT =800000/5

NP=160000

v) NET PROFIT /SALES =20%

160000/SALES =20/100

20*SALES =160000*100

SALES =16000000/20

=800000

vi) GROSSPROFIT =SALES *25/100

= 800000*25/100

=200000

vii) STOCK TURNOVER RATIO=10 TIMES

10=60000/AVG STOCK

AVG STOCK =60000

=20000

TO OPENING STOCK 20000 BY SALES 800000

900000 900000

200000 200000

2400000 240000

Analysis’- Comment

Soultion:

Analysis refers to the methodical classification of the data given the financial statement.the

term interpretation means explaining the meaning and signification of the data so arranged

.it is the the study of the relationship between various financial factors

accounting analysis and interpretation are closely related. Interpretation is not possible

without analysis and without interpretation analysis has no value .hence the terms analysis

is widely used to refer both analysis and interpretation.it is a process of evaluating the

relationship between the various components of a financial statement to obtain a clear

understanding of a firms position and performance.

4. From the following details prepare statement of proprietary funds with as many details as

possible.

Fixed assets turnover ratio: 4 Gross profit turnover ratio 20 per cent

Debtors’ velocity :2 months Creditors Velocity : 73 days

The Gross profit was Rs.60, 000 ;Reserves and Surplus amount to Rs.20, 000.

Soultion:

CALCULATION OF SALES:

SINCE G/P RATIO IS 20% AND GROOS PROFIT IS RUPEES 60000 , SALES ARE

400000

20/100 = 60000/SALES

300000

CALCULATION OF PURCHASE

= 240000

PURCHASE =240000+5000=245000

CALCULATION OF STOCK:

6= 240000/AVG STOCK

=37500

=37500+5000

=42500

CALCULATION OF DEBTORS =

=50000

CALCULATION OF CREDITORS

73=TOTAL CREDITORS/245000*365

365*TOTAL CREDITORS=245000*73

TOTAL CREDITORS=245000*73/365

=49000

CALCULATIO OF FIXED ASSET

=60000

CALCULATIN OF CAPITAL

2=24000/CAPITAL

2*CAPITAL=240000

CAPITAL=120000

=120000-20000

=100000

BALANSE SHEET

RESERVES & 20000 STOCK 42500

SURPLUS 49000 DEBTORS 50000

CREDITORS CASH(BF) 16500

169000 169000

Stock velocity :8 months Debtors’ velocity: 3 months

Creditors Velocity: 2 months Gross profit Ratio: 25%

Gross profit for the year Rs.4, 00,000; Bills Receivable Rs.25,000; Bills Payable Rs.10,000;

Closing stock of the year is Rs.10,000 more than the opening stock. Find out

Soultion:

1)SALES :

SALES IS 100%

GP IS 25%

100/25*400000

=1600000

2)DEBTORS :

400000-B/R

=375000

=1200000

3) CLOSING STOCK:

=800000

AVG STOCK= OPENING+(OPENING STOCK+10000)/2

=795000

=805000

4)

=1200000+805000-795000

=1210000

201667-10000(B.F) =191667

DESCRIPTIVE QUESTIONS

1. Explain briefly the different ratios that are commonly used in financial statement analysis.

On the basis of function or test, the ratios are classified as liquidity ratios, profitability ratios,

activity ratios and solvency ratios.

Liquidity Ratios:

Liquidity ratios measure the adequacy of current and liquid assets and help evaluate the

ability of the business to pay its short-term debts. The ability of a business to pay its short-term

debts is frequently referred to as short-term solvency position or liquidity position of the

business.

Generally a business with sufficient current and liquid assets to pay its current liabilities as and

when they become due is considered to have a strong liquidity position and a businesses with

insufficient current and liquid assets is considered to have weak liquidity position.

Short-term creditors like suppliers of goods and commercial banks use liquidity ratios to know

whether the business has adequate current and liquid assets to meet its current obligations.

Financial institutions hesitate to offer short-term loans to businesses with weak short-term

solvency position.

Four commonly used liquidity ratios are given below:

1. Current ratio or working capital ratio

2. Quick ratio or acid test ratio

3. Absolute liquid ratio

4. Current cash debt coverage ratio

Unfortunately, liquidity ratios are not true measure of liquidity because they tell about the

quantity but nothing about the quality of the current assets and, therefore, should be used

carefully. For a useful analysis of liquidity, these ratios are used in conjunction with activity

ratios (also known as current assets movement ratios). Examples of activity ratios

are receivables turnover ratio, accounts payable turnover ratio and inventory turnover ratio etc.

Profitability ratios:

Profit is the primary objective of all businesses. All businesses need a consistent improvement in

profit to survive and prosper. A business that continually suffers losses cannot survive for a long

period.

Profitability ratios measure the efficiency of management in the employment of business

resources to earn profits. These ratios indicate the success or failure of a business enterprise

for a particular period of time.

Profitability ratios are used by almost all the parties connected with the business.

A strong profitability position ensures common stockholders a higher dividend income and

appreciation in the value of the common stock in future.

Creditors, financial institutions and preferred stockholders expect a prompt payment of interest

and fixed dividend income if the business has good profitability position.

Management needs higher profits to pay dividends and reinvest a portion in the business to

increase the production capacity and strengthen the overall financial position of the company.

Some important profitability ratios are given below:

Net profit (NP) ratio

Gross profit (GP) ratio

Price earnings ratio (P/E ratio)

Operating ratio

Expense ratio

Dividend yield ratio

Dividend payout ratio

Return on capital employed ratio

Earnings per share (EPS) ratio

Return on shareholder’s investment/Return on equity

Return on common stockholders’ equity ratio

Activity ratios:

Activity ratios (also known as turnover ratios) measure the efficiency of a firm or company in

generating revenues by converting its production into cash or sales. Generally a fast conversion

increases revenues and profits.

Activity ratios show how frequently the assets are converted into cash or sales and, therefore,

are frequently used in conjunction with liquidity ratios for a deep analysis of liquidity.

Some important activity ratios are:

Inventory turnover ratio

Receivables turnover ratio

Average collection period

Accounts payable turnover ratio

Average payment period

Asset turnover ratio

Working capital turnover ratio

Fixed assets turnover ratio

Solvency ratios:

Solvency ratios (also known as long-term solvency ratios) measure the ability of a business to

survive for a long period of time. These ratios are very important for stockholders and creditors.

Solvency ratios are normally used to:

Analyze the capital structure of the company

Evaluate the ability of the company to pay interest on long term borrowings

Evaluate the ability of the the company to repay principal amount of the long term loans

(debentures, bonds, medium and long term loans etc.).

Evaluate whether the internal equities (stockholders’ funds) and external equities

(creditors’ funds) are in right proportion.

Some frequently used long-term solvency ratios are given below:

Debt to equity ratio

Times interest earned (TIE) ratio

Proprietary ratio

Fixed assets to equity ratio

Current assets to equity ratio

Capital gearing ratio

Classification on the basis of financial statements:

Income statement/profit and loss ratios:

Income statement/profit and loss account ratios are those ratios that are calculated by using

the items of income statement/profit and loss account of a particular period only. Examples of

income statement/profit and loss account ratios are net profit ratio, gross profit ratio, operating

ratio, and times interest earned ratio etc.

Balance sheet ratios:

Balance sheet ratios are those ratios that are calculated by using figures from the balance

sheet only. The figures must be used from the balance sheet of the same period. Examples of

balance sheet ratios are current ratio, liquid ratio, and debt to equity ratio etc.

Composite ratios:

These ratios are calculated by using the items of both income statement and balance sheet for

the same period. Composite ratios are, therefore, also known as mixed ratios and inter-

statement ratios. Numerous composite ratios are computed depending on the need of analyst.

Some examples are inventory turnover ratio, receivables turnover ratio, accounts payable

turnover ratio, and working capital turnover ratio etc.

Classification on the basis of importance:

On the basis of importance or significance, the ratios are classified as primary ratios and

secondary ratios. The most important ratios are called primary ratios and less important ratios

are called secondary ratios. Secondary ratios are usually used to explain the primary ratios.

Examples of primary ratios for a commercial undertaking are return on capital employed ratio

and net profit ratio because the basic purpose of these undertakings is to earn profit.

Importance of ratios significantly varies among industries therefore each industry has its own

primary and secondary ratios. A ratio that is of primary importance in one industry may be of

secondary importance in another industry.

Classification of ratios on the basis of importance or significance is very useful for inter-firm

comparisons.

2. What is meant by Ratio Analysis? Discuss the Uses and Significance of Ratio analysis

1. Decision Making:

Ratios help in highlighting the areas deserving attention and corrective action facilitating

decision making.

Planning and forecasting can be done only by knowing the past and the present. Ratio help the

management in understanding the past and the present of the unit. These also provide useful

idea about the existing strength and weaknesses of the unit. This knowledge is vital for the

management to plan and forecast the future of the unit.

3. Communication:

Ratios have the capability of communicating the desired information to the relevant persons in a

manner easily understood by them to enable them to take stock of the existing situation:

4. Co-ordination is Facilitated:

Being precise, brief and pointing to the specific areas the ratios are likely to attract immediate

grasping and attention of all concerned and is likely to result in improved coordination from all

quarters of management.

System of planning and forecasting establishes budgets, develops forecast statements and lays

down standards. Ratios provide actual basis. Actual can be compared with the standards.

Variances to be computed an analyzed by reasons and individuals. So it is great help in

administering an effective system of control.

Existing as well as prospective owners or shareholders are fundamentally interested in the (a)

long-term solvency and (b) profitability of the unit. Ratio analysis can help them by analyzing

and interpreting both the aspects of their unit.

Creditors may broadly be classified into short-term and long term. Short-term creditors are

trade creditors, bills payables, creditors for expenses etc., they are interested in analyzing the

liquidity of the unit. Long-term creditors are financial institutions, debenture holders, mortgage

creditors etc., they are interested in analyzing the capacity of the unit to repay periodical

interest and repayment of loans on schedule. Ratio analysis provides, both type of creditors,

answers to their questions.

Usefulness to Employees:

Employees are interested in fair wages: adequate fringe benefits and bonus linked with

productivity/profitability. Ratio analysis provides them adequate information regarding efficiency

and profitability of the unit. This knowledge helps them to bargain with the management

regarding their demands for improved wages, bonus etc.

Govt. is interested in the financial information of the units both at macro as well as micro levels.

Individual unit's information regarding production, sales and profit is required for excise duty,

sales tax and income tax purposes. Group information for the industry is required for

formulating national policies and planning. In the absence of dependable information, Govt.

plans and policies may not achieve desired results.

3. From the following information make out a statement of proprietors funds with as

many details as possible.

Current Ratio 2.5: Liquid Ratio 1.5: Proprietary Ratio (Fixed assets /Proprietary fund): 0.75

Working Capital Rs.60,000 Reserves and surplus Rs.40,000Bank overdraft Rs.10,000

There is no long term loan or fictitious asset.

Solution:

60,000 = 1.5X

Calculation of Stock

= 1.5(given)

Stock = 1, 00,000-60,000 = Rs. 40,000

.25X = 60,000

X = Rs.2, 40,000

Calculation of Capital

Proprietors’ Funds

Share Capital 2,00,000

Reserve & Surplus 40,000

2,40,000

Investment of Funds

Fixed Assets 1,80,000

Current Assets:

Stock 40,000

Others 60,000

40,000

2,40,000

4. From the following information given below, You are required to prepare a Balance sheet of

Shree &co

Stock turnover Ratio = 9 Gross profit ratio = 25%

(Cost of sales /Closing stock) Debt collection period =1.5 months

Reserves and surplus to capital =0.2 Turnover to Fixed Assets =1.2

Fixed Assets to networth=1.25 Capital gearing ratio = 0.6

(Long term debt to equity capital)

Sales for the year = Rs. 12,00,000.

Particulars Rs

I Equity and Liabilities

Equity share capital 3,00,000

9% Preference share capital 1,00,000

Reserves and surplus 50,000

Non Current Liabilities:

10% Debentures 2,00,000

Long Term Loans 25,000

Current Liabilities 2,25,000

Total 9,00,000

II Assets

Non-current Assets:

Fixed Assets 6,00,000

Investments 50,000

Current Assets 2,50,000

Total 9,00,000

(i)Debt - Equity Ratio - (Long - Term Debt to Equity)(ii) Proprietary Ratio (iii) Solvency Ratio

(iv) Fixed Assets to Proprietors Funds Ratio(v) Fixed Assets Ratio(vi) Current Assets to

Proprietors Funds Ratio

Solution:

=Rs 2,25,000

Capital+ Reserves and Surplus

=Rs 3,00,000+1,00,000+50,000

=Rs4,50,000

=1: 2

= Rs4,50,000/9,00,000

=0.50 or 50%

=Rs2,00,000+25,000+2,25,000/Rs

9,00,000

=Rs4,50,000/9,00,000

=0.50 or 50%

=6,00,000/4,50,000

=1.33 or 1.33.33%

Funds

=6,00,000/4,50,000+2,25,000=6,00,000/6,75,000

=2,25,000/4,50,000

6.Pearl Ltd gives you the following Balance Sheet for the year ending December 31, 2015

BALANCE SHEET

Equity capital Goodwill 50,000

20,000 Shares of 10 each 2,00,000 Plant & Machinery 2,50,000

Preference Capital Furniture & Fittings 70,000

50,000 shares of Rs. 20 each 1,00,000 Trade Investments 1,50,000

Reserve Fund 50,000 Cash 20,000

Dividend Equalisation Fund 60,000 Sundry Debtors 1,25,000

Profit & Loss A/C 40,000 Bills Receivables 65,000

5% Debentures 1,50,000 Advance Tax 20,000

7% Mortgage Loan 70,000

Sundry Creditors 50,000

Bank Overdraft 30,000

7,50,000 7,50,000

(a) Debt - Equity Ratio (b) Funded Debt to Total Capitalization(c) Proprietary Ratio

(d) Solvency Ratio(e) Fixed Assets to Net worth Ratio(f) Current Assets to Proprietors Funds

Ratio.

Solution:

= 300000

= 450000

= 0.67

b) Funded Debt to total equilisation = funded debt (longterm debt)*100 / Total capitalization

surplus +

= 220000

= 670000

= 0.33

Total liabilities to outsiders = 150000+70000+50000+30000

= 300000

= 0.4

= 450000 / 750000

= 0.6

FA = 50000+250000+70000

= 370000

= 370000 / 450000

f) CA to proprietor’s fund

CA = 20000+125000+65000+20000

CA = 230000

= 0.51

7. From the following particulars extracted from the financial statements of XYZ Ltd. compute

(a) Current Ratio (b) Liquid Ratio (c) Inventory Turnover Ratio (i) Net Sales/Average Inventory and(ii)

Cost of Goods Sold/Average Inventory (d) Debtors Turnover Ratio (e) Creditors Turnover Ratio

(Rs) (Rs)

Opening Stock 47,000 Sundry Debtors 42,000

Closing Stock 53,000 Cash 10,000

Sales less returns 2,52,000 Bank 8,000

Provisions for bad debts 2,000 Bills receivables 15,000

Sundry Creditors 32,000 Bills payable 29,000

Purchase 1,80,000 Marketable Securities 8,000

Solution:

a)current ratio = CA / CL

CA = CS+Drs+Cash+Bank+BillsReceivable+Marketable securities

CA = 53000+42000+10000+8000+15000+8000

CA = 136000

= 32000+2000+15000+29000

CL = 78000

= 1.74 times

b)QR = QA / CL

QA = CA-Stock

= 136000-53000

QA = 83000

QR = 83000 / 78000

LR (or) QR = 1.06

= 47000+53000 / 2

Cost of goods sold =OS+P-CS

= 47000+180000-53000

CGS= 174000

=174000 / 50000

=42000+15000

= 252000 / 57000

DTR = 4.42

= 32000+29000

CGS = OS+P-CS

174000 = 47000+P-53000

174000-47000+53000 = P

P = 180000

= 180000 / 61000

CTR = 2.95

8. Following is the Profit and Loss Account of Electro Matrix Ltd for the year ended 31 st

December 2015.

(Dr) Rs Rs (Cr)

To Wages 3, 50,000 By Closing Stock 1, 00,000

Wages 9,000

To Gross Profit c/d 2, 01,000

6, 60,000 6, 60,000

To Administrative expenses 20,000 By Gross Profit b/d 2, 01,000

To Selling & Distribution Exp. 89,000 By Interest on Investment

(Outside business) 10,000

To Non-operating expenses 30,000 By Profit on Sale of

To Net Profit 80,000 Investments 8,000

2,19,000 2,19,000

You are required to calculate:

(i) Gross Profit Ratio (ii) Net Profit Ratio (iii) Operating Ratio

(iv) Operating Profit Ratio (v) Administrative Expenses Ratio

Solution:

Alternatively, Net Profit Ratio =Net Operating Profit / Net Sales X 100

Sales

=1,00,000+3,50,000+9,000-1,00,000=Rs 3,59,000

4. Operating Profit Ratio = 100 – Operating Ratio

100

9. Rearrange the following statement in a form suitable for analysis and calculate 5 significant

ratios to analyze the financial trend of the business.

Debtors 11,260 11,210

Stock 56,160 50,460

Fixed Assets Less Depreciation 2,17,200 2,19,810

_______ _______

3,00,000 3,07,500

_______ _______

Creditors 20,000 16,500

Bills Payable 12,750 6,500

Debentures 1,00,000 1,00,000

Reserves 67,250 84,500

Paid up Capital 1,00,000 1,00,000

________ _______

3,00,000 3,07,500

Solution:

Current Ratio

CR = CA / CL

I Year

= 15380+11260+56160

CA = 82800

CL = Creditors + BP

= 20000+12750

= 32750

CR = 82800 / 32750

= 2.53:1

II Year

CA = 26020+11210+50460

CA = 87730

CL = 16500+6500

=23000

CR = 87730 / 23000

= 3.81:1 times

Current ratio of the firm for the first year and second year are satisfied when compare

with standard normal.

Liquid Ratio

LR = LA / CL

I Year

LA = CA-Stock

= 82800-56160

= 26640

LR = 26640 / 32750

LR = 0.81:1

II year

LA = 87730-50460

LA = 37270

LR = 37270 / 23000

= 1.62:1

The liquid ratio of the firm in the first year is not satisfied and the second year shows

good symptom.

I Year

= 100000+12750+20000

Debt = 132750

= 100000+67250

= 132750 / 167250

II year

Debt = 16500+6500+100000

= 123000

Equity = 84500+100000

= 184500

= 0.67

Debt-equity ratio shows decreased when compare with I year. It shows poor situation

I Year

= 167250 / 300000

II Year = 184500 / 307500

FA ratio = 2.17

FA ratio = 2.20

FA ratio of the company has increased from the first year to second year.

Equity share Capital 1,00,000 Fixed Assets 3,60,000

7% Preference Capital 20,000 Less: Depreciation 1,00,000

Reserves and surplus 80,000 2,60,000

6% Debentures 1,40,000 Stock 60,000

Creditors 12,000 Debtors 40,000

Bills Payable 20,000 Trade investments 30,000

Outstanding expenses 2,000 Cash 10,000

Taxation provision 26,000

_________ __________

4,00,000 4,00,000

__________ __________

Additional Information:

ii) Cost of goods sold Rs.5, 16,000

iii) Net income before Tax Rs.40, 000

iv) Net income afterTax Rs.20, 000

Calculate Solvency Ratios

Solution:

CR = CA / CL

CA = Stock+Drs+Tradeinvestments+cash

= 60000+40000+30000+10000

=140000

= 12000+20000+2000+26000

= 60000

CR = 140000 / 60000

CR = 2.33:1

LR = LA / CL

LA = CA-Stock

= 140000-60000

= 80000

LR = 80000 / 60000

= 1.33:1

=100000+20000+80000

= 200000

= 0.5:1

= 140000+12000+20000+2000+26000

= 200000

Equity (or) proprietor’s funds = 200000

= 200000 / 200000

FA to proprietor’s funds = FA / PF

= 260000 / 200000

FA to PF ratio = 1.3:1

Interest coverage ratio = N/P (before Interest and taxes) / Fixed interest charges

= 140000*6%

= 8400

= 4.76 times

= 200000 / 400000

= 0.5:1

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