5.1 Analysis of Accounting Ratios, Exercise Problem Questions & their solutions

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Analysis of Accounting Ratios, Exercise Problem Questions & their solutions

Problem Question 1

Following is the Balance sheet of XYZ Ltd. As on 31^st December, 2005

Liabilities	Rs.	Assets	Rs.
Equity Share Capital		Machinery	400,000
2400 shares of 100 each	240,000	Furniture	50,000
Profit & Loss Account	60,000	Stock	120,000
10% Debentures	150,000	Sundry Debtors	90,000
Sundry Creditors	150,000	Cash at bank	22,800
Provision for Taxation	10,000	Prepaid Insurance	7200
Bank Overdraft	80,000

	690,000		690,000

Sales Rs. 600,000
Gross Profit 20% on Cost

Calculate following ratios:

Current Ratio
Liquidity Ratio
Stock Turnover Ratio
Debtors Turnover Ratio

Solution:

$\left( \mathbf{i} \right)\mathbf{Current\ Ratio =}\frac{\mathbf{Current\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{240,000}}{\mathbf{240,000}}\mathbf{= 1:1}\$

$\mathbf{(ii)Liquid\ Ratio =}\frac{\mathbf{\ Liquid\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{112,800}}{\mathbf{240,000}}\mathbf{=}\frac{\mathbf{0.47}}{\mathbf{1}}\mathbf{= 0.47:1}\$

$\left( \mathbf{iii} \right)\mathbf{Stock\ Turnover\ Ratio =}\frac{\mathbf{\ Cost\ of\ Goods\ Sold}}{\mathbf{Average\ Stock}}\mathbf{=}\frac{\mathbf{500,000}}{\mathbf{120,000}}\mathbf{=}\frac{\mathbf{4.17}}{\mathbf{1}}\mathbf{= 4.17:1}\$

$\left( \mathbf{iv} \right)\mathbf{Debtors\ Turnover\ Ratio =}\frac{\mathbf{\ Net\ Credit\ Sales}}{\mathbf{Average\ Trade\ Debtors}}\mathbf{=}\frac{\mathbf{600,000}}{\mathbf{90,000}}\mathbf{=}\frac{\mathbf{6.67}}{\mathbf{1}}\mathbf{= 6.67:1}\$

Working: 1Current Assets & Current Liabilities
Current Liabilities	Rs.	Current Assets	Rs.
Sundry Creditors	150,000	Stock	120,000
Provision for Taxation	10,000	Sundry Debtors	90,000
Bank Overdraft	80,000	Cash at bank	22,800
		Prepaid Insurance	7200

	240,000		240,000

Working 2: Liquid Assets
Liquid Assets	Rs.
Current Assets	240,000
Less Stock	(120,000)
Less Prepaid Expenses	(7200)
Liquid Assets	112,800

Working 3: Cost of Goods Sold
Assumed Cost	100
Add Gross Profit 20% of Cost	20
Sales	120%

Note: If Sales is Rs. 600,000 which is 120% then Cost will be:

$\mathbf{Cost =}\frac{\mathbf{600,000}}{\mathbf{120}}\mathbf{\ x\ 100 = 500,000}\$

Problem Question 2

Calculate the following ratios from the balance sheet given below:

Current Ratio
Quick Ratio
Debt-Equity Ratio
Proprietary Ratio
Fixed Asset Ratio

Liabilities	Rs.	Assets	Rs.
Equity Share Capital	500,000	Plant & Machinery	800,000
Reserves & Surplus	100,000	Furniture & Fixture	200,000
12% Mortgage Loan	440,000	Stock	220,000
10% Debentures	160,000	Debtors	120,000
Bank Overdraft	100,000	Prepaid Expenses	8,000
Creditors	80,000	Cash in Hand	52,000
Outstanding Expenses	20,000
	14,00,000		14,00,000

Solution:

$\left( \mathbf{a} \right)\mathbf{Current\ Ratio =}\frac{\mathbf{Current\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{400,000}}{\mathbf{200,000}}\mathbf{= 2:1}\$

$\left( \mathbf{b} \right)\mathbf{Quick\ Ratio =}\frac{\mathbf{Quick\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{172,000}}{\mathbf{200,000}}\mathbf{= 0.86:1}\$

$\left( \mathbf{c} \right)\mathbf{Debt\ to\ Equity\ Ratio =}\frac{\mathbf{Long\ Term\ Debt}}{\mathbf{Equity}}\mathbf{=}\frac{\mathbf{600,000}}{\mathbf{600,000}}\mathbf{= 1:1}\$

$\left( \mathbf{d} \right)\mathbf{Proprietory\ Ratio =}\frac{\mathbf{Share\ Holde}\mathbf{r}^{\mathbf{'}}\mathbf{s\ Fund}}{\mathbf{Total\ Assets}}\mathbf{=}\frac{\mathbf{600,000}}{\mathbf{1400,000}}\mathbf{= 0.43:1}\$

$\left( \mathbf{e} \right)\mathbf{Fixed\ Assets\ Ratio =}\frac{\mathbf{Net\ Fixed\ Assets}}{\mathbf{Long\ Term\ Funds}}\mathbf{=}\frac{\mathbf{10,00,000}}{\mathbf{1200,000}}\mathbf{= 0.84:1}\$

Working: 1Current Assets & Current Liabilities
Current Liabilities	Rs.	Current Assets	Rs.
Bank Overdraft	100,000	Stock	220,000
Creditors	80,000	Debtors	120,000
Outstanding Expenses	20,000	Prepaid Expenses	8,000
		Cash in Hand	52,000

	200,000		400,000

Working 2: Quick/Liquid Assets
Quick/Liquid Assets	Rs.
Current Assets	400,000
Less Stock	(220,000)
Less Prepaid Expenses	(8000)
Quick/Liquid Assets	172,000

Working 3: Long Term Debt
Long Term debt	Rs.
12% Mortgage Loan	440,000
10% Debentures	160,000

Long Term Debt	600,000

Working 4: Equity
	Rs.
Equity Share Capital	500,000
Reserves & Surplus	100,000

Total Equity	600,000

Working 5: Net Fixed Assets
	Rs.
Plant & Machinery	800,000
Furniture & Fixture	200,000

Net Fixed Assets	10,00,000

Working 6: Long Term Funds
	Rs.
Equity Share Capital	500,000
Reserves & Surplus	100,000
12% Mortgage Loan	440,000
10% Debentures	160,000

Total Long Term Funds	12,00,000

Problem Question 3

The following is the balance sheet of ABC enterprises Ltd. For the year ended on 31^st December, 2005.

Liabilities	Rs.	Assets	Rs.
Share Capital	200000	Goodwill	120000
Capital Reserve	40000	Fixed Assets	280000
12% Debentures	100000	Stock	60000
Profit & Loss A/C	60000	Investment (Short term)	20000
Sundry Creditors	80000	Cash	60000
Provision for Taxation	40000
Bank Overdraft	20000
	540,000		540,000

Calculate the following ratios:

Current Ratio
Liquidity Ratio
Proprietary Ratio
Debt-Equity Ratio
Return on Equity Ratio

Solution:

$\left( \mathbf{a} \right)\mathbf{Current\ Ratio =}\frac{\mathbf{Current\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{140,000}}{\mathbf{140,000}}\mathbf{= 1:1}\$

$\left( \mathbf{b} \right)\mathbf{Quick\ Ratio =}\frac{\mathbf{Liquid\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{80,000}}{\mathbf{140,000}}\mathbf{= 0.57:1}\$

$\left( \mathbf{c} \right)\mathbf{Proprietory\ Ratio =}\frac{\mathbf{Share\ Holde}\mathbf{r}^{\mathbf{'}}\mathbf{s\ Fund}}{\mathbf{Total\ Assets}}\mathbf{=}\frac{\mathbf{300,000}}{\mathbf{540,000}}\mathbf{= 0.55:1}\$

$\left( \mathbf{d} \right)\mathbf{Debt\ to\ Equity\ Ratio =}\frac{\mathbf{Long\ Term\ Debt}}{\mathbf{Equity}}\mathbf{=}\frac{\mathbf{100,000}}{\mathbf{300,000}}\mathbf{= 0.33:1}\$

$\left( \mathbf{e} \right)\mathbf{Return\ on\ Equity\ Ratio =}\frac{\mathbf{Net\ Profit\ After\ Tax}}{\mathbf{Equity}}\mathbf{=}\frac{\mathbf{60,000}}{\mathbf{300,000}}\mathbf{= 0.2:1}\$

Working: 1Current Assets & Current Liabilities
Current Liabilities	Rs.	Current Assets	Rs.
Sundry Creditors	80000	Stock	60000
Provision for Taxation	40000	Investment (Short term)	20000
Bank Overdraft	20000	Cash	60000
	140,000		140,000

Working 2: Quick/Liquid Assets
Quick/Liquid Assets	Rs.
Current Assets	140,000
Less Stock	(60,000)
Less Prepaid Expenses	(0)
Quick/Liquid Assets	80,000

Working 3: Share Holders Fund/Equity	Rs.
Share Capital	200000
Capital Reserve	40000
Profit & Loss A/C	60000

Total Share Holders Fund/Equity	300,000

Working 4: Long Term Debt
12% Debentures	100000

Long Term Debt	600,000

Analysis of Accounting Ratios, Exercise Problem Questions & their solutions

Problem Question 4

Compute the debtors turnover ratio and debtors collection period from the following:

	2004	2005
Gross Sales	950000	800000
Cash Sales	100000	75000
Sales Return	50000	25000
Debtors in the beginning of the year	73000	—
Bills Receivable in the beginning of the year	10000	—
Debtors at the end of the year	102000	77000
Bill Receivable at the end of the year	15000	6000

Solution:

$\left( \mathbf{a} \right)\mathbf{Debtors\ Turnover\ Ratio\ 2004 =}\frac{\mathbf{Net\ Credit\ Sales}}{\mathbf{Average\ Total\ debtors}}\mathbf{=}\frac{\mathbf{800,000}}{\mathbf{100,000}}\mathbf{= 8:1}\$

$\left( \mathbf{a} \right)\mathbf{Debtors\ Turnover\ Ratio\ 2005 =}\frac{\mathbf{Net\ Credit\ Sales}}{\mathbf{Average\ Total\ debtors}}\mathbf{=}\frac{\mathbf{700,000}}{\mathbf{100,000}}\mathbf{= 7:1}\$

$\mathbf{\ }\left( \mathbf{b} \right)\mathbf{Debtors\ Collection\ Period\ 2004 =}\frac{\mathbf{Average\ Total\ debtors}}{\mathbf{Net\ Credit\ Sales}}\mathbf{x}\mathbf{365 =}\frac{\mathbf{100000}}{\mathbf{800000}}\mathbf{x}\mathbf{365 = 45.625\ or\ 46\ days}\$

$\left( \mathbf{b} \right)\mathbf{Debtors\ Collection\ Period\ 2004 =}\frac{\mathbf{Average\ Total\ debtors}}{\mathbf{Net\ Credit\ Sales}}\mathbf{x}\mathbf{365 =}\frac{\mathbf{100000}}{\mathbf{700000}}\mathbf{x}\mathbf{365 = 52\ days}\$

Working 1: Net Credit Sales
	2004	2005
Gross Sales	950000	800000
Less Cash Sales	(100000)	(75000)
Less Sales Return	(50000)	(25000)
Net Credit Sales	800,000	700,000

Working 2: Average Total Debtors

$\mathbf{Average\ Total\ Debtors\ 2004 =}\frac{\mathbf{Opening\ Debtors + Opening\ B.R + Closing\ Debtors + Closing\ B.R}}{\mathbf{2}}\$

$\mathbf{Average\ Total\ Debtors\ 2004 =}\frac{\mathbf{73000 + 10000 + 102000 + 15000}}{\mathbf{2}}\mathbf{= 100,000}\$

$\mathbf{Average\ Total\ Debtors\ 2005 =}\frac{\mathbf{102000 + 15000 + 77000 + 6000}}{\mathbf{2}}\mathbf{= 100,000}\$

Problem Question 5

Chand & Co. purchases goods both for cash and credit. The following figures have been taken from their books:

Total Purchases	425000
Cash Purchases	113000
Return Outwards	12000
Creditors at the end of year	53200
Bills Payable at the end of year	6800

Taking a year of 365 days, calculate creditors turnover ratio and average payment period.

Solution:

$\left( \mathbf{a} \right)\mathbf{Creditors\ Turnover\ Ratio\ =}\frac{\mathbf{Net\ Credit\ Purchases}}{\mathbf{Average\ Total\ Creditors}}\mathbf{=}\frac{\mathbf{300,000}}{\mathbf{60,000}}\mathbf{= 5:1}\$

$\left( \mathbf{b} \right)\mathbf{Average\ Payment\ Period\ =}\frac{\mathbf{Average\ Total\ Creditors}}{\mathbf{Net\ Credit\ Purchases}}\mathbf{x}\mathbf{365 =}\frac{\mathbf{60,000}}{\mathbf{300,000}}\mathbf{x}\mathbf{365 = 73\ days}\$

Working 1:Net Credit Purchases
Total Purchases	425000
Cash Purchases	(113000)
Return Outwards	(12000)
Net Credit Purchases	300,000

Working 2: Average Total Creditors

Note: Opening Bills Payable and Creditors are not given so only closing are treated.

$\mathbf{Average\ Total\ Creditors =}\frac{\mathbf{0 + 0 + 53200 + 6800}}{\mathbf{1}}\mathbf{= 60,000}\$

Problem Question 6

From the summarized balance sheet given below of a company, calculate:

Stock turnover ratio
Debtors Turnover Ratio
Working Capital Turnover Ratio
Fixed Assets Turnover Ratio

Liabilities	Rs	Assets	Rs
Equity	124000	Fixed Assets	208000
Long term Loans	110000	Stock	46000
Current Liabilities	74000	Debtors	44000
		Cash	10000
	308000		308000

Sales Rs. 400,000; Gross Profit 20%

Solution

$\left( \mathbf{a} \right)\mathbf{Stock\ Turnover\ Ratio =}\frac{\mathbf{Cost\ of\ Sales}}{\mathbf{Average\ STock}}\mathbf{=}\frac{\mathbf{320,000}}{\mathbf{46,000}}\mathbf{= 6.96:1}\$

$\left( \mathbf{b} \right)\mathbf{Debtors\ Turnover\ Ratio\ =}\frac{\mathbf{Net\ Credit\ Sales}}{\mathbf{Average\ Total\ debtors}}\mathbf{=}\frac{\mathbf{400,000}}{\mathbf{44,000}}\mathbf{= 9.09:1}\$

$\left( \mathbf{c} \right)\mathbf{Wokring\ Capital\ Turnover\ Ratio\ =}\frac{\mathbf{Cost\ of\ Sales}}{\mathbf{Net\ Working\ Capital}}\mathbf{=}\frac{\mathbf{320,000}}{\mathbf{26,000}}\mathbf{= 12.30:1}\$

$\left( \mathbf{d} \right)\mathbf{Fixed\ Assets\ Turnover\ Ratio\ =}\frac{\mathbf{Cost\ of\ Sales}}{\mathbf{Net\ Fixed\ Assets}}\mathbf{=}\frac{\mathbf{320,000}}{\mathbf{208,000}}\mathbf{= 1.54:1}\$

Working 1: Cost of Sales
Sales	400,000
Less Gross Profit 20% of 400,000	(80,000)
Cost of Sales	320,000

Working 2: Current Assets
Stock	46000
Debtors	44000
Cash	10000
Current Assets	100,000

Working 3: Net Wokring Capital
Current Assets	100,000
Less Current Liabilities	(74,000)
Cost of Sales	26,000

Problem Question 7

From the following Trading and Profit & Loss Account of Allied Chemical Ltd., compute:

Gross Profit Ratio
Operating Profit Ratio
Operating Ratio
Net Profit Ratio
Stock Turnover Ratio

Detail	Dr. Rs.	Detail	Cr. Rs.
Stock	55000	Sales	843500
Purchases	465000	Stock	79500
Factory Expenses	143000
Gross Profit c/d	260000

	923,000		923,000
Office Expenses	50,000	Gross Profit b/d	260,000
Selling Expenses	30,000	Profit on Sale of car	20,000
Distribution Expenses	20,000	Interest on Investment	40,000
Provision for doubtful debts	4000
Depreciation	16,000
Interest on debentures	14,000
Loss of cash by theft	6,000
Net Profit	180,000

	320,000		320,000

Solution

$\left( \mathbf{a} \right)\mathbf{Gross\ Profit\ Ratio =}\frac{\mathbf{Gross\ Profit}}{\mathbf{Net\ Sales}}\mathbf{\ x\ 100 =}\frac{\mathbf{260,000}}{\mathbf{843500}}\mathbf{x}\mathbf{100 = 30.82\%}\$

$\left( \mathbf{b} \right)\mathbf{Operating\ Profit\ Ratio =}\frac{\mathbf{Operating\ Profit}}{\mathbf{Net\ Sales}}\mathbf{\ x\ 100 =}\frac{\mathbf{140,000}}{\mathbf{843500}}\mathbf{x}\mathbf{100 = 16.60\%}\$

$\left( \mathbf{c} \right)\mathbf{Operating\ Ratio =}\frac{\mathbf{Cost\ of\ Goods\ Sold + Operating\ Expenses}}{\mathbf{Net\ Sales}}\mathbf{\ x\ 100}\$

$\mathbf{Operating\ Ratio =}\frac{\mathbf{583500 + 120,000}}{\mathbf{843500}}\mathbf{\ x\ 100 = 83.40\%}\$

$\left( \mathbf{d} \right)\mathbf{Net\ Profit\ Ratio =}\frac{\mathbf{Net\ Profit}}{\mathbf{Net\ Sales}}\mathbf{\ x\ 100 =}\frac{\mathbf{180,000}}{\mathbf{843500}}\mathbf{x}\mathbf{100 = 21.34\%}\$

$\left( \mathbf{e} \right)\mathbf{Stock\ Turnover\ Ratio =}\frac{\mathbf{Cost\ of\ Sales}}{\mathbf{Average\ Stock}}\mathbf{=}\frac{\mathbf{583500}}{\mathbf{67250}}\mathbf{= 8.68:1}\$

Working 1: Operating Profit
Net Profit	180,000
Add Non Operating Expenses:
Interest on debentures	14,000
Loss of cash by theft	6,000
Less Non Operating Income:
Profit on Sale of car	(20,000)
Interest on Investment	(40,000)
Net Operating Profit	140,000

Working 2: Cost of Goods Sold
Sales	8,43,500
Less Gross Profit	(260,000)
Cost of Goods Sold	583500

Working 3: Operating Expenses
Office Expenses	50,000
Selling Expenses	30,000
Distribution Expenses	20,000
Provision for doubtful debts	4000
Depreciation	16,000
Operating Expenses	120,000

Working 4 Average Stock

$\mathbf{Average\ Stock =}\frac{\mathbf{Opening\ Stock + Closing\ Stock}}{\mathbf{2}}\mathbf{=}\frac{\mathbf{55,000 + 79,500}}{\mathbf{2}}\mathbf{= 67250}\$

Problem Question 8

Following are the extracts taken from the financial statements of Paradise Paper Ltd. at the year end 31^st December 2010.

Particulars	Rs.	Particulars	Rs.
Gross Sales	650,000	Long term Liabilities	80,000
Sales Return	10,000	Cash	21,000
Net Profit before Tax	50,000	Marketable Securities	17,000
Interest Expenses	12,000	Accounts Receivable	47,000
Income Tax Rate	40%	Inventory	50,000
Cost of Goods Sold	452,000	Net Fixed Assets	200,000
Operating Expenses	126,000	Paid up Capital @ Rs. 10 each	100,000
Total Current Liabilities	75,000	Profit & Loss A/C (Cr.)	30,000
		General Reserve	50,000

The company had issued 10,000 equity shares on 31-12-2010. Market value per share on 31-12-2010 was Rs. 25.

Calculate:

Current Ratio
Earnings Per Share
Debt-Equity Ratio
Interest Coverage Ratio
Price/Earnings Ratio

Solution:

$\left( \mathbf{a} \right)\mathbf{Current\ Ratio =}\frac{\mathbf{Current\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{135,000}}{\mathbf{75,000}}\mathbf{= 1.8:1}\$

$\left( \mathbf{b} \right)\mathbf{Earning\ Per\ Share\ EPS =}\frac{\mathbf{Net\ Profit\ after\ giving\ Preferred\ Stock}}{\mathbf{Number\ of\ Shares}}\mathbf{=}\frac{\mathbf{30,000}}{\mathbf{10,000}}\mathbf{= 3}\$

$\left( \mathbf{c} \right)\mathbf{Debt\ to\ Equity\ Ratio =}\frac{\mathbf{Long\ Term\ Debt}}{\mathbf{Equity\ or\ Long\ Term\ Funds}}\mathbf{=}\frac{\mathbf{80,000}}{\mathbf{260,000}}\mathbf{= 0.308:1}\$

$\left( \mathbf{d} \right)\mathbf{Interest\ Coverage\ or\ Debt\ Coverage\ Ratio =}\frac{\mathbf{Earning\ Before\ Interest\ }\&\ Tax\ EBIT}{\mathbf{Fixed\ Interest\ Charges}}\mathbf{=}\frac{\mathbf{62,000}}{\mathbf{12,000}}\mathbf{= 5.167:1}\$

$\left( \mathbf{e} \right)\mathbf{Price\ Earning\ Ratio =}\frac{\mathbf{Market\ Price\ Per\ Share}}{\mathbf{Earning\ Per\ Share}}\mathbf{=}\frac{\mathbf{25}}{\mathbf{3}}\mathbf{= 8.34:1}\$

Working 1: Current Assets & Current Liabilities
Current Assets	Rs.	Current Liabilities	Rs.
Cash	21,000	Total Current Liabilities	75,000
Marketable Securities	17,000
Accounts Receivable	47,000
Inventory	50,000

Total Current Assets	135,000	Total Current Liabilities	75,000

Working 2:Long Term Debt	Rs.
Long term Liabilities	80,000
Total Long Term Debt	80,000

Working 3: Long Term Fund	Rs.
Paid up Capital @ Rs. 10 each	100,000
Profit & Loss A/C (Cr.)	30,000
General Reserve	50,000
Long term Liabilities	80,000
Total Long Term Funds	260,000

Working 4:EBIT	Rs.
Net Profit Before Tax	50,000
Add Interest Charge	12,000
Earning Before Interest & Tax	62,000

Problem Question 9

Balance Sheet of A Ltd. is given below:

Liabilities	Rs.	Assets	Rs.
Share Capital	800,000	Building	1200,000
15% Debentures	400,000	Machinery	240,000
Profit & Loss A/C (Current Year)	600,000	Debtors	1300,000
General Reserve	600,000	Stock	700,000
Current Liabilities	11,60,000	Bank	120,000

	35,60,000		35,60,000

Net Sales for the current year Rs. 5760,000

Compute:

Net Profit Ratio
Current Ratio
Fixed Assets Turnover Ratio
Debt-Equity Ratio
Stock Turnover Ratio
Debtors Turnover Ratio

Solution:

$\left( \mathbf{i} \right)\mathbf{Net\ Profit\ Ratio =}\frac{\mathbf{Net\ Profit}}{\mathbf{Net\ Sales}}\mathbf{\ x\ 100 =}\frac{\mathbf{6,00,000}}{\mathbf{57,60,000}}\mathbf{x}\mathbf{100 = 10.42\%}\$

$\left( \mathbf{ii} \right)\mathbf{Current\ Ratio =}\frac{\mathbf{Current\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{21,20,000}}{\mathbf{11,60,000}}\mathbf{= 1.83:1}\$

$\left( \mathbf{iii} \right)\mathbf{Fixed\ Assets\ Turnover\ Ratio =}\frac{\mathbf{Cost\ of\ Sales\ or\ Sales}}{\mathbf{Fixed\ Assets}}\mathbf{=}\frac{\mathbf{57,60,000}}{\mathbf{14,40,000}}\mathbf{= 4:1}\$

$\left( \mathbf{iv} \right)\mathbf{Debt\ to\ Equity\ Ratio =}\frac{\mathbf{Long\ Term\ Debt}}{\mathbf{Equity\ or\ Long\ Term\ Funds}}\mathbf{=}\frac{\mathbf{400,000}}{\mathbf{20,00,000}}\mathbf{= 0.20:1}\$

$\left( \mathbf{v} \right)\mathbf{Stock\ Turnover\ Ratio =}\frac{\mathbf{Cost\ of\ Sales}}{\mathbf{Average\ Stock}}\mathbf{=}\frac{\mathbf{57,60,000}}{\mathbf{700,000}}\mathbf{= 8.23:1}\$

$\left( \mathbf{vi} \right)\mathbf{Debtors\ Turnover\ Ratio =}\frac{\mathbf{Net\ Credit\ Sales}}{\mathbf{Average\ Total\ Debtors}}\mathbf{=}\frac{\mathbf{57,60,000}}{\mathbf{13,00,000}}\mathbf{= 4.43:1}\$

Working 1: Current Assets = Debtors + Stock + Bank = 1300,000 + 700,000 + 120,000=21,20,000

Working 2: Fixed Assets = Building + Machinery = 12,00,000 + 240,000 = 14,40,000

Working 3: Long Term Fund	Rs.
Share Capital	800,000
Profit & Loss A/C (Cr.)	600,000
General Reserve	600,000
Total Long Term Funds	20,00,000

Working 3: Long Term Funds = Share Capital + General Reserve + P&L=800,000+600,000+600,000=20

Problem Question 10

From the following information calculate for both Companies:

Gross Profit Ratio
Working Capital Ratio
Stock Turnover Ratio
Liquid Ratio

	X Ltd.	Y Ltd.
Sales	25,20,000	21,40,000
Cost of Sales	19,20,000	16,35,000
Opening Stock	300,000	275,000
Closing Stock	500,000	350,000
Other Current Assets	760,000	640,000
Fixed Assets	14,40,000	1600,000
Net Worth	1500,000	14,00,000
Debts (Long Term)	900,000	950,000
Current Liabilities	600,000	665,000

Solution:

$\left( \mathbf{a} \right)\mathbf{Gross\ Profit\ Ratio\ X\ Ltd. =}\frac{\mathbf{Gross\ Profit}}{\mathbf{Net\ Sales}}\mathbf{\ x\ 100 =}\frac{\mathbf{600,000}}{\mathbf{25,20,000}}\mathbf{x100 = 23.81\%}\$

$\left( \mathbf{a} \right)\mathbf{Gross\ Profit\ Ratio\ Y\ Ltd. =}\frac{\mathbf{Gross\ Profit}}{\mathbf{Net\ Sales}}\mathbf{\ x\ 100 =}\frac{\mathbf{505,000}}{\mathbf{21,40,000}}\mathbf{x}\mathbf{100 = 23.60\%}\$

$\left( \mathbf{b} \right)\mathbf{Working\ Capital\ Ratio\ X\ Ltd. =}\frac{\mathbf{Current\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{1260,000}}{\mathbf{600,000}}\mathbf{= 2.1:1}\$

$\left( \mathbf{b} \right)\mathbf{Working\ Capital\ Ratio\ Y\ Ltd. =}\frac{\mathbf{Current\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{990,000}}{\mathbf{665,000}}\mathbf{= 1.49:1}\$

$\left( \mathbf{c} \right)\mathbf{Stock\ Turnover\ Ratio\ X\ Ltd. =}\frac{\mathbf{Cost\ of\ Sales}}{\mathbf{Average\ Stock}}\mathbf{=}\frac{\mathbf{19,20,000}}{\mathbf{400,000}}\mathbf{= 4.8:1}\$

$\left( \mathbf{c} \right)\mathbf{Stock\ Turnover\ Ratio\ Y\ Ltd. =}\frac{\mathbf{Cost\ of\ Sales}}{\mathbf{Average\ Stock}}\mathbf{=}\frac{\mathbf{16,35,000}}{\mathbf{312,500}}\mathbf{= 5.232:1}\$

$\left( \mathbf{d} \right)\mathbf{Liquid\ Ratio\ X\ Ltd. =}\frac{\mathbf{\ Liquid\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{760,000}}{\mathbf{600,000}}\mathbf{=}\frac{\mathbf{0.47}}{\mathbf{1}}\mathbf{= 1.27:1}\$

$\left( \mathbf{d} \right)\mathbf{Liquid\ Ratio\ Y\ Ltd. =}\frac{\mathbf{\ Liquid\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{640,000}}{\mathbf{665,000}}\mathbf{=}\frac{\mathbf{0.47}}{\mathbf{1}}\mathbf{= 0.96:1}\$

Working 1: Gross Profit
	X Ltd.	Y Ltd.
Sales	25,20,000	21,40,000
Less Cost of Sales	(19,20,000)	(16,35,000)
	600,000	505000

Working 2: Current Assets
	X Ltd.	Y Ltd.
Closing Stock	500,000	350,000
Add: Other Current Assets	760,000	640,000
	1260,000	990,000

$\mathbf{Working\ 3:Average\ Stock\ X\ Ltd. =}\frac{\mathbf{300,000 + 500,000}}{\mathbf{2}}\mathbf{= 400,000}\$

$\mathbf{Working\ 3:Average\ Stock\ Y\ Ltd. =}\frac{\mathbf{275,000 + 350,000}}{\mathbf{2}}\mathbf{= 312,500}\$

Problem Question 11

From the following figures extracted from Income Statement and Balance Sheet of Messers M.A & Sons Pvt. Ltd; Calculate:

Gross Profit Ratio
Net Profit Ratio
Return on Capital Employed
Return on Share Holders’ Fund

Fixed Assets	900,000
Current Assets	250,000
Investment in Government Securities	250,000
Sales	10,00,000
Cost of Goods Sold	505,000
Operating Expenses	100,000
Share Capital	600,000
Reserves	200,000
10% Debentures	200,000
Interest on Investment	25,000
Interest on Debentures	20,000

Provision for Tax @40% of net profit

Solution:

$\left( \mathbf{a} \right)\mathbf{Gross\ Profit\ Ratio =}\frac{\mathbf{Gross\ Profit}}{\mathbf{Net\ Sales}}\mathbf{\ x\ 100 =}\frac{\mathbf{495,000}}{\mathbf{10,00,000}}\mathbf{x}\mathbf{100 = 49.5\%}\$

$\left( \mathbf{b} \right)\mathbf{Net\ Profit\ Ratio =}\frac{\mathbf{Net\ Profit}}{\mathbf{Net\ Sales}}\mathbf{\ x\ 100 =}\frac{\mathbf{240,000}}{\mathbf{10,00,000}}\mathbf{x}\mathbf{100 = 24\%}\$

$\left( \mathbf{c} \right)\mathbf{Return\ on\ Capital\ Employed =}\frac{\mathbf{Net\ Profit\ Before\ Interest\ }\&\ Tax}{\mathbf{Net\ Capital\ Employed}}\mathbf{\ x\ 100 =}\frac{\mathbf{395,000}}{\mathbf{990,000}}\mathbf{x}\mathbf{100 = 39.9\%}\$

$\left( \mathbf{d} \right)\mathbf{Return\ on\ Shareholde}\mathbf{r}^{\mathbf{'}}\mathbf{s\ Fund =}\frac{\mathbf{Net\ Profit\ after\ tax}}{\mathbf{Share\ Holde}\mathbf{r}^{\mathbf{'}}\mathbf{s\ Fund}}\mathbf{\ x\ 100 =}\frac{\mathbf{240,000}}{\mathbf{10,40,000}}\mathbf{x}\mathbf{100 = 23.07\%}\$

Working 1: Gross Profit
Sales	10,00,000
Less Cost of Goods Sold	505,000
	495,000

Working 2: Net Profit
Sales	10,00,000
Less Cost of Goods Sold	(505,000)
Gross Profit	495,000
Less Operating Expenses	(100,000)
Operating Profit	395,000
Add Interest on Investment	25,000
Less Interest on Debentures	(20,000)
Profit Before Tax	400,000
Tax @40% on Profit	(160,000)
Net Profit After Tax	240,000

Working 3: Net Capital Employed
Current Assets	250,000
Less Current Liabilities(Tax)	(160,000)
Add Fixed Expenses	900,000
	990,000

Working 4: Share Holder’s Fund/Equity
Share Capital	600,000
Add Reserve	200,000
Add Net Profit	240,000
	10,40,000

Problem Question 12

The following data is taken from comparative balance sheet prepared for the Stanford Company:

	2009	2010
Cash	16,000	30,000
Marketable Securities	20,000	10,000
Trade Receivables (net)	45,000	55,000
Inventories	60,000	75,000
Prepaid Expenses	1500	2500
Plant & Equipment (net)	80,000	85,000
Intangible Assets	25,000	22500
Other Assets	5,000	6000
	2,52,500	286,000
Current Liabilities	60,000	100,000

(a) From the data given calculate for both years:

The Working Capital
The Current Ratio
The Acid Test Ratio
The ratio of current Assets to Total Assets
The ratio of cash to current liabilities

(b) Evaluate each of the above changes

Solution:

$\left( \mathbf{i} \right)\mathbf{The\ Working\ Capital = Current\ Assets - Current\ Liabilities}\$

$\mathbf{The\ Working\ Capital\ 2009 = 142,500 - 60,000 = 82,500}\$

$\mathbf{The\ Working\ Capital\ 2010 = 172,500 - 100,000 = 72,500}\$

Evaluation: Working Capital reduced by 10,000 due to increase in current liabilities.

$\left( \mathbf{ii} \right)\mathbf{The\ Current\ Ratio\ 2009 =}\frac{\mathbf{Current\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{142,500}}{\mathbf{60,000}}\mathbf{= 2.375\ :1}\$

$\mathbf{The\ Current\ Ratio\ 2010 =}\frac{\mathbf{Current\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{172,500}}{\mathbf{100,000}}\mathbf{= 1.725\ :1}\$

Evaluation: Current ratio reduced (2.375 – 1.725) results negative impact

$\left( \mathbf{iii} \right)\mathbf{The\ Acid\ Test\ Ratio\ 2009 =}\frac{\mathbf{Liquid\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{81,000}}{\mathbf{60,000}}\mathbf{= 1.35\ :1}\$

$\mathbf{The\ Acid\ Test\ Ratio\ 2010 =}\frac{\mathbf{Liquid\ Assets}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{95,000}}{\mathbf{100,000}}\mathbf{= 0.95\ :1}\$

Evaluation: Acid Test ratio reduced (1.35 – 0.95) results negative impact

$\left( \mathbf{iv} \right)\mathbf{The\ Ratio\ of\ Current\ Assets\ to\ Total\ Assets\ 2009 =}\frac{\mathbf{Current\ Assets}}{\mathbf{Total\ Assets}}\mathbf{=}\frac{\mathbf{142,500}}{\mathbf{252,500}}\mathbf{= 0.564\ :1}\$

$\mathbf{The\ Ratio\ of\ Current\ Assets\ to\ Total\ Assets\ 2010 =}\frac{\mathbf{Current\ Assets}}{\mathbf{Total\ Assets}}\mathbf{=}\frac{\mathbf{172,500}}{\mathbf{286,000}}\mathbf{= 0.60\ :1}\$

Evaluation: The ratio of current assets to total assets increased slightly (0.564 to 0.60) results positive impact.

$\left( \mathbf{v} \right)\mathbf{The\ Ratio\ of\ Cash\ to\ Current\ Liabilities\ 2009 =}\frac{\mathbf{Cash}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{16,000}}{\mathbf{60,000}}\mathbf{= 0.27\ :1}\$

$\mathbf{The\ Ratio\ of\ Cash\ to\ Current\ Liabilities\ 2010 =}\frac{\mathbf{Cash}}{\mathbf{Current\ Liabilities}}\mathbf{=}\frac{\mathbf{30,000}}{\mathbf{100,000}}\mathbf{= 0.3\ :1}\$

Evaluation: The ratio of cash to current liabilities increased slightly (0.27 to 0.3) results positive impact.

Working 1: Current Assets
	2009	2010
Cash	16,000	30,000
Marketable Securities	20,000	10,000
Trade Receivables (net)	45,000	55,000
Inventories	60,000	75,000
Prepaid Expenses	1500	2500
	142,500	172,500

Working 2: Quick/Liquid Assets
Quick/Liquid Assets	2009 Rs.	2010 Rs.
Current Assets	142,500	172,500
Less Stock	(60,000)	(75,000)
Less Prepaid Expenses	(1500)	(2500)
Quick/Liquid Assets	81,000	95,000

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5.1 Analysis of Accounting Ratios, Exercise Problem Questions & their solutions

Table of Contents

Analysis of Accounting Ratios, Exercise Problem Questions & their solutions

Problem Question 1

Problem Question 2

Problem Question 3

Problem Question 4

Problem Question 5

Problem Question 6

Problem Question 7

Problem Question 8

Problem Question 9

Problem Question 10

Problem Question 11

Problem Question 12

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Table of Contents

Analysis of Accounting Ratios, Exercise Problem Questions & their solutions

Problem Question 1

Problem Question 2

Problem Question 3

Problem Question 4

Problem Question 5

Problem Question 6

Problem Question 7

Problem Question 8

Problem Question 9

Problem Question 10

Problem Question 11

Problem Question 12

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