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

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

In this post, we are going to discuss Exercise Problem Questions & their solutions of the Topic Analysis of Accounting Ratios. If you want to learn more about Accounting Ratios, its type, formulas with more practical example questions, then click here.

Analysis of Accounting Ratios, Exercise Problem Questions & their solutions

Problem Question 1

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

Equity Share Capital Machinery400,000
2400 shares of 100 each240,000Furniture50,000
Profit & Loss Account60,000Stock120,000
10% Debentures150,000Sundry Debtors90,000
Sundry Creditors150,000Cash at bank22,800
Provision for Taxation10,000Prepaid Insurance7200
Bank Overdraft80,000  
 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


 \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 LiabilitiesRs.Current AssetsRs.
Sundry Creditors150,000Stock120,000
Provision for Taxation10,000Sundry Debtors90,000
Bank Overdraft80,000Cash at bank22,800
  Prepaid Insurance7200
 240,000 240,000
Working 2: Liquid Assets
Liquid AssetsRs.
Current Assets240,000
Less Stock(120,000)
Less Prepaid Expenses(7200)
Liquid Assets112,800
Working 3: Cost of Goods Sold
Assumed Cost100
Add Gross Profit 20% of Cost20

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
Equity Share Capital500,000Plant & Machinery800,000
Reserves & Surplus100,000Furniture & Fixture200,000
12% Mortgage Loan440,000Stock220,000
10% Debentures160,000Debtors120,000
Bank Overdraft100,000Prepaid Expenses8,000
Creditors80,000Cash in Hand52,000
Outstanding Expenses20,000  
 14,00,000 14,00,000


 \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 LiabilitiesRs.Current AssetsRs.
Bank Overdraft100,000Stock220,000
Outstanding Expenses20,000Prepaid Expenses8,000
  Cash in Hand52,000
 200,000 400,000
Working 2: Quick/Liquid Assets
Quick/Liquid AssetsRs.
Current Assets400,000
Less Stock(220,000)
Less Prepaid Expenses(8000)
Quick/Liquid Assets172,000
Working 3: Long Term Debt
Long Term debtRs.
12% Mortgage Loan440,000
10% Debentures160,000
Long Term Debt600,000
Working 4: Equity
Equity Share Capital500,000
Reserves & Surplus100,000
Total Equity600,000
Working 5: Net Fixed Assets
Plant & Machinery800,000
Furniture & Fixture200,000
Net Fixed Assets10,00,000
Working 6: Long Term Funds
Equity Share Capital500,000
Reserves & Surplus100,000
12% Mortgage Loan440,000
10% Debentures160,000
Total Long Term Funds12,00,000

Problem Question 3

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

Share Capital200000Goodwill120000
Capital Reserve40000Fixed Assets280000
12% Debentures100000Stock60000
Profit & Loss A/C60000Investment (Short term)20000
Sundry Creditors80000Cash60000
Provision for Taxation40000  
Bank Overdraft20000  
 540,000 540,000

Calculate the following ratios:

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


 \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 LiabilitiesRs.Current AssetsRs.
Sundry Creditors80000Stock60000
Provision for Taxation40000Investment (Short term)20000
Bank Overdraft20000Cash60000
 140,000 140,000
Working 2: Quick/Liquid Assets
Quick/Liquid AssetsRs.
Current Assets140,000
Less Stock(60,000)
Less Prepaid Expenses(0)
Quick/Liquid Assets80,000
Working 3: Share Holders Fund/EquityRs.
Share Capital200000
Capital Reserve40000
Profit & Loss A/C60000
Total Share Holders Fund/Equity300,000
Working 4: Long Term Debt
12% Debentures100000
Long Term Debt600,000
Analysis of Accounting Ratios, Exercise Problem Questions & their solutions

Problem Question 4

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

Gross Sales950000800000
Cash Sales10000075000
Sales Return5000025000
Debtors in the beginning of the year73000
Bills Receivable in the beginning of the year10000
Debtors at the end of the year10200077000
Bill Receivable at the end of the year150006000


 \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
Gross Sales950000800000
Less Cash Sales(100000)(75000)
Less Sales Return(50000)(25000)
Net Credit Sales800,000700,000

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 Purchases425000
Cash Purchases113000
Return Outwards12000
Creditors at the end of year53200
Bills Payable at the end of year6800

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


 \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 Purchases425000
Cash Purchases(113000)
Return Outwards(12000)
Net Credit Purchases300,000

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
Equity124000Fixed Assets208000
Long term Loans110000Stock46000
Current Liabilities74000Debtors44000
 308000 308000

Sales Rs. 400,000; Gross Profit 20%


 \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
Less Gross Profit 20% of 400,000(80,000)
Cost of Sales320,000
Working 2: Current Assets
Current Assets100,000
Working 3: Net Wokring Capital
Current Assets100,000
Less Current Liabilities(74,000)
Cost of Sales26,000

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
DetailDr. Rs.DetailCr. Rs.
Factory Expenses143000  
Gross Profit c/d260000  
 923,000 923,000
Office Expenses50,000Gross Profit b/d260,000
Selling Expenses30,000Profit on Sale of car20,000
Distribution Expenses20,000Interest on Investment40,000
Provision for doubtful debts4000  
Interest on debentures14,000  
Loss of cash by theft6,000  
Net Profit180,000  
 320,000 320,000


 \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 Profit180,000
Add Non Operating Expenses: 
Interest on debentures14,000
Loss of cash by theft6,000
Less Non Operating Income: 
Profit on Sale of car(20,000)
Interest on Investment(40,000)
Net Operating Profit140,000
Working 2: Cost of Goods Sold
Less Gross Profit(260,000)
Cost of Goods Sold583500
Working 3: Operating Expenses
Office Expenses50,000
Selling Expenses30,000
Distribution Expenses20,000
Provision for doubtful debts4000
Operating Expenses120,000

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 31st December 2010.

Gross Sales650,000Long term Liabilities80,000
Sales Return10,000Cash21,000
Net Profit before Tax50,000Marketable Securities17,000
Interest Expenses12,000Accounts Receivable47,000
Income Tax Rate40%Inventory50,000
Cost of Goods Sold452,000Net Fixed Assets200,000
Operating Expenses126,000Paid up Capital @ Rs. 10 each100,000
Total Current Liabilities75,000Profit & Loss A/C (Cr.)30,000
  General Reserve50,000

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


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


 \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 AssetsRs.Current LiabilitiesRs.
Cash21,000Total Current Liabilities75,000
Marketable Securities17,000  
Accounts Receivable47,000  
Total Current Assets135,000Total Current Liabilities75,000
Working 2:Long Term DebtRs.
Long term Liabilities80,000
Total Long Term Debt80,000
Working 3: Long Term FundRs.
Paid up Capital @ Rs. 10 each100,000
Profit & Loss A/C (Cr.)30,000
General Reserve50,000
Long term Liabilities80,000
Total Long Term Funds260,000
Working 4:EBITRs.
Net Profit Before Tax50,000
Add Interest Charge12,000
Earning Before Interest & Tax62,000

Problem Question 9

Balance Sheet of A Ltd. is given below:

Share Capital800,000Building1200,000
15% Debentures400,000Machinery240,000
Profit & Loss A/C (Current Year)600,000Debtors1300,000
General Reserve600,000Stock700,000
Current Liabilities11,60,000Bank120,000
 35,60,000 35,60,000

Net Sales for the current year Rs. 5760,000


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


  \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 FundRs.
Share Capital800,000
Profit & Loss A/C (Cr.)600,000
General Reserve600,000
Total Long Term Funds20,00,000

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.
Cost of Sales19,20,00016,35,000
Opening Stock300,000275,000
Closing Stock500,000350,000
Other Current Assets760,000640,000
Fixed Assets14,40,0001600,000
Net Worth1500,00014,00,000
Debts (Long Term)900,000950,000
Current Liabilities600,000665,000


 \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.
Less Cost of Sales(19,20,000)(16,35,000)
Working 2: Current Assets
 X Ltd.Y Ltd.
Closing Stock500,000350,000
Add: Other Current Assets760,000640,000

  \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 Assets900,000
Current Assets250,000
Investment in Government Securities250,000
Cost of Goods Sold505,000
Operating Expenses100,000
Share Capital600,000
10% Debentures200,000
Interest on Investment25,000
Interest on Debentures20,000

 Provision for Tax @40% of net profit


  \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
Less Cost of Goods Sold505,000
Working 2: Net Profit
Less Cost of Goods Sold(505,000)
Gross Profit495,000
Less Operating Expenses(100,000)
Operating Profit395,000
Add Interest on Investment25,000
Less Interest on Debentures(20,000)
Profit Before Tax400,000
Tax @40% on Profit(160,000)
Net Profit After Tax240,000
Working 3: Net Capital Employed
Current Assets250,000
Less Current Liabilities(Tax)(160,000)
Add Fixed Expenses900,000
Working 4: Share Holder’s Fund/Equity
Share Capital600,000
Add Reserve200,000
Add Net Profit240,000

Problem Question 12

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

Marketable Securities20,00010,000
Trade Receivables (net)45,00055,000
Prepaid Expenses15002500
Plant & Equipment (net)80,00085,000
Intangible Assets25,00022500
Other Assets5,0006000
Current Liabilities60,000100,000

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

  1. The Working Capital
  2. The Current Ratio
  3. The Acid Test Ratio
  4. The ratio of current Assets to Total Assets
  5. The ratio of cash to current liabilities

(b) Evaluate each of the above changes


  \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
Marketable Securities20,00010,000
Trade Receivables (net)45,00055,000
Prepaid Expenses15002500
Working 2: Quick/Liquid Assets
Quick/Liquid Assets2009 Rs.2010 Rs.
Current Assets142,500172,500
Less Stock(60,000)(75,000)
Less Prepaid Expenses(1500)(2500)
Quick/Liquid Assets81,00095,000

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