CBSE Class 12 Accountancy Financial Statement Analysis Assignment

Question. Which of the following is device of comparative statements?
(a) Comparison expressed in terms of absolute data
(b) Comparison expressed in terms of percentages
(c) Comparison expressed in terms of ratios
(d) All of the Above

Answer: D

Question. Financial Statement Analysis Objectives/Need is
(a) All of the options
(b) Measure the profitability of the business
(c) Measure the financial strength of the business
(d) Make comparative study within the firm and with other forms

Answer: A

Question. Financial analysis become useless because it:
(a) Measures the profitability
(b) Measures the Solvency
(c) Lacks Qualitative Analysis
(d) Makes a comparative study

Answer: C

Question. In the Statement of Profit & Loss of a Common Size Statement:
(a) Figure of net revenue from operations is assumed to be equal to 100
(b) Figure of gross profit is assumed to be equal to 100
(c) Figure of net profit is assumed to be equal to 100
(d) Figure of assets is assumed to be equal to 100

Answer: A

Question. Interest on Loans is
(a) Direct Expenses
(b) Indirect Expenses
(c) Operating Expenses
(d) None of the Above

Answer: B

Question. Importance of Comparative Statement is
(a) All of the options
(b) Make the data simple and more understandable
(c) Indicate the trend with respect to the previous year
(d) compare the firm performance with the performance of other firm in the same business

Answer: A

Question. In which analysis Financial Statement for a single year analysed
(a) Dynamic Analyses
(b) Vertical Analysis and Dynamic Analyses
(c) Vertical Analysis
(d) None of the options

Answer: C

Question. An equation in which total assets are multiplied to profit margin is classified as
(a) Du DuPont equation
(b) Turnover equation
(c) Preference equation
(d) None of the options

Answer: A

Question. Operating Expenses is include
(a) All of the options
(b) Office and Administrative expenses
(c) Selling and Distribution expenses
(d) Provision for doubtful debts

Answer: A

Question. Rent received, Profit on sale of fixed assets, Compensation for acquisition of land are example of
(a) Operating Incomes
(b) Non-operating Incomes
(c) Operating expenses
(d) None of the options

Answer: B

Question. Main limitation of analysis of financial statements is
(a) Affected by window dressing
(b) Difficulty in forecasting
(c) Do not reflect changes in price level
(d) All of the Above

Answer: D

Question. In a common-size Balance Sheet, total equity and liabilities are assumed to be equal to :
(a) 1,000
(b) 100
(c) 10
(d) 1

Answer: B

Question. each item is expressed as a percentage of some common base in
(a) Common size statement
(b) Fund Flow Statement
(c) Cash Flow Statement
(d) Cash Flow Statement

Answer: A

Question. Comparative Financial Statements show:
(a) Financial position of a concern
(b) Earning capacity of a concern
(c) Both of them
(d) None of these

Answer: C

Question. Comparative statement are also known as
(a) Horizontal analysis
(b) Dynamic analysis
(c) Vertical analysis
(d) External analysis

Answer: A

Question. Importance of Comparative Statements
(a) Make Presentation Simpler
(b) All of the options
(c) Help in Drawing Conclusion
(d) Help in Detection of Problems

Answer: B

Question. For a healthy business the current ratio lies between
(a) 0 to 1.5
(b) 3 to 4.5
(c) 4.5 to 6
(d) 1.5 to 3

Answer: D

Question. What will be the trend percentage, if the Inventory of a firm is Rs.2,00,000; Rs.2,40,000; Rs.3,00,000 and Rs.4,00,000 respectively?
(a) 1, 1.2, 1.5,2
(b) 10, 12, 15,20
(c) 100, 120, 150, 200
(d) None of the Above

Answer: C

Question. The analysis of financial statement by a shareholder is an example of:
(a) External Analysis
(b) Internal Analysis
(c) Vertical Analysis
(d) Horizontal Analysis

Answer: A

Question. Feature of financial analysis is to present the data contained in financial statements in
(a) Easy form
(b) Convenient and rational groups
(c) Comparable form
(d) All of the Above

Answer: D

Question. Which of the following is not a limitation of Financial Statement Analysis?
(a) Ignores the Qualitative Elements
(b) Not free from personal bias
(c) Intra-firm Comparison
(d) Ignores the price level changes

Answer: C

Question. An Annual Report is issued by a company to its:
(a) Management
(b) Directors
(c) Auditors
(d) Management

Answer: A

Question. Which of the following is untrue :
(a) Common size Balance Sheet
(b) Common size Statement of Profit & Loss
(c) Common size cash Flow Statement
(d) None of the Above

Answer: C

Question. Common size analysis is also known as ______ Analysis
(a) Vertical
(b) Vertical
(c) Vertical
(d) None of the options

Answer: A

Question. Which objective is not fulfilled by comparative financial statement:
(a) Indicate the extent of change in assets and liabilities
(b) Indicate the extent of change in items of Statement of Pofit & Loss
(c) Show effect of operative activities on assets and liabilities
(d) Show the direction of change in assets and liabilities

Answer: B

Question. The analysis of financial statements is important for
(a) management
(b) trade unions
(c) creditors
(d) All of the above

Answer: D

Question. Which of the following is not an objective of comparative statement analysis?
(a) To compare with other firms and industrial data
(b) To judge the financial instability
(c) To help in forecasting and planning
(d) Understand complex data in simplified manner

Answer: B

Question. Cost of material consumed was Rs 6,00,000 in 2021-22 and total revenue from operations was Rs 10,00,000, then percentage of cost of material consumed to total revenue from operations is
(a) 60%
(b) 30%
(c) 25%
(d) 18%

Answer: A

Question. In comparative statements, percentage change can be calculated with the help of which of the follwing formula?
(a) Absolute Change ×100/Amount of Previous Year
(b) Absolute Change ×100/Amount of Current Year
(c) Absolute Change ×100/Amount of Total Profit
(d) None of these

Answer: A

Question. Revenue from operations on 31st March, 2021 was Rs 15,00,000 and on 31st March, 2020 was Rs12,00,000, then what will be the percentage change in revenue from operations?
(a) 50%
(b) 62%
(c) 45%
(d) 25%

Answer: D

Question. Tangible assets are Rs 4,00,000 on 31st March, 2020 and intangible assets are Rs 2,00,000. Total assets of the firm are Rs 10,00,000, then what will be the percentage of tangible assets to total assets?
(a) 48%
(b) 50%
(c) 40%
(d) 32%

Answer: C

Question. If shareholders’ fund of Grow Ltd. was Rs 4,00,000 in 31st December, 2019 and Rs 5,00,000 in 31st December, 2020, then what is the percentage change in shareholders’ fund?
(a) 10%
(b) 25%
(c) 30%
(d) Data insufficient

Answer: B

Question. The financial statements of a business enterprise include
(a) balance sheet
(b) statement of profit and loss account
(c) cash flow statement
(d) All of the above

Answer: D

Question. When financial statements for a single year are analysed, it is called
(a) vertical analysis
(b) horizontal analysis
(c) lateral analysis
(d) circular analysis

Answer: A

Question. An Annual Report is issued by a company to its
(a) directors
(b) auditors
(c) shareholders’
(d) management

Answer: C

Question. Long-term borrowings of a firm on 31st March, 2021 was Rs 5,00,000 and Rs 8,00,000 on 31st March, 2022.What will be the absolute change and percentage change in comparative balance sheet?
(a) Rs 4,00,000, 80% respectively
(b) Rs 3,00,000, 60% respectively
(c) Rs 5,00,000, 35% respectively
(d) Rs 8,00,000, 25% respectively

Answer: B

Question. Balance sheet provides information about financial position of enterprise
(a) at a point in time
(b) over a period of time
(c) for a period of time
(d)None of the above

Answer: A

Question. Which of the following is not a tool of financial analysis?
(a) Comparative income statement
(b) Comparative position statement
(c) Statement of profit and loss
(d) Cash flow statement

Answer: C

Question. Which item is assumed to be 100 while preparing common size statement of profit and loss?
(a) Total income
(b) Cost of revenue from operations
(c) Revenue from operations
(d) None of the above

Answer: C

Question. Calculate amount of tax to be deducted. Revenue from Operations Rs 5,00,000 Other income (% of Revenue from Operations) 20% Expenses (% of Operating Revenue) 40% Tax Rate 30%
(a) Rs 1,50,000
(b) Rs 1,20,000
(c) Rs 1,00,000
(d) Rs 2,00,000

Answer: B

Question. The most commonly used tools for financial analysis are
(a) horizontal analysis
(b) vertical analysis
(c) ratio analysis
(d) All of these

Answer: D

Question. If shareholders’ fund of XYZ Ltd. was Rs 10,00,000, long-term borrowings was Rs 1,40,000 and trade payable was Rs 3,60,000, then what will be the percentage of shareholders’ fund to the total liabilities side of balance sheet?
(a) 70%
(b) 33.33%
(c) 66.66%
(d) Data insufficient

Answer: C

Question. In common size balance sheet,
(a) amount of share capital is taken as 100
(b) amount of current liabilities is taken as 100
(c) amount of total assets is taken as 100
(d) None of the above

Answer: C

Question. Fixed assets of a company increased from Rs 3,00,000 to Rs 4,00,000. What is the percentage change?
(a) 25%
(b) 33.3%
(c) 20%
(d) 50%

Answer: B

Question. Horizontal analysis provides information in
(a) absolute terms
(b) percentage terms
(c) Both ((a) and ((b)
(d) different terms

Answer: C

Question. Sumatra limited wants to assess the future profit earning capacity of its business. It will conduct
(a) external analysis
(b) short-term analysis
(c) long-term analysis
(d) None of these

Answer: C

Question. Comparative balance sheet consists of ……… columns.
(a) five
(b) three
(c) six
(d) four

Answer: A

Question. Comparative statement of profit and loss is also known as
(a) statement showing absolute and percentage changes
(b) statement showing only percentage change
(c) income and expenditure account
(d) None of the above

Answer: A

Question. Comparative statements are also known as
(a) dynamic analysis
(b) horizontal analysis
(c) vertical analysis
(d) external analysis

Answer: B

Question. Total of equity and liabilities is Rs 15,00,000 and share capital is Rs 3,00,000 as on 31st March, 2020. What will be the percentage of share capital shown in the common size balance sheet?
(a) 18%
(b) 20%
(c) 15%
(d) 25%

Answer: B

Question. If net revenue from operations is Rs 1,20,000, cost of revenue from operations is Rs 40,000 and operating expenses are Rs 20,000, what will be the percentage of operating income on net revenue from operations?
(a) 45%
(b) 55%
(c) 50%
(d) 65%

Answer: C

QUESTIONS: 01 MARKS

Question 1. How would you show the following two items in a company's Balance Sheet as at 31st March, 2012 as per the requirement of Schedule VI: General Reserve (Since 31st March, 2011) Rs. 3,00,000, Statement of Profit and Loss (Debit Balance) for 2011-12 Rs. 2,00,000.
Answer: Balance Sheet as at 31st March, 2012
Equity and Liabilities - Shareholders' Funds - Reserve and Surplus (Note 1): Rs. 1,00,000
Notes to Accounts:
Reserve and Surplus:
General Reserve (1st April, 2011) = Rs. 3,00,000
Less: Statement of Profit and Loss (Dr. Balance) = Rs. 2,00,000
Net Balance = \(3,00,000 - 2,00,000 = \text{Rs. } 1,00,000\)
In simple words: Negative balances like a debit balance in the statement of profit and loss are subtracted from reserves under shareholders' funds.

Exam Tip: Always deduct accumulated losses or debit balances of profit and loss from positive reserves and surplus items.

Question 2. Under which main headings and sub-headings of Equity and Liabilities of the balance sheet as per the Revised Schedule VI of a company will you classify the following items: (i) Proposed dividend (ii) Fixed Deposit from Public.
Answer:
(i) Proposed dividend: Main-Heading = Current Liabilities, Sub-Heading = Short-term provisions
(ii) Fixed deposit from Public: Main-Heading = Non-Current Liabilities, Sub-Heading = Long-term borrowings
In simple words: Public deposits taken for long periods are long-term borrowings, while proposed dividends are short-term provisions.

Exam Tip: Memorize the exact sub-headings under Non-Current and Current Liabilities as per Revised Schedule VI.

Question 3. State any two items which are shown under the head 'Investment' in a company balance sheet.
Answer: (i) Government Securities.
(ii) Sinking Fund Investment.
In simple words: Investments include securities or funds placed outside the business to earn returns or meet specific future obligations.

Exam Tip: State standard financial securities to score full marks for investment items.

Question 4. How is analysis of Financial statements suffered from the limitation of window dressing?
Answer: Analysis of financial statements is affected by window dressing because companies may hide vital information or show items at incorrect values to portray better profitability and financial position. For example, a company may overvalue closing stock to show higher profits.
In simple words: Window dressing means manipulating accounts to present a healthier financial picture than what actually exists.

Exam Tip: Mention the manipulation of inventory or hiding liabilities as classic examples of window dressing.

Question 5. What is the interest of Shareholders in the analysis of Financial Statements?
Answer: (i) They want to judge the present and future earning capacity of the business.
(ii) They want to judge the safety of their investment.
In simple words: Shareholders analyze financial statements to see if their capital is safe and growing.

Exam Tip: Focus on return on investment and capital appreciation as primary shareholder interests.

Question 6. Name two tools of Financial Analysis?
Answer: (i) Comparative Financial Statements.
(ii) Ratio Analysis.
In simple words: Comparative statements and accounting ratios are common tools used to study financial statements.

Exam Tip: Tools also include common-size statements, cash flow statements, and trend analysis.

Question 7. What is Horizontal Analysis?
Answer: The analysis which is made to review and compare the financial statements of two or more years is called Horizontal Analysis.
In simple words: Horizontal analysis compares figures across multiple accounting periods side by side.

Exam Tip: Associate horizontal analysis directly with comparative statements and trend analysis.

Question 8. Give the example of Horizontal Analysis.
Answer: Comparative Financial Statement.
In simple words: Comparative balance sheets and comparative income statements are classic examples.

Exam Tip: Keep examples precise and directly related to accounting tools.

Question 9. What is Vertical Analysis?
Answer: The analysis which is made to review the financial statements of one particular year only is called Vertical Analysis.
In simple words: Vertical analysis evaluates relationships between different items within a single accounting period.

Exam Tip: Common-size statements and accounting ratios represent vertical analysis.

Question 10. Give the example of Vertical Analysis?
Answer: Ratio Analysis.
In simple words: Calculating ratios for a single year is a vertical analysis method.

Exam Tip: Common-size statements are another excellent example of vertical analysis.

QUESTIONS: 03 MARKS

Question 1. Give the Main Heading and Sub-Heading of Equity and Liabilities of the Balance Sheet of a company as per the Revised Schedule VI of the Companies Act, 1956.
Answer: Main Headings and Sub-Headings under Equity and Liabilities:
1. Shareholders' Funds: (a) Share Capital, (b) Reserves and Surplus, (c) Money received against share warrants.
2. Share Application Money Pending Allotment
3. Non-Current Liabilities: (a) Long-term borrowings, (b) Deferred tax liabilities (Net), (c) Other Long-term liabilities, (d) Long-term provisions.
4. Current Liabilities: (a) Short-term borrowings, (b) Trade payables, (c) Other current liabilities, (d) Short-term provisions.
In simple words: The liabilities side of a company balance sheet is categorized into four main headings with specific sub-heads.

Exam Tip: Write the main headings and sub-headings in exact sequential order as prescribed in Schedule VI.

Question 2. Give the Main Heading and Sub-Heading of Assets of the Balance Sheet of a company as per the Revised Schedule VI of the Companies Act, 1956.
Answer: Main Headings and Sub-Headings under Assets:
1. Non-Current Assets: (a) Fixed Assets (Tangible assets, Intangible assets, Capital work-in-progress, Intangible assets under development), (b) Non-current investments, (c) Deferred tax assets (net), (d) Long-term loans and advances, (e) Other non-current assets.
2. Current Assets: (a) Current investments, (b) Inventories, (c) Trade receivables, (d) Cash and cash equivalents, (e) Short-term loans and advances, (f) Other current assets.
In simple words: Assets are broadly divided into non-current and current assets with detailed sub-classifications.

Exam Tip: Ensure all four categories of fixed assets under tangible and intangible heads are correctly mentioned.

Question 3. Rearrange the following items under assets according to Revised or New Schedule VI: a. Livestock, b. Loose Tools, c. Goodwill, d. Trademarks, e. Bills Receivable, f. Debtors, g. Land, h. Leasehold, i. Stock-in-Trade, j. Stores and Spare Parts, k. Vehicles, l. Cash at Bank, m. Work in Progress (Machinery), n. Interest accrued on Investment, o. Furniture, p. Advance to Subsidiaries, q. Cash in Hand, r. Plant, s. Deposits with electricity supply company.
Answer:
(i) Fixed Assets (Tangible): Livestock, Land, Leasehold, Furniture, Vehicles, Plant
(ii) Capital Work-in-Progress: Work in progress (Machinery)
(iii) Fixed Assets (Intangible): Goodwill, Trademarks
(iv) Inventories: Loose Tools, Stock-in-Trade, Stores and Spare Parts
(v) Trade Receivables: Bills Receivable, Debtors
(vi) Cash and Cash Equivalents: Cash at Bank, Cash in Hand
(vii) Long-term Loans and Advances: Advance to Subsidiaries, Deposits with Electricity Supply Company
(viii) Other Current Assets: Interest Accrued on Investments
In simple words: Each asset is placed into its proper Schedule VI category based on its nature and liquidity.

Question 4. List any three items that can be shown as contingent liabilities in a company's balance sheet.
Answer: (i) Claims against the company not acknowledged as debts.
(ii) Uncalled liability on partly paid shares.
(iii) Arrears of dividend on cumulative preference shares.
In simple words: Contingent liabilities are potential obligations that may or may not arise depending on future events.

Exam Tip: Contingent liabilities are shown as notes to accounts, not inside the balance sheet totals.

Question 5. How is a company's balance sheet different from that of a partnership firm? Give two points only.
Answer: (i) For a company's balance sheet, a standardized format is prescribed under the Companies Act, whereas no standard form is prescribed under the Indian Partnership Act, 1932 for a partnership firm.
(ii) In the case of a company's balance sheet, previous years' figures are mandatory, whereas it is not a legal requirement for a partnership firm's balance sheet.
In simple words: Company balance sheets follow strict statutory formats and comparative disclosure rules unlike partnership firms.

Exam Tip: Highlight statutory regulation and comparative figures as the key points of difference.

QUESTIONS: 04 MARKS

Question 1. Prepare Comparative and Common Size Income Statement from the following information for the years ended March 31, 2008 and 2009:
1. Net Sales: 2008 = Rs. 8,00,000; 2009 = Rs. 10,00,000
2. Cost of Goods Sold: 60% of sales for both years
3. Indirect Expenses: 10% of Gross Profit for both years
4. Income Tax Rate: 2008 = 50%; 2009 = 60%
Answer:
1. Comparative Income Statement:

2. Common Size Income Statement:

In simple words: Comparative statements show absolute and percentage changes over time, while common-size statements express every item as a percentage of net sales.

Exam Tip: Always double-check percentage calculations by dividing the absolute change by the previous year's amount and multiplying by 100.

RATIO ANALYSIS - 1 MARK QUESTIONS

Question 1. X Ltd has a debt-equity ratio at 3:1. According to the management, it should be maintained at 1:1. What are the two choices to do so?
Answer: The two choices to maintain debt-equity ratio at 1:1 are:
a) To increase the equity.
b) To reduce the debt.
In simple words: To lower a high debt-equity ratio, either increase equity capital or pay off long-term debt.

Exam Tip: Remember that debt-equity ratio formula is Debt divided by Equity.

Question 2. Assuming that the debt-equity ratio is 1:2, state giving reason whether the ratio will improve, decline or will have no change if equity shares are issued for cash.
Answer: It will decrease the ratio as equity increases without any change in the debt.
In simple words: Issuing equity increases the denominator (equity), thereby reducing the overall ratio value.

Exam Tip: Always analyze the effect on numerator and denominator separately before concluding.

Question 3. State the satisfactory ratio of Current ratio and Liquid ratio.
Answer: The standard current ratio is 2:1 whereas the ideal liquid ratio is 1:1.
In simple words: A current ratio of 2:1 and liquid ratio of 1:1 are considered standard benchmarks for business liquidity.

Question 4. Current ratio of a firm is 2:1. State whether "Purchase of goods for cash" will improve, decrease or will not have any change in the ratio.
Answer: It will not change the ratio as stock increases and cash decreases by the exact same amount.
In simple words: Since both current assets (inventory and cash) change equally inside current assets, the total current assets and current liabilities remain unaffected.

Exam Tip: Transactions affecting only current assets with equal increases and decreases do not alter the current ratio.

Question 5. Define "Ratio Analysis".
Answer: Ratio analysis refers to the process of computing, determining, and explaining the relationship between component items of financial statements in terms of ratios.
In simple words: Ratio analysis is a mathematical technique to evaluate financial health using financial statement data.

Exam Tip: Mention both computation and explanation to make the definition complete.

RATIO ANALYSIS - 2 to 3 MARKS QUESTIONS

Question 6. A company has a current ratio of 4:1 and quick ratio is 2.5:1. Assuming that the inventories are Rs. 22,500, find out total current assets and current liabilities.
Answer:
Current ratio = 4:1
Quick ratio = 2.5:1
Inventory proportion in ratio = \(4 - 2.5 = 1.5\)
If inventory proportion is 1.5, then Current Assets = 4
If inventory = Rs. 22,500, then:
Current Assets = \(\frac{4 \times 22,500}{1.5} = \text{Rs. } 60,000\)
Current Liabilities = \(\frac{60,000}{4} = \text{Rs. } 15,000\)
In simple words: The difference between current ratio and quick ratio represents inventory, which helps calculate total current assets and liabilities.

Exam Tip: Use the proportional difference method for quick calculation of current assets and liabilities.

Question 7. From the following, calculate stock turnover ratio: Net Sales = Rs. 2,00,000, Gross Profit = 25%, Opening Stock = Rs. 5,000, Closing Stock = Rs. 15,000.
Answer:
Stock Turnover Ratio = \(\frac{\text{Cost of Goods Sold}}{\text{Average Stock}}\)
Cost of Goods Sold = Sales - Gross Profit
Gross Profit = 25% of Sales = \(25\% \text{ of } 2,00,000 = \text{Rs. } 50,000\)
Cost of Goods Sold = \(2,00,000 - 50,000 = \text{Rs. } 1,50,000\)
Average Stock = \(\frac{\text{Opening Stock} + \text{Closing Stock}}{2}\)
Average Stock = \(\frac{5,000 + 15,000}{2} = \frac{20,000}{2} = \text{Rs. } 10,000\)
Stock Turnover Ratio = \(\frac{1,50,000}{10,000} = 15 \text{ times}\)
In simple words: Divide the cost of goods sold by average inventory to find how many times inventory is turned over during the year.

Question 8. Calculate gross profit and sales: Average Stock = Rs. 80,000, Stock Turnover Ratio = 6 times, Selling Price = 25% above cost.
Answer:
Stock Turnover Ratio = \(\frac{\text{Cost of Goods Sold}}{\text{Average Stock}}\)
\(6 = \frac{\text{Cost of Goods Sold}}{80,000}\)
Cost of Goods Sold = \(80,000 \times 6 = \text{Rs. } 4,80,000\)
Gross Profit = 25% above cost = \(4,80,000 \times \frac{25}{100} = \text{Rs. } 1,20,000\)
Sales = Cost of Goods Sold + Gross Profit
Sales = \(4,80,000 + 1,20,000 = \text{Rs. } 6,00,000\)
In simple words: Multiply average stock by the turnover ratio to get cost, then add gross profit to find total sales.

Exam Tip: Ensure whether the profit percentage is given on cost or on sales.

Question 9. A company made credit sales of Rs. 7,20,000 during the year. If the collection period is 50 days and the year is assumed to be of 360 days, calculate: (a) Average Debtors (b) Debtors Turnover Ratio (c) Opening and Closing Debtors if the closing debtors are Rs. 10,000 more than the opening debtors.
Answer:
Credit Sales per day = \(\frac{7,20,000}{360} = \text{Rs. } 2,000 \text{ per day}\)
(a) Average Debtors = \(2,000 \times 50 \text{ days} = \text{Rs. } 1,00,000\)
(b) Debtors Turnover Ratio = \(\frac{\text{Net Credit Sales}}{\text{Average Debtors}}\)
Debtors Turnover Ratio = \(\frac{7,20,000}{1,00,000} = 7.2 \text{ times}\)
(c) Let Opening Debtors be \(x\)
Closing Debtors = \(x + 10,000\)
Average Debtors = \(\frac{x + x + 10,000}{2} = 1,00,000\)
\(2x + 10,000 = 2,00,000\)
\(2x = 1,90,000\)
\(x = 95,000\)
Opening Debtors = Rs. 95,000
Closing Debtors = \(95,000 + 10,000 = \text{Rs. } 1,05,000\)
In simple words: Use daily credit sales and collection period to find average debtors, then set up an algebraic equation for opening and closing balances.

Exam Tip: Make sure to use 360 days in the denominator when specified in the problem.

Question 10. Calculate Operating Ratio:
Net Sales = Rs. 5,40,000
Net Purchases = Rs. 3,10,000
Opening Stock = Rs. 75,000
Direct Expenses = Rs. 32,000
Closing Stock = Rs. 50,000
Selling Expenses = Rs. 25,000
Distribution Expenses = Rs. 15,000
Answer:
Operating Ratio = \(\frac{\text{Cost of Goods Sold} + \text{Operating Expenses}}{\text{Net Sales}} \times 100\)
Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses - Closing Stock
Cost of Goods Sold = \(75,000 + 3,10,000 + 32,000 - 50,000 = \text{Rs. } 3,67,000\)
Operating Expenses = Selling Expenses + Distribution Expenses
Operating Expenses = \(25,000 + 15,000 = \text{Rs. } 40,000\)
Total Operating Cost = \(3,67,000 + 40,000 = \text{Rs. } 4,07,000\)
Operating Ratio = \(\frac{4,07,000}{5,40,000} \times 100 = 75.37\%\)
In simple words: Operating ratio combines cost of goods sold and operating expenses, divided by net sales, expressed as a percentage.

Exam Tip: Exclude non-operating expenses like interest or loss on sale of assets from operating expenses.

Question 11. Net profit after interest but before tax is Rs. 1,40,000, 15% Long-term debt is Rs. 4,00,000, Shareholders' funds is Rs. 2,40,000, Tax rate is 50%. Calculate Return on Capital Employed.
Answer:
Interest on long-term debt = \(15\% \text{ of } 4,00,000 = \text{Rs. } 60,000\)
Net Profit before Interest and Tax = Net profit after interest + Interest
Net Profit before Interest and Tax = \(1,40,000 + 60,000 = \text{Rs. } 2,00,000\)
Capital Employed = Debt + Shareholders' Funds
Capital Employed = \(4,00,000 + 2,40,000 = \text{Rs. } 6,40,000\)
Return on Capital Employed = \(\frac{\text{Net Profit before Interest and Tax}}{\text{Capital Employed}} \times 100\)
Return on Capital Employed = \(\frac{2,00,000}{6,40,000} \times 100 = 31.25\%\)
In simple words: Add back interest to net profit to get profit before interest and tax, then divide by total capital employed.

Exam Tip: Capital employed is the sum of long-term debt and shareholders' funds.

Question 12. Calculate Inventory Turnover Ratio: Sales = Rs. 4,00,000, Average Stock = Rs. 55,000, Gross Loss Ratio = 10%.
Answer:
Gross Loss = 10% of Sales = \(10\% \text{ of } 4,00,000 = \text{Rs. } 40,000\)
Cost of Goods Sold = Sales + Gross Loss
Cost of Goods Sold = \(4,00,000 + 40,000 = \text{Rs. } 4,40,000\)
Inventory Turnover Ratio = \(\frac{\text{Cost of Goods Sold}}{\text{Average Stock}}\)
Inventory Turnover Ratio = \(\frac{4,40,000}{55,000} = 8 \text{ times}\)
In simple words: When there is a gross loss, add the loss amount to sales to determine the cost of goods sold.

Question 13. Calculate Fixed Assets Turnover Ratio: Cost of Goods Sold = Rs. 16,80,000, Gross Profit = Rs. 5,60,000, Capital Employed = Rs. 43,00,000, Working Capital = Rs. 80,000.
Answer:
Net Sales = Cost of Goods Sold + Gross Profit
Net Sales = \(16,80,000 + 5,60,000 = \text{Rs. } 22,40,000\)
Capital Employed = Net Fixed Assets + Working Capital
\(43,00,000 = \text{Net Fixed Assets} + 80,000\)
Net Fixed Assets = \(43,00,000 - 80,000 = \text{Rs. } 42,20,000\)
Fixed Assets Turnover Ratio = \(\frac{\text{Net Sales}}{\text{Net Fixed Assets}}\)
Fixed Assets Turnover Ratio = \(\frac{22,40,000}{42,20,000} = 0.53 \text{ times}\)
In simple words: Divide net sales by net fixed assets to measure how efficiently fixed assets are utilized.

Exam Tip: Subtract working capital from capital employed to find net fixed assets.

Question 14. Calculate Current Asset Turnover Ratio if: Cost of Goods Sold = Rs. 7,50,000, Gross Profit = Rs. 2,10,000, Total Assets = Rs. 3,00,000, Capital Employed = Rs. 3,00,000, Working Capital = Rs. 60,000.
Answer:
Net Sales = Cost of Goods Sold + Gross Profit
Net Sales = \(7,50,000 + 2,10,000 = \text{Rs. } 9,60,000\)
Capital Employed = Net Fixed Assets + Working Capital
Net Fixed Assets = Capital Employed - Working Capital
Net Fixed Assets = \(3,00,000 - 60,000 = \text{Rs. } 2,40,000\)
Current Assets = Total Assets - Net Fixed Assets
Current Assets = \(3,00,000 - 2,40,000 = \text{Rs. } 60,000\)
Current Assets Turnover Ratio = \(\frac{\text{Net Sales}}{\text{Current Assets}}\)
Current Assets Turnover Ratio = \(\frac{9,60,000}{60,000} = 16 \text{ times}\)
In simple words: Divide net sales by current assets to see how effectively current assets generate revenue.

Exam Tip: Current assets can be found by deducting fixed assets from total assets.

Question 15. From the following information calculate: (a) Debt-Equity Ratio (b) Total Assets to Debt Ratio (c) Proprietary Ratio
Equity Share Capital = Rs. 20,00,000
Reserves and Surplus = Rs. 12,00,000
12% Debentures = Rs. 10,00,000
Bank Loan = Rs. 8,00,000
Current Liabilities = Rs. 5,00,000
Fixed Assets = Rs. 25,00,000
Goodwill = Rs. 4,00,000
Current Assets = Rs. 18,00,000
Answer:
(a) Debt-Equity Ratio = \(\frac{\text{Debt}}{\text{Equity}}\)
Debt = 12% Debentures + Bank Loan = \(10,00,000 + 8,00,000 = \text{Rs. } 18,00,000\)
Equity = Equity Share Capital + Reserves and Surplus = \(20,00,000 + 12,00,000 = \text{Rs. } 32,00,000\)
Debt-Equity Ratio = \(\frac{18,00,000}{32,00,000} = 0.56:1\)

(b) Total Assets to Debt Ratio = \(\frac{\text{Total Assets}}{\text{Long-Term Debt}}\)
Total Assets = Fixed Assets + Goodwill + Current Assets = \(25,00,000 + 4,00,000 + 18,00,000 = \text{Rs. } 47,00,000\)
Long-Term Debt = Rs. 18,00,000
Total Assets to Debt Ratio = \(\frac{47,00,000}{18,00,000} = 2.6:1\)

(c) Proprietary Ratio = \(\frac{\text{Equity (Proprietary Fund)}}{\text{Total Assets}}\)
Proprietary Ratio = \(\frac{32,00,000}{47,00,000} = 0.68 \text{ or } 68\%\)
In simple words: Solvency ratios measure long-term financial stability by comparing total debts, equity, and assets.

Exam Tip: Include all assets including goodwill when calculating total assets for proprietary and asset-to-debt ratios.