DK Goel Solutions Class 12 Accountancy Chapter 5 Accounting Ratios

Short  Answer  Questions

Question . 1.      “Accounting Ratios ignore qualitative factors and are also not comparable if different firms follow different accounting policies.” Comment.

Solution  . 1      Ratio analysis is the quantitative measurement of the performance of a business. It ignores the qualitative factors. For example while calculating the credit analysis of a customer seeking credit, he may deserve the credit to be granted on the basis of financial statements submitted by him but in reality his character and credit worthiness mat be doubtful.

Question . 2.      What ratios will you calculate for the following purposes: (a) Analysis for short term debts, and (b) Analysis for long term debts?

Solution  . 2        

(a) Analysis for short term debts :- Liquidity Ratio 

(b) Analysis for long term debts :- Solution vency Ratio

Question . 3.      The Current Ratio of a Company is 3:1. Give your Comments.

Solution  . 3         The Current Ratio of a Company is 3:1 means that current assets of a business thrice of its current liabilities. The higher the ratio the better it is, because the firm will be able to pay its current liabilities more easily. But a much higher ratio may be considered to be adverse from the view point of management on account of the following reasons:

1.) A much higher ratio indicates that inventory might be pilling up because of poor sales.

2.) Large amount is locked up in trade receivables due to inefficient collection policy.

Question . 4.      State the main limitation of Current Ratio.

Solution  . 4      Window Dressing: Some companies in order to cover up their bad financial position resort to window dressing i.e., showing a better position than the one which really exists. They change their balance sheet in such a way that the important fact and truth may be concealed.

Question . 5.      What is ‘Window Dressing’? Explain with the help of an example.

Solution  . 5      Some companies in order to cover up their bad financial position resort to window dressing i.e., showing a better position than the one which really exists. They change their balance sheet in such a way that the important fact and truth may be concealed. For example, the current assets of a company are Rs. 1,00,000 and its current liabilities are Rs. 50,000, so the current ratio is 2:1. After this, it purchased goods for Rs. 50,000 for credit in the month of March. If it records the purchases, the current assets will increase to Rs. 1,50,000 and current liabilities will increase to Rs. 1,00,000. As a result, the current ratio will be reduced to 3:2. The company may pass the entry for purchase in the beginning of the next year or may postpone the purchase itself for a few days.

Question . 6.      Distinguish between Current Ratio and Question uick Ratio.

Solution  . 6      Current Ratio:- The ratio explains the relationship between current assets and current liabilities of a business. The formula for calculating the ratio is

Quick Ratio:- Quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately. As such, the quick ratio is calculated by dividing liquid assets (Quick Current Assets) by current liabilities:

Question . 7.      Why Quick Ratio is considered to be more dependable than Current Ratio? Specify.

Solution  . 7      Quick Ratio is a better test of short-term financial position of the company than the current ratio, as it considers only those assets which can be easily and readily converted into cash. Inventory is not included in liquid assets as it may take a lot of time before it is converted into cash.

Question . 8.      What items are included in the Shareholder’s Fund?

Solution  . 8      Shareholder’s Funds included Share Capital and Reserve & Surplus.

Question . 9.      What items are included in Equity Shareholder’s Fund?

Solution  . 9      Equity shareholders fund included Equity Share Capital.

Question . 10.   What does debts-equity ratio indicate?

Solution  . 10    This ratio expresses the relationship between long term debts and shareholder’s funds. It indicates the proportion of funds which are acquired by long-term borrowings in comparison to shareholder’s funds. This ratio is calculated to ascertain the soundness of the long-term financial policies of the firm.

Question . 11.      What are implications of high and low inventory turnover ratios?

Solution  . 11       The higher ratio of inventory turnover ratio indicates that inventory is selling quickly. In a business where inventory turnover ratio is high goods can be sold at a low margin of profit and even then the profitability may be quite high.

A low inventory turnover ratio indicates that inventory does not sell quickly and remains lying in the godown for quite a long time. This results in increased storage costs, blocking of funds and losses on accounts of goods becoming obsolete or un-sale able.

Question . 12.     Illustrate the method of determining trade receivables turnover ratio. What does it indicate?

                            Calculation of Trade receivables turnover ratio:-

Total Revenue from Operations for the year (Total Sales)               Rs. 2,00,000

Cash Revenue from Operations for the year (Cash Sales)                Rs. 40,000

Trade Receivables at the beginning of the year                                    Rs. 20,000

Trade Receivables at the end of the year                                                Rs. 60,000

Solution 12.

Working Note:-

Credit Revenue from Operations = Total Revenue from Operations – Cash Revenue from Operations

Credit Revenue from Operations = Rs. 2,00,000 – Rs. 40,000

Credit Revenue from Operations = Rs. 1,60,000

Trade Receivables Turnover Ratio indicates the  relationship between credit Revenue from Operations and average trade receivables during the year.

Question . 13.    What inference would you draw from the following:-

I. A low Trade Receivables Turnover Ratio

II. A high Inventory Turnover Ratio.

Solution . 13       I. A too low trade receivables turnover ratio will indicate the liberal and inefficient credit and collection policy of the management. It shows that more money is being locked-up in trade receivables which will result in higher bad-debts, increase in cost of collection and also the loss of interest on the money due form trade receivables. 

II. The higher ratio of inventory turnover ratio indicates that inventory is selling quickly. In a business where inventory turnover ratio is high goods can be sold at a low margin of profit and even then the profitability may be quite high.

Question .14.   What does too low ‘Trade Receivables Turnover Ratio’ indicate?

Solution . 14    A too low trade receivables turnover ratio will indicate the liberal and inefficient credit and collection policy of the management. It shows that more money is being locked-up in trade receivables which will result in higher bad-debts, increase in cost of collection and also the loss of interest on the money due form trade receivables.

Question . 15.  What does too high ‘Trade Receivables Turnover Ratio’ indicate?

Solution . 15    A high trade receivables turnover ratio indicates the prompt payment by trade receivables but a too high ratio may be the result of restrictive credit and collection policy of the management which may curtail the sales and hence may adversely affect the profits.

Question . 16.   “Comparison with the help of ratios is not possible if different firms follow different accounting policies.” Comment.

Solution  . 16    There may be different accounting policies adopted by different firms with regard to providing depreciation, creation of provision for doubtful debts, method of valuation of closing inventory etc. For instance, one firm may adopt the policy of charging depreciation on straight-line basis, while other way charges on written-down value method. Such difference makes the accounting ratios incomparable.

Question . 17.   How ratio analysis does becomes less effective due to price level changes?

Solution  . 17    Price level over the years goes on charging, therefore, the ratio of various years cannot be compared. For example, one firm sells 1,000 Machines for Rs. 10 Lakhs during 2017; it again sells 1,000 Machines of the same type in 2018 but owing to rising price the sale price was Rs. 15 Lakhs. On the basis of ratios it will be concluded that the sales have increased by 50%, whereas in actual, sales have not increased at all. Hence the figures of the past year must be adjusted in the light of price level changes before the ratios for these years are compared.

Question . 18.    Briefly explain the meaning and significance of any two of the following ratio:-

(i) Debt-Equity Ratio,

(ii) Inventory Turnover Ratio and

(iii) Trade Received Turnover Ratio.

Solution  . 18       (i) Debt-Equity Ratio:- This ratio expresses the relationship between long term debts and shareholder’s funds. It indicates the proportion of funds which are acquired by long-term borrowings in comparison to shareholder’s funds. This ratio is calculated to ascertain the soundness of the long-term financial policies of the firm.

Question . 19.    Briefly explain the meaning and significance of any two of the following ratio:-

(i) Gross Profit Ratio,

(ii) Inventory Turnover Ratio and

(iii) Current Ratio.

Solution . 19       (i) Gross Profit Ratio:- This Ratio establishes a relationship between Gross Profit and Revenue from Operations i.e. Net Sales. This ratio is computed and presented in percentage. The formula for computing this ratio is:

Question . 20.    Briefly explain the meaning and significance of any two of the following ratio:-

(i) Debt Equity Ratio,

(ii) Operating Ratio and

(iii) Trade Receivables Turnover Ratio.

Solution . 20       (i) Debt-Equity Ratio:- This ratio expresses the relationship between long term debts and shareholder’s funds. It indicates the proportion of funds which are acquired by long-term borrowings in comparison to shareholder’s funds. This ratio is calculated to ascertain the soundness of the long-term financial policies of the firm.

Question . 21.    Briefly explain the meaning and significance of any two of the following ratio:-

(i) Gross Profit Ratio,

(ii) Question . uick Ratio and

(iii) Inventory Turnover Ratio.

Solution . 21       (i) Gross Profit Ratio:- This Ratio establishes a relationship between Gross Profit and Revenue from Operations i.e. Net Sales. This ratio is computed and presented in percentage. The formula for computing this ratio is:

Numerical Questions:-

Question .1.       From the following particulars compute the Current Ratio:

Solution .1

Question .2.       From the following compute (a) Current Ratio (b) Quick Ratio:

Solution .2

Question .3.       Following particulars are given to you:

Solution .3.

Comment: The short term financial position of the company is quite satisfactory because its current ratio is 3;2;1, which is more than the ideal current ratio of 2:1. Liquid ratio of the company is 1.4:1, which is also more than the ideal liquid ratio of 1:1.

Therefore, it can be said that the company is in a position to pat its current liabilities instantly.

Question .4         Calculate Current Ratio and Quick Ratio from the following. Also give your opinion about the short -term financial position of the company:

Solution . 4          

Comment: The ideal current ratio should be 2:1. But in this case the current ratio is 1.92:1 which is less than the ideal ratio. Therefore, it can be said that the short-term financial position of the company is not satisfactory.

The ideal quick ratio should be 1:1. But in this case the quick ratio is .78: 1, hence, the short- term financial position cannot be said to be satisfactory.

Question .5.       From the following compute Current Ratio:

Solution .5

Question .6.       Calculate Current Ratio from the following information:

Solution .6

Question .7(A)  Current Ratio of a Company is 2:1. Which of the following suggestions would improve the ratio, which would reduce it and which would not change it?

1. Purchase of goods on Credit.
2. Purchase of goods against Cheque.
3. Sale of goods Costing Rs. 50,000 for Rs. 60,000 on credit.
4. To sell a fixed asset at a slight loss.
5. To borrow money on a promissory note (B/P).
6. To give promissory note to a Creditor.
7. To give promissory note to a Creditor.

Solution .7(A)   Current Ratio as given in the question is 2:1. In order to understand the question in a simple manner, it may be assured that current assets are Rs. 2,00,000 and current liabilities are Rs. 1,00,000.

Question .7(B)   The Current Ratio of a company is 2:5:1. Which of the following suggestions would improve, reduce and not change it?

1. Payment to trade payables.
2. Sell machinery against cheque.
3. Sale of inventory at loss against Cheque.
4. Cash collected from trade receivables.
5. B/P dishonored.
6. Issue of shares.
7. Issue of shares against the purchase of a building
8. Redemption (Repayment) of Debentures

Solution .7(B)     Current Ratio as given in the question 2.5:2. Hence, it may be assured that Current Assets are Rs. 2,50,000 and current Liabilities are RS. 1,00,000.

Question .8.       Assuming that the Current ratio is 1.5:1, State giving reasons, which of the following transactions would (i) improve, (ii) reduce, (iii) not alert the current ratio:-

1. Realization of current assets
2. Payment of current liabilities
3. B/R dishonored
4. Sale of goods at par
5. Sale of goods at profit
6. Sale of goods at loss
7. Purchase of goods for cash
8. Purchase of goods on credit of 3 months
9. Sale of furniture for cash
10. Sale of machinery on a credit of 5 months
11. Sale of land on long- term deferred payment basis
12. Purchase of motor car for cash
13. Purchase of building on a credit of 4 months
14. Purchase of a plot of land on long-term deferred payment basis.
15. Repayment of long- term loan which was availed from a bank
16. Issue of shares for cash.

Solution .8           Statement showing the effect of various transactions on Current Ratio:

Question .9.       The Current Ratio of a company is 3:1. State giving reasons which of the following suggestions would (i) improve, (ii) reduce, (iii) not change; the Current Ratio:-

(a)    Payment of trade payables.

(b)   Sale of goods costing Rs. 20,000 for Rs. 20,000 for Cash .

(c)    Sale of goods costing Rs. 20,000 for Rs. 18,000 for Credit.

(d)   Sale of goods costing Rs. 20,000 at a profit of Rs. 1,000.

(e)    Purchase of goods on Credit.

(f)     Purchase of goods for Cash.

(g)    Purchase of machinery against long- term loan.

Solution .9          

Statement showing the effect of various transactions on Current Ratio;

Question .10.     State giving reason, whether the Current Ratio will improve or decline or will have no effect in each one of the following transactions if Current Ratio is (i) 2.5:1, (ii) 1:1, (iii) 0.75:1.

1. paid Rs. 50,000 to a Creditor.
2. Sale of goods at a loss of 10%.
3. Sale of a fixed assets for Rs. 1,00,000 (Book Value Rs. 1,20,000).
4. Payment of outstanding salaries.
5. Received Rs. 25,000 from a debtor of RS. 30,000 in full settlement of his account.
6. Bills payable discharged on maturity.
7.  Bills Receivable drawn on debtor.
8. Purchase goods on credit.
9. Issue debentures to the vendors of machinery.

Solution .10

Question .11.     State giving reason, which of the following transactions would Improve; Reduce or Not Change the Question uick Ratio if Question uick Ratio is (i) 1.5:1, (ii) 1:1, (iii) 0.8:1.

1. Payment of outstanding Liabilities.
2. Debentures of Rs. 2,00,000 converted into Equity shares.
3. Purchase goods on credit of 2 months.
4. B/R endorse to creditors.
5. Sale of goods Costing Rs. 50,000 for Rs. 45,000.
6. B/R drawn on a Debtor.
7. Paid rent Rs. 3,000 in advance.
8. Trade receivables included a debtor sh. Ashok who paid his entire amount Rs. 9,700.

Solution .11

Question .12.     Calculate Current Ratio from the following:

Working Capital Rs. 1,92,000; Long term Debt Rs. 80,000 and Total debt Rs. 2,00,000.

Solution .12

Current liabilities = Total debt – Long term Debt

= Rs. 2,00,000 – Rs. 80,000 = Rs. 1,20,000

Current Assets = Working Capital + Current Liabilities

= Rs. 1,92,000 + Rs. 1,20,000 = Rs. 3,12,000

Question .13.     Calculate Current Ratio from the following:

Working Capital Rs. 4,80,000; Trade Payables Rs. 2,00,000 and Bank Overdraft Rs. 40,000.

Solution .13        Current liabilities = Trade Payables – Bank Overdraft

= Rs. 2,00,000 – Rs. 40,000 = Rs. 2,40,000

Current Assets = Working Capital + Current Liabilities

= Rs. 4,80,000 + Rs. 2,40,000 = Rs. 7,20,000

Question .14.     Calculate Current Ratio from the following:

Working Capital Rs. 4,80,000; Current Assets Rs. 6,00,000; inventory Rs. 4,00,000 and Trade Receivables Rs. 1,50,000.

Solution .14.       

Question .15 (A).     A firm had current assets of Rs. 4,10,000. It then paid trade payables of Rs. 50,000. After this payment, the current ratio was 2.4:1. Ascertain the amount of Current Liabilities and working Capital after the payment.

Solution .15 (A)

Question .15 (B).      A firm had current assets of Rs. 7,20,000. It then purchased goods for Rs. 30,000 on Credit. After this purchase, the current ratio was 3:1. Ascertain the amount of Current Liabilities and Working Capital after the purchase.

Solution .15 (B)  

Question .16.(A).       Current Ratio 2:1, Question uick Ratio 1.5:1, Current Liabilities RS. 1,60,000. Calculate Current Assets, Question uick Assets and Inventory.

Solution .16 (A)

Given: Question uick Ratio=1.5, Current Liabilities = Rs. 1,60,000

Question uick Assets = Rs. 1,60,000 × 1.5 = RS. 2,40,000

Inventory = Current Assets – liquid Assets

= Rs. 3,20,000 – Rs. 2,40,000 = RS. 80,000

Question .16.(B).       Current Ratio 2.5:1, Question uick Ratio 0.95:1, Current Assets RS. 17,00,000. Calculate Current Liabilities, Question uick Assets and Inventory.

Solution .16 (B)

Given: Quick Ratio=0.95

Calculated: Current Liabilities = Rs. 6,80,000

Quick Assets = Rs. 6,80,000 × 0.95 = RS. 6,46,000

Inventory = Current Assets – liquid Assets

= Rs.17,00,000 – Rs.6,46,000 = RS. 10,54,000

Question .16.(C).         Working capital Rs. 5,40,000; current Ratio 2.8:1; Inventory Rs. 3,30,000.

Calculate Current Assets, Current liabilities and Question uick Ratio.

Solution .16(C)

Question .17.    A business has a Current Ratio of 4:1 and a Question uick Ratio of 1.2 :1. If the working Capital is RS. 1,80,000, Calculate the total current Assets and Inventory.

Solution  .17

Working Capital = Current Assets – Current Liabilities

Current Ratio = 4:1 , therefore, based on current ratio, the working capital is 4-1=3

If Working Capital is 3, Current Assets = 4

Question .18.    Current Ratio 2.4; Current Assets RS. 1,81,10,400; inventories RS. 79,23,300. Calculate the Liquid Ratio.

Solution  .18

Comment: the short term financial position of the enterprise is satisfactory because its liquid ratio is 1.35:1, which is above the ideal ratio of 1:1.

Question .19.    Quick Ratio 1.5; Current Assets Rs. 1,00,000; Current Liabilities Rs. 40,000. Calculate the value of Inventory.

Solution .19

Question .20.  A company’s inventory is RS. 2,00,000. Total liquid assets are RS. 8,00,000 and quick ratio is 2:1. Calculate the current ratio.

Solution .20

Question .21.      A firm has current Ratio 4.5:1 and quick Ratio of 3:1. If its inventory is Rs. 72,000, find out its total current assets and total current liabilities.

Solution .21       

Current Ratio is 4.5 and Question uick ratio is 3

Difference between current ratio and quick ratio is inventory.

Therefore, inventory is 4.5-3=1.5.

If Inventory is 1.5, Current Assets = 4.5

Question .22.(A)            Current Assets Rs. 85,000; inventory Rs. 22,000; prepaid expenses Rs. 3,000; Working Capital RS. 45,000. Calculate Question uick Ratio.

Solution .22 (A) 

Calculation of Quick Ratio:

Quick Assets (Liquid Assets)        = Current Assets – Inventory – Prepaid Expenses

                                                                = Rs. 85,000 – Rs. 22,000 – Rs. 3,000

                                                                = Rs. 60,000

Current Liabilities                             = Current Assets – working Capital

                                                                = Rs. 85,000 -Rs. 45,000

                                                                = Rs. 40,000

Question .22.(B)            Question uick Assets Rs. 90,000; Inventory Rs. 1,08,000; prepaid Expenses RS. 2,000; Working Capital RS. 1,50,000. Calculate Current Ratio.

Solution .22(B)              Calculation of Current Ratio:

Current Assets                                  = Quick Assets – Inventory – Prepaid Expenses

                                                                = Rs. 90,000 – Rs. 1,08,000 – Rs. 2,000

                                                                = Rs. 2,00,000

Current Liabilities                             = Current Assets – working Capital

                                                                = Rs. 2,00,000 -Rs. 1,50,000

                                                                = Rs. 50,000

Question .23.  Working Capital Rs. 4,80,000; Total Debt Rs. 16,00,000; Long Term Debt Rs. 10,00,000; Inventory Rs. 3,40,000; Prepaid insurance Rs. 20,000. Calculate liquid ratio.

Solution .23.

Current Liabilities                             = Total debt – Long term Debt

                                                                = Rs. 16,00,000 – Rs. 10,00,000

                                                                = Rs. 6,00,000

Current Assets                                  = Current Liabilities + working Capital

                                                                = Rs. 6,00,000 -Rs. 4,80,000

                                                                = Rs. 10,80,000

Liquid Assets                                      = Current Assets – Inventory – prepaid Insurance

                                                                = Rs. 10,80,000 – Rs. 3,40,000 – RS. 20,00

                                                                = Rs. 7,20,000

Question .24       The ratio of current Assets (Rs. 32,00,000) to Current liabilities (RS. 20,00,000) is 1.6:1. The accountant of the firm is interested in maintaining a Current Ratio od 2:1, by paying off a part of the Current Liabilities. Compute the amount of the Current Liabilities that should be paid, so that the Current ratio at the level 2:1 may be maintained.

Solution .24        Payment of current liabilities will result in equivalent reduction both in the amount of current assets as well as current liabilities.

Let the amount of current liabilities to be paid =

Or RS. 40,00,000 – 2

= 8,00,000.

Current liabilities to the extent of Rs. 8,00,000 should be paid to achieve the Current Ratio at the level of 2:1.

Question .25.    The ratio of Current Assets (Rs. 5,00,000) to Current Liabilities is 2.5:1. The accountant of this firm is interested in maintaining a Current Ratio of 2:1 by acquiring some Current Assets on Credit. You are required to suggest him the amount of current Assets which must be acquired for this purpose.

Solution .25

Therefore, current Assets of RS. 1,00,000 should be acquired on credit to maintain a Current Ratio of 2:1

Question .26.     Calculation the debt Equity Ratio from the following:-

Solution .26

Question .27      From the following, ascertain Debt – Equity Ratio:

Solution .27

Question .28.     Balance Sheet of X Ltd. shows the following information as at 31^st March, 2016;

Calculate ratios indicating the loan-term and Short -term financial position of the Company.

Solution .28               

(i) Long term financial position of the Company can be assessed by calculating Debt-Equity Ratio.

Question .29.     Calculate debt Equity Ratio from the following;

Solution .29

Long term Debts             = Long term Borrowings + Long term Provisions

                                              = Rs. 16,00,000 + Rs. 1,50,000

                                              = Rs. 17,50,000

Shareholder’s Funds     = Non-Current Assets + Working Capital – Non- Current Liabilities

Non- Current Assets     = Tangible Fixed Assets + Intangible Fixed Assets

                                              =Rs. 24,50,000 + Rs. 3,00,000

                                              =Rs. 27,50,000

Working Capital               = Current Assets – Current Liabilities

                                              = Rs. 3,34,000 – Rs. 84,000

                                              = Rs. 2,50,000

Non -Current Liabilities refer to Long term Debts Thus,

Shareholder’s Funds     = RS. 27,50,000 + RS. 2,50,000 – Rs. 17,50,000

                                              = RS. 12,50,000

Question .30.     Calculate Debt Equity Ratio from the following:

Total Assets Rs. 2,30,000; Total Debts Rs. 1,50,000; Current Liabilities Rs. 30,000.

Solution .30

Question .31.     The Debt Equity ratio of a company is 1:2. Which of the following would increase, decrease or not change it?

i)        Issue of equity shares

ii)   Cash Received from Trade Receivables

iii)   Sale of Goods on Cash Basis

iv)  Repayment of long-term borrowing

v)  Purchase Goods on Credit

Solution .31

In the above question, Debt – Equity Ratio is given as 1:2, therefore, it may be assumed that Long term Debts are Rs. 1,00,000 and share holders’ fund shares worth Rs. 2,00,000.

(i) Issue of Equity Shares : Suppose equity shares worth Rs. 1,00,000 are issued them by the issue of Equity shares, shareholder’s Funds will be increases and will stand at Rs. 2,00,000 + Rs. 1,00,000 = Rs. 3,00,000 therefore, the revised ratio will be ;

Therefore, it can be concluded that increased in shareholder’s funds decreased the ratio.

(ii) Cash Received from Trade Receivables: By receiving cash from Trade receivables there will be affect on the cash and trade receivables only. Hence, there will be no change in debt equity ratio because neither the long – term debt nor the shareholder’s funds are affected.

(iii) Sale of goods on cash Basis: Goods sold on cash will affect only the Inventories and Cash. Hence, there will be no change in debt- equity ratio because neither the long -term debts nor the Shareholder’s Funds are affected.

(iv) Repayment of long term Borrowings: Suppose there is repayment of long term borrowings for Rs. 50,000 then by the repayment of long-term borrowing of Rs. 50,000, Long Term Debts will be reduced by Rs. 50,000 and these will stand at Rs. 1,00,000 – Rs. 50,000 = Rs. 50,000. Therefore, the revised ratio will be:

(v) Purchase of Goods on credit: Goods purchased on Credit will affect only the inventories and trade payables. Hence, there will be no change in debt- equity ratio because neither the long -term debts nor the Shareholder’s Funds are affected.

Question .32.     Assuming that the debt- equity ratio is 2:1, state giving reasons, which of the following transactions would (i) increase (ii) decrease (iii) not alter the debt-equity ratio:-

1. Issue of Preference Shares
2. Buy -back of its own shares by a Company
3. Issue of Debentures
4. Repayment of Bank Loan
5. Sale of a fixed assets at par
6. Sale of a fixed assets at profit
7. Sale of a fixed assets at loss
8. Purchase of a fixed assets on a credit of 3 months
9. Purchase of a fixed assets on long term deferred payment basis

Solution .32       

Statement showing the effect of various transactions on Debt-Equity Ratio:-

Question .33.     Compute Total Assets to debt Ratio from the following information;

Solution .33

Question .34.     Calculate total Assets to debt ratio from the following information:

Solution .34.

Note: Reserve and Surplus will be ignored since it is already included in Shareholder’s fund

Question .35      From the following information, calculate total Assets to Debt Ratio:

Solution .35

Note: Surplus i.e., Balance is Statement of profit & loss will be ignored since it is already included in Reserve ad Surplus

Question .36    Total debt Rs. 40,00,000; Share Capital RS. 15,00,000; Reserve and Surplus RS. 8,00,000 ; current Liabilities RS. 5,00,000 Working Capital RS. 7,00,000. Calculate total assets to Debt ratio.

Solution .36

Question .37      Calculate total Assets to Debt ratio from the following:

Solution .37.

Question .38      Following particulars are extracted from the books of Bharat Rubber Ltd.

You are required to work out the following ratios:-

(i) Debt- Equity Ratio ; (ii)Total Assets; (iii) Proprietary Ratio; (iv) Quick Ratio 

Solution .38

Question .39      Calculation (i) Debt Equity Ratio, (ii) Proprietary Ratio and (iii) Total Assets to Debt Ratio from the following information:

Solution .39

Question .40      Following particulars are given to you:

Solution .40

Question .41.     Calculate the value of Current Assets of X Ltd. from the following information:

Solution .41

Question .42.     The proprietary ratio of m Ltd. is 0.80:1.

State with reasons whether the following transactions will increase, decrease or not change the proprietary ratio:

i)                    Obtain a loan from bank Rs. 2,00,000 payable after five years.

ii)                   Purchased machinery for cash Rs. 75,000.

iii)                 Redeemed 5% redeemable preference shares RS. 1,00,000.

iv)                 Issued equity shares to the vendors of machinery purchased for Rs. 4,00,000.

Solution .42

Question .43.     From the following information, calculate interest coverage ratio and give your comments also:

Solution .43

Question .44.      The following particulars are given to you

Net Profit for the year after interest and tax was Rs. 96,000. Rate of Income Tax was 50 %.

Calculate (i) Debt Equity Ratio;

(ii) proprietary Ratio;

(iii) Interest Coverage Ratio. Also give your Comments.

Solution .44

Comment:   Proprietary Ratio is only 20 % which means that the long term financial position of the company is not satisfactory because only 20% of the total assets of the company are funded by equity.

Comment: Normally, acceptable interest- coverage ratio is 6 or 7 times, where as the actual ratio for this company is 4. It means that the company may face difficulty in paying the interest on long- term loans regularly in case of fall of profits.

Question .45.      Calculate inventory turnover ratio from the following:

Solution .45

Question .46.      Calculate Inventory turnover Ratio from the following:

Solution  .46

Note : Carriage outwards, Salaries and Rent will by ignored while calculating Inventory Turnover Ratio.

Question .47.     Following is the Statement of Profit & Loss of Triveni Ltd. Calculate Inventory Turnover Ratio:

Solution .47

Note : Carriage outwards, Salaries and Rent will by ignored while calculating Inventory Turnover Ratio.

Question .48.     Calculate Inventory Turnover ratio and Average Age of inventory from the following:

Solution .48

Question . 49.     From the following data, calculate ‘Inventory turnover Ratio’ when gross profit is given 20%:

Solution . 49

Question .50.      Calculate the (i) Inventory Turnover Ratio and  (II) Average Age of Inventory from the following;-

Opening Inventory Rs. 54,000; Closing Inventory Rs. 66,000; Revenue from Operations (Sales) Rs. 5,00,000; Gross Profit Ratio 40% on Revenue from Operations.

Solution  .50

Question .51      Calculate Inventory Turnover Ratio from the following:

Opening Inventory Rs. 42,500; Closing Inventory Rs. 37,500; Revenue from Operations (Sales) Rs. 3,00,000; Gross Profit Ratio 30% on

Solution .51

Question .52      From the following information, Calculate Inventory Turnover Ratio:

Purchases RS. 10,00,000; Revenue from Operations (Sales) RS. 12,00,000; Direct Expenses RS. 48,000; Gross Profit Ratio 15% on Revenue from Operations; Closing Inventory RS. 1,64,000.

Solution .52

Question .53.     Calculate Opening Inventory from the following information:

Purchases RS. 5,70,000; Freight Rs. 20,000; Miscellaneous Expenses Rs. 10,000; Revenue from Operations (Sales) Rs. 5,00,000; Closing Inventory RS. 70,000;  Gross Loss 16% on Revenue from operations.

Solution .53

Cost of revenue from Operations          = Revenue from Operations (Sales) + Gross Profit 

                                                       = Rs. 5,00,000 – 16% of 5,00,000 = Rs. 5,80,000

Cost of revenue from Operations          Opening Inventory + Purchases + Freight – Closing Inventory

Rs. 5,80,000                         = Opening Inventory + RS. 5,70,000 + RS. 20,000 – Rs. 70,000

RS. 5,80,000                         = Opening Inventory + RS. 5,20,000

Opening Inventory                 = Rs. 60,000

Question  .54.      From the following information, calculate Inventory Turnover Ratio:

Revenue from Operations (Sales) Rs. 4,00,000, Average Inventory: RS. 55,000. The rate of Gross Loss on Revenue from Operations was 10%.

Solution .54

Question .55.     Compute Inventory Turnover Ratio from the following:

Solution .55.

Cost of revenue from Operations          = Opening Inventory + Purchases + Direct Charges (i.e., Wages, carriage Inwards) – Closing Inventory

Rs. 5,60,000                                     = Rs. 75,000 + Rs. 4,40,000 + RS. 1,30,000 + Rs. 15,000 – Closing Inventory

Closing Inventory                               = RS. 6,60,000 = RS. 5,60,000 + Closing inventory

Question .56      From the give information, calculate the Inventory turnover Ratio:

Revenue from Operations (Sales) Rs. 2,00,000; G.P.: 25%; Opening Inventory was 1/4^Th of the value of Closing Inventory. Closing Inventory was 40% of Revenue from Operations.

Solution . 56       Cost of revenue from Operations             = Revenue from operations – Gross profit

= RS. 2,00,000 – 25% of 2,00,000

= RS. 2,00,000 – RS. 50,000= RS. 1,50,000

Question .57.     Calculate Inventory Turnover Ratio from the following:

Solution .57

Gross Profit is 25% on cost. Therefore, goods costing RS. 100 is sold for RS. 125.

Hence, if Revenue from Operations are Rs. 125,

Cost of Revenue from Operations = Rs. 100

If Revenue from Operations are Rs. 10,00,000

Question .58.

Find out the value of Closing Inventory, If Closing Inventory is RS. 16,000 more than the Opening Inventory.

Solution .58

Question .59

Calculate the value of opening and closing Inventory in each of the follow alternative cases:

Cast I: If Closing inventory was RS. 1,00,000 in excess of opening inventory.

Case II: If closing inventory was 2 times that in the beginning.

Case III: If closing inventory was 2 times more than that in the beginning.

Case IV: If Closing inventory was 3 times that in the beginning.

Solution .59

Question .60(A)               RS. 3,00,000 is the cost of Revenue from Operations (Cost of Goods Sold), Inventory turnover 8 Times; Inventory at the Beginning is 2 times more than that inventory at the end. Calculate the value of opening & Closing Inventory.

Solution  .60(A)

Question .60 (B).             RS. 1,50,000 is the cost of Revenue from Operations, Inventory turnover 8 times; Inventory at the beginning is 1.5 times more than the inventory at the end. Calculate the value of Opening & Closing Inventory.

Solution .60 (B)

Question .61.  Average Inventory carried by a trader is Rs. 60,000; Inventory turnover ratio is 10 times. Goods are sold at a profit of 10% on cost. Find out the profit.

Solution .61

Question .62.     Determine the amount of Revenue from operations from the following particulars:-

You are informed that closing inventory is two times in comparison to opening inventories.

Solution .62

Cost of Revenue from Operations        = 6 × 60,000 = Rs. 3,60,000

Revenue from Operations add a profit of 20% on sales.

Goods costing RS. 80 which have been sold for Rs. 100. As such:

If Cost of Revenue from operations is Rs. 80, revenue from Operations are 100.

If Cost of Revenue from Operations is 3,60,000, Revenue from Operations are   ¹⁰⁰/₈₀× 3,60,000 = RS. 4,50,000

Question .63.     A company’s Inventory turnover is 5 Times. Inventory at the end of the year is RS. 4,000 more than inventory at the beginning of the year. Revenue from Operations during the year (all credit) were RS. 3,00,000. Rate of Gross Profit is 25% on cost of Revenue from Operations. Current Liabilities at the end of the year were RS. 50,000. Question uick Ratio is 1:1. Calculate: -

(i) Cost of revenue from operations (Cost of Goods Sold)

(ii) Opening Inventory.

(iii) Closing Inventory.

(iv) Question uick Assets.

(v) Current Assets at the end.

Solution .63       

Gross profit is 25% od cost. Therefore, goods costing RS. 100 is sold for RS. 125.

If Revenue from Operations are 125, Cost is 100

Current Liabilities are RS. 50,000 and Quick Ratio is 1 Therefore,

(iv) Quick Assets                                 = RS. 50,000 × 1 = Rs. 50,000

(v) Current Assets                                             = Quick Assets + Closing Inventory

                                                                      = RS. 50,000 + Rs. 50,000 = RS. 1,00,000

Question .64.     Following information is given to you:

On the basis of the information given above, calculate any two of the following ratios:

(i) Liquid Ratio,

(ii) Inventory Turnover Ratio, and

(iii) Debt Equity Ratio.

Solution .64

Question .65.     Calculate inventory turnover ratio from the following : Opening inventory RS. 20,000; Purchases Rs. 2,40,000 and Closing Inventory RS. 60,000. State, giving reason, which of the following transactions will (a) increase (b) decrease or (c) not alter the inventory turnover ratio:

(i) Goods purchased for Rs. 40,000.

(ii) Sale of goods for Rs. 25,000 (Cost RS. 30,000).

(iii) Decreases in the value of closing inventory by Rs. 20,000.

(iv) Increase in the value of closing inventory by Rs. 10,000.

(v) Goods costing Rs. 5,000 distributed as free sample.

Solution .65

Question .66.     Calculate trade receivables Turnover ratio from the following;-

Solution .66

Question .67      Calculate Trade receivables Turnover Ratio and Average Collection period from the following:

Solution .67

Question . 68     Calculate Trade Receivables Turnover and Average Collection period from the following:

Solution .68      

In order to ascertain the Trade Receivables Turnover ratio, the figure of Credit Revenue from Operations will have to be ascertained. It is as follows:

If credit revenue from operations are 100, Cash revenue from operations will be 20 Therefore, Total revenue from operations will be 100 + 20 = 120

Again, if total revenue from operations are 120,

Credit revenue from operations=100

If total revenue from operations are 4,80,000,

It is to be noted that any fraction of a day such as .48 would, in practice, mean that the payment will be received next day. Hence, in the above case, 68.48 days would imply 69 days.

Question .69.      Calculate Trade Receivables Turnover Ratio and Average Collection Period from the following figures:-

Solution .69

Question .70.      From the following particulars determine the Opening Trade Receivables:-

Credit Revenue from Operations                                                                          RS. 4,32,000

Trade Receivables turnover Ratio                                                                         12 Times

Closing Trade Receivables                                                                                    RS. 40,000

Solution .70

Calculation of closing receivables:                                                    

Opening Trade Receivables + Closing Trade Receivables = Average Trade receivables × 2

                                                                                =RS. 36,000 × 2= Rs. 72,000

As Closing Trade Receivables = Rs. 40,000,

Opening Trade Receivables = Rs. 72,000 – Rs. 40,000 = Rs. 32,000.

Question .71    Credit Revenue from operations of X Ltd. during the year ended 31^st March, 2016 were Rs. 5,64,000. If trade receivables turnover ratio is 6 times, calculate trade receivables in the beginning and at the end of the year. Trade Receivables at the end were Rs. 10,000 more than that at the beginning of the year.

Solution .71

Question .72      A company made Credit Revenue Credit from Operations of Rs. 8,76,000 during the year ended 31^st March, 2016. If Trade Receivables Turnover Ratio is 18.25 rimes calculate:

(1)    Average Trade Receivables; and (2) Closing Trade receivables. If closing Trade Receivables are three times in comparison to opening Trade Receivables.

Solution .72

Question .73.     Calculate the amount of Opening Trade Receivables and Closing Trade Receivable from the following particulars:

Solution .73

Question .74.     Calculate closing Trade receivables from the following information:

Solution .74

Question .75.     Following figures have been obtained from the books of Pawan roadways Ltd:

Calculate the Trade Receivables Turnover Ratio. Also Calculate Inventory turnover Ratio. Give necessary Comments.

Solution .75

Comment: 1.

In 2017, Trade Receivables Turnover ratio has increased from 6 times to 7.5 times. It indicates that amount from trade receivables is being collected more quickly.

2. In 2017, Inventory Turnover Ratio has also increased. It indicates that inventory is being rotated into revenue from operations more quickly. As such, the sales policy of the management is quite efficient.

Question .76.     Calculate trade receivables turnover ratio from the following:

State given reason, what will be the effect of the following on trade receivables turnover ratio:

(i) Received Rs. 20,000 from a customer.

(ii) sale of goods on credit Rs. 30,000.

(iii) cash revenue from operations Rs. 40,000.

Solution .76

Question .77      Calculate Trade Payable Turnover Ratio and Average Payment period of the following:

Solution .77

Question .78      On the basis of the following information calculate (I) trade Receivables Turnover Ratio; (ii) Average Collection period; (iii) trade Payables Turnover Ratio and (iv) Average Payment Period.

Solution .78

Question .79.     Calculate Working Capital Turnover Ratio from the following:

Solution .79.                                           

Net Revenue from Operations           =Credit Revenue from Operations + Cash Revenue from operations- Revenue from Operations return

                                                     = Rs. 8,00,000 + Rs. 12,60,000 – Rs. 80,000

                                                     = Rs. 19,80,000

Working Capital                                =Current Assets – Current liabilities

                                                      = Rs. 7,20,000 – Rs. 3,24,000 = Rs. 3,96,000

Question .80      Calculate Working Capital Turnover Ratio from the following:

Solution .80       

Current Assets = Inventory + Trade receivables + cash

                      = Rs. 6,00,000 + Rs. 5,00,000 + Rs. 1,00,000

                      = Rs. 12,00,000

Current Liabilities             = Trade Payables + Bank Overdraft

= Rs. 2,00,000 + Rs. 1,20,000

= Rs. 3,20,000

Working Capital                        =Current Assets – Current liabilities

                                             = Rs. 12,00,000 – Rs. 3,20,000

                                             = Rs. 8,80,000

Question .81.     Calculate Working Capital Turnover Ratio from the following information:

Solution .81

Question .82.     Calculate Working Capital turnover Ratio from the following information:

Solution .82

Question .83      Following information is Given to you:

Calculate:

1. Revenue from operations
   1. Working Capital
   2. Current Assets.

Solution .83

Question .84.     Calculate Working Capital Turnover Ratio from the following:

Solution .84

Question .85.(A)               Calculate Gross profit Ratio from the following figures: -

Solution .85(A)

Question .85. (B)              The following figures have been taken from the published accounts of G. Associates for the successive years:

Comment upon the profitability for the two years.

Solution .85(B)

Comment: Gross Profit Ratio has decreased considerably, which indicates that the price of  materials Purchased, wages and other direct changes ,may have gone up but the sales price may not have increased in the same proportion.

Question .86(A)                Calculate Gross Profit Ratio from the following figures: -

Opening Inventory Rs. 40,000; Closing Inventory Rs. 60,000; Purchases Rs. 7,10,000; Return Outwards Rs. 10,000; Wages Rs. 80,000; Cash revenue from Operations Rs. 3,45,000; Credit Revenue from operations Rs. 6,30,000; return Inward Rs. 25,000.

Solution .86(A)

Question .86 (B)               Calculate Gross profit Ratio from the following figures: -

Cash Revenue from Operations Rs. 4,20,000; Credit Revenue from Operations Rs. 6,00,000; Revenue from Operations Returns Rs. 20,000; Cost of Revenue from Operations Rs. 7,50,000.

Solution .86(B)

Question .87.     Calculate G.P. ratio from the following: -

Net profit Rs. 40,000; Office Expenses Rs. 20,000; Selling Expenses Rs. 36,000; Net Revenue from Operations Rs. 6,00,000.

Solution .87

Question .88.     Calculate G.P. Ratio from the following: -

Solution .88.