TS Grewal Solution Class 12 Chapter 4 Accounting Ratios

Question 7. Working Capital is Rs. 18,00,000; Trade Payable Rs. 1,80,000; and Other Current Liabilities are Rs. 4,20,000. Calculate Current Ratio.

Answer: 

Calculation of Current Assets:-
Working Capital = Current Assets – Current Liabilities
Rs. 18,00,000 = Current Assets – Rs. 6,00,000
Current Assets = Rs. 18,00,000 + Rs. 6,00,000
Current Assets = Rs. 24,00,000

Calculation of Current Liabilities:-
Current Liabilities = Trade Payable + Other Current Liabilities
Current Liabilities = Rs. 1,80,000 + Rs. 4,20,000
Current Liabilities = Rs. 6,00,000

Things to Remember:
Financial Statement Analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements, and a study of trends of these factors, as shown in a series of statements.

Important Notes:
To Assess the Earning Capacity or Profitability: Earning Capacity and Profitability of the enterprise can be accessed from the financial statement analysis. It also facilitates forecasting of the same for the future years. External users are interested in earnings and hence, this is their prime objective of analyzing financial statement. ii. To Assess the Managerial Efficiency: This assessment is possible because financial statement analysis identifies the areas where managers have been efficient and where not. Favorable and unfavorable variations can be identified to pinpoint the managerial inefficiency.

Q14. A firm had Current Assets of Rs. 5,00,000. It paid Current Liabilities of Rs. 1,00,000 and the Current Ratio became 2:1. Determine Current Liabilities and Working Capital before and after the payment was made.

Answer:

Calculation of Current Liabilities:-
Current Liabilities before payment = Rs. 3,00,000
Current Liabilities after payment = Rs. 3,00,000 – Rs. 1,00,000 = Rs. 2,00,000

Calculation of Working Capital:- 
Working Capital before payment = Rs. 5,00,000 – Rs. 3,00,000 = Rs. 2,00,000
Working Capital after payment = Rs. 4,00,000 – Rs. 2,00,000 = Rs. 2,00,000

About Solution:
Formula for current ratio:
Current Ratio = Current Assets/Current Liabilities

Things to Remember:
Researchers: Parties engaged into research activity and wish to perform the same over the business entities so as to analyze the profitability, growth and financial position of an enterprise. To gather information on such areas, they are interested in analyzing respective aspects of such areas which includes data related to business operations, finance, human resource, etc.

Important Notes:
Tax Authorities: Tax Authorities are interested in ensuring proper assessment of tax liabilities of the enterprise as per the tax laws in force from time to time.

Q15. A firm had current Liabilities of ₹ 5,40,000. It purchased stock of ₹ 60,000 on credit. After the purchase of stock, Current Ratio was 2:1. Calculate Current Assets and Working Capital after and before the stock was purchased.

Answer: 

Given that, Current Liabilities = Rs. 5,40,000 and stock Purchased = Rs. 60,000

Current Assets before Stock purchased = Rs. 12,00,000 – Rs. 60,000
Current Assets before Stock purchased = Rs. 11,40,000

Current Liabilities after stock purchased on credit = Rs. 5,40,000 + Creditors of stock
Current Liabilities after stock purchased on credit = Rs. 5,40,000 + Rs. 60,000
Current Liabilities after stock purchased on credit = Rs. 6,00,000

Current Assets after stock purchased = Current Assets before stock purchased + Stock
Current Assets after stock purchased = Rs. 11,40,000 + Rs. 60,000
Current Assets after stock purchased = Rs. 12,00,000

Working Capital before purchased = Current Assets before purchased – Current liabilities before purchased 
Working Capital before purchased = Rs. 11,40,000 – Rs. 5,40,000
Working Capital before purchased = Rs. 6,00,000

Working Capital before purchased = Current Assets after purchased – Current liabilities after purchased 
Working Capital before purchased = Rs. 12,00,000 – Rs. 6,00,000
Working Capital before purchased = Rs. 6,00,000

About Solution:
Current ratio is a part of Liquidity ratio. Liquidity Ratio has two parts:
a) Current Ratio
b) Quick Ratio / Liquidity Ratio

Things to Remember:
Internal Analysis: This is a detailed and accurate type of analysis done by the management of the enterprise to determine the financial position and operational efficiency of the organisation. Since, management has access of complete information, they perform an extensive type of analysis which is more detailed and accurate.

Important Notes:
Horizontal Analysis: It is also known as Dynamic Analysis. It is done to review and analyse financial statement for a number of years and hence, is also known as time series analysis. It facilitates comparison of financial data for several years against a chosen base year.

Q16. State giving reason, whether the Current Ratio will improve or decline or will have no effect in each of the following transactions if Current Ratio is 2:1:
(a) Cash paid to Trade Payables.
(b) Bills Payable discharged.
(c) Bills Receivable endorsed to a creditor.
(d) Payment of final Dividend already declared.
(e) Purchase of Stock-in-Trade on credit.
(f) Bills Receivable endorsed to a Creditor dishonoured.
(g) Purchases of Stock-in-Trade for cash.
(h) Sale of Fixed Assets (Book Value of Rs. 50,000) for Rs. 45,000.
(i) Sale of Fixed Assets (Book Value of Rs. 50,000) for Rs. 60,000. 

Answer:

About Solution:
Idol ratio for current ratio is 2:1. If current asset is more than current liability it’s used to find solvency of a company. 

Things to Remember:
Customers: Customers have an interest in information about the continuance of an enterprise. This is particularly when they are either dependent on the enterprise or they have a long term involvement with the enterprise.

Important Notes:
External Analysis: This type of analysis is done by investors, credit agencies, researchers, etc. who do not have access to the confidential and complete records of an enterprise and therefore, have to depend on information published in various statements or reports which shall comprise of Statement of Profit and Loss, Balance Sheet, Auditor's Reports etc.

Answer:

Calculation of Quick Ratio:-

Quick Ratio = 1.5:1

Current Liabilities = Total Debt – Long term Borrowings – Long term Provisions
Current Liabilities = Rs. 12,00,000 – Rs. 4,00,000 – Rs. 4,00,000
Current Liabilities = Rs. 4,00,000

Current Assets = Total Assets – Property, Plant and Equipment – Non-Current Investments – long term Loans and Advances
Current Assets = Rs. 16,00,000 – Rs. 6,00,000 – Rs. 1,00,000 – Rs. 1,00,000
Current Assets = Rs. 8,00,000

Quick Assets = Current Assets – Prepaid Expenses – Inventories
Quick Assets = Rs. 8,00,000 – Rs. 10,000 – Rs. 1,90,000
Quick Assets = Rs. 6,00,000

Things to Remember:
Interpretation: This is the concluding part of the financial statement analysis. The interpretation should be precise and directed towards indicating the movement if various financial characteristics.

Important Notes:
Comparative Statements:
i.) It means a comparative study of individual components or elements or items of Balance Sheet and Statement of Profit or Loss for two or more years.
ii.) At first, the value of each component or element or item of two or more financial years is placed alongside each other.
iii.) After this, differences between the two amounts are determined.
iv.) Lastly percentage change in the amount from the base year is ascertained. Such comparative statements can be Intra-Firm or Inter-Firm Comparisons.

Q19. Quick Assets Rs. 3,00,000; Inventory (Stock) Rs. 80,000; Prepaid Expenses Rs. 20,000; Working Capital Rs. 2,40,000. Calculate Current Ratio.

Answer:

Calculation of Current Assets:-
Current Ratio = (Current Assets)/(Current Liabilties)
Current Ratio = 4,00,000/1,60,000 
Current Ratio = 2.5:1

Calculation of Current Assets:-
Current Assets = Quick Assets + Stock + Prepaid Expenses
Current Assets = Rs. 3,00,000 + Rs. 80,000 + Rs. 20,000 
Current Assets = Rs. 4,00,000

Calculation of Current Liabilities:-
Current Liabilities = Current Assets – Working Capital
Current Liabilities = Rs. 4,00,000 – Rs. 2,40,000 
Current Liabilities = Rs. 1,60,000

Things to Remember:
Intra-firm Analysis: It facilitates a comparison of the various financial variables of an enterprise over a period of time and therefore, it is also known as Time Series Analysis or Trend Analysis. It helps analyzing performance of an enterprise over a period of time.

Important Notes:
Rearrangement of Financial Statements: It is necessary to reclassify the complex data contained in the financial statement into purposive classes so that maximum desired information from every data for analysis can be obtained.

Q20. Current Assets Rs. 6,00,000; Inventories Rs. 1,20,000; Working Capital Rs. 5,04,000. Calculate Quick Ratio.

Answer:

Calculation of Liquid Assets:-
Liquid Assets = Current Assets – Inventories
Liquid Assets = Rs. 6,00,000 – Rs. 1,20,000 
Liquid Assets = Rs. 4,80,000

Calculation of Current Assets:-
Current Liabilities = Current Assets – Working Capital
Current Liabilities = Rs. 6,00,000 – Rs. 5,04,000 
Current Liabilities = Rs. 96,000

Things to Remember:
Comparison: Once the classification of the complex data is done, it is necessary to obtain comparative data of the same enterprise of the past periods if it is a time series analysis. If it is a cross sectional analysis, it is necessary to obtain comparative data of the same accounting period of similar or comparable enterprises.

Important Notes:
Analysis: The comparative financial data is then analyzed with reference to financial characteristics like profitability, solvency and liquidity.

Q26. Xolo Ltd. Liquidity Ratio is 2.5:1. Inventory is Rs. 6,00,000. Current Ratio is 4:1. Find out the Current Liabilities.

Answer:

Calculation of Inventory:-
Inventory = Current Assets – Liquid Assets
Rs. 6,00,000 = 4X – 2.5X
Rs. 6,00,000 = 1.5X
X = 6,00,000/1.5
X = Rs. 4,00,000

About Solution:
If ratio is given you need to use reverse approach for ex-
Current Asset = Liquid Assets – Inventory
Liquid Assets=Current Assets - Inventory

Things to Remember:
Comparative Financial Statements is a tool of financial analysis that shows change in each item from the base year in absolute amount and in percentage, taking the amounts for the preceding or previous accounting period as the base. Therefore, preparation of such statement is important because for the following different reasons:
1. Shareholders
2. Lenders
3. Investment Decision

Important Notes:
Aggregate Information: Financial Statements show aggregate information and not detailed information and hence, it is not that useful for the users in decision making.

Q27. Current Assets of a company is are Rs. 5,00,000. Its Current Ratio is 2.5:1 and Quick Ratio is 1:1. Calculate value of Current Liabilities, Liquid Assets and Inventory.

Answer:

Current Assets = Rs. 5,00,000
Current Ratio =  2:5:1
Quick Ratio = 1:1

Things to Remember:
It is a statement which is used for comparing the assets, liabilities and capital and ascertaining increase or decrease in those items  It is horizontal analysis of Balance Sheet in which each item of assets, equity and liabilities is analyzed horizontally for two or more accounting periods.

Important Notes:
Meaning: It is a horizontal analysis of Income Statement which shows the operating results for more than one accounting period so that changes in absolute amounts and percentages from one period to another are known. It will consist of all the items that are present in the normal Income statement like revenue from operations, cost of materials consumed, employee benefit expenses, etc. The methodology or formulae used to compute all these amounts also remain the same.

Q28. Working Capital of a company is ₹ 3,60,000; Total Debts ₹ 7,80,000; Long term debts ₹ 6,00,000; Inventories ₹ 1,80,000. Calculate Liquid Ratio.

Answer:

Liquid Ratio = (Quick Assets)/(Current Liabilities)
Liquid Ratio = 3,60,000/1,80,000
Liquid Ratio = 2:1

Calculation of Current Assets:-
Working Capital = Current Assets – Current Liabilities
Rs. 3,60,000 = Current Assets – Rs. 1,80,000
Current Assets = Rs. 3,60,000 + Rs. 1,80,000
Current Assets = Rs. 5,40,000

Total Debts = Non-Current Liabilities + Current Liabilities
Rs. 7,80,000 = Rs. 6,00,000 + Current Liabilities
Current Liabilities = Rs. 7,80,000 - Rs. 6,00,000
Current Liabilities = Rs. 1,80,000

Q29. Working Capital ₹ 4,00,000; Total Debts ₹ 18,00,000; Non-Current Liabilities ₹ 16,00,000; Inventories ₹ 1,90,000; Prepaid Expenses ₹ 10,000.

Answer:

Quick Ratio = (Quick Assets)/(Current Liabilities)
Quick Ratio = 4,00,000/2,00,000
Quick Ratio = 2:1

Total Debts = Non-Current liabilities + Current Liabilities
Rs. 18,00,000 = Rs. 16,00,000 + Current Liabilities
Rs. 18,00,000 = Rs. 16,00,000 + Current Liabilities
Current Liabilities = Rs. 18,00,000 - Rs. 16,00,000
Current Liabilities = Rs. 2,00,000

Working Capital = Current Assets – Current Liabilities 
Rs. 4,00,000 = Current Assets – Rs. 2,00,000
Current Assets = Rs. 4,00,000 + Rs. 2,00,000
Current Assets = Rs. 6,00,000

Quick Assets = Current Assets – Inventories – Prepaid Expenses
Quick Assets = Rs. 6,00,000 – Rs. 1,90,000 – Rs. 10,000
Quick Assets = Rs. 4,00,000

Q30. Quick Ratio of a company is 2:1. State giving reasons, which of the following transactions would (i) improve, (ii) reduce, (iii) Not change the Quick Ratio: 
(a) Purchase of goods for cash; 
(b) Purchase of goods on credit; 
(c) Sale of goods (costing Rs.10,000) for Rs.10,000; 
(d) Sale of goods (costing Rs.10,000) for Rs.11,000; 
(e) Cash received from Trade Receivables.

Answer:

The Quick Ratio of a Company is 2:1. The following are given reasons for the answers.
Quick Ratio = (Liquid Assets)/(Current Liabilities)
Quick Ratio = (Rs.  40,000)/(Rs.  20,000) = 2/1 = 2:1 (Let the expected figures be)
(a) Purchases of goods for cash will decreased cash or quick assets but will increase current assets for increase in stock. Therefore numerator of the fraction will decrease which alternatively reduce the ratio.
(b) Purchase of goods on credit will increase stock i.e., current assets but not the Liquid Assets. The creditors i.e., Current Liabilities will increase due to credit purchases. When numerator remains constant and denominator increases then quick ratio will reduce.
(c) Sale of Goods (Costing Rs. 10,000) for Rs. 10,000 will increase cash and quick assets by Rs. 10,000. The increase in numerator will improve the ratio.
(d) Sale of goods (Costing Rs. 10,000) for Rs. 11,000 will increase quick assets and cash. When only numerator of the fraction is increased the ratio will improve.
(e) Cash received from debtors will no way change quick assets. So the quick ratio will not change.

About Solution:
Formula to find quick ratio:
Quick Ratio = (Liquid Assets)/(Current Liabilities)

Things to Remember:
Meaning of Common Size Statement of Profit and Loss: A Common-size Statement of Profit and Loss may be prepared for different periods of the firm or for the same period of two firms. It shows the relative efficiency in operating the business.

Important Notes:
Objectives: Following are the Objectives of Common-size Statement of Profit and Loss:
i.) To analyze change in individual items of Income Statement.
ii.) To study the trend in different items of Incomes and Expenses. To assess the efficiency.

Q31: Quick Ratio of Z Ltd. is 1 : 1. State, with reason, which of the following transactions would (i) Increase (ii) Decrease or (iii) Not Change the ratio:
(a) Included in the trade payables was bill payable of ₹ 3,000 which was met on maturity;
(b) Debentures of ₹ 50,000 were converted into equity shares.

Answer:

Let’s assume Quick Assets be Rs. 1,00,000 and Current Liabilities be Rs. 1,00,000

Q32. The Quick Ratio of a company is 0.8:1. State with reason, whether the following transactions will increase, decrease or not change the Quick Ratio:
(i) Purchase of loose tools for Rs.2,000; (ii) Insurance premium paid in advance Rs.500; (iii) Sale of goods on credit Rs.3,000; (iv) Honoured a bills payable of Rs.5,000 on maturity.

Answer:

The Quick Ratio of a Company is 0.8:1. The following are given reasons for the answers.
Quick Ratio = (Liquid Assets)/(Current Liabilities)
Quick Ratio = (Rs.  8,000)/(Rs.  10,000)
Quick Ratio = 0.8/1
Quick Ratio = 0.8:1 (Let the expected figures be)
(i) Purchase of loose tools for Rs. 2,000 for cash will decrease cash or quick assets but will increase current assets for increase in loose tools. Therefore numerator of the fraction will decrease which alternatively reduce the ratio.
(ii) Insurance premium paid in advance Rs. 500 in cash will decreased cash or quick assets but will increase current assets for increase in prepaid expenses. Therefore numerator of the fraction will decrease which alternatively reduce the ratio.
(iii) Sale of goods on credit Rs. 3,000 will increase debtors and reduce stock Rs. 3,000 which alternatively increase liquid assets and reduce current assets. Therefore numerator of the fraction will increase which alternatively increase the ratio.
(iv) Honoured bill payable of Rs. 5,000 on maturity in cash will decreased cash or quick assets and decrease current liabilities. Therefore numerator and denominator of the fraction will increase which alternatively reduce the ratio.

About Solution:
Formula to find quick ratio:
Quick Ratio = (Liquid Assets)/(Current Liabilities)

Things to Remember:
Solvency (long-term solvency): These are the ratios which assess the long-term financial position of the enterprise. They assess the ability to meet the long-term financial obligations of the enterprise. It includes:
1. Debt to Equity Ratio
2. Total Assets to Debt Ratio
3. Proprietary Ratio
4. Interest Coverage Ratio

Important Notes:
Activity/Turnover: These are the ratios which show how efficiently the enterprise resources are being used for the business operations. It includes:
1. Inventory Turnover Ratio
2. Trade Receivables Turnover Ratio
3. Trade Payables Turnover Ratio
4. Working Capital Turnover Ratio

Q33. Venus. Ltd’s Inventory is ₹ 3,00,000. Total Liquid Assets are ₹ 12,00,000 and Quick Ratio is 2 : 1. Work out Current Ratio.

Answer:

Things to Remember:
Profitability: These ratios show the profitability of the enterprise. It includes:
1. Gross Profit Ratio
2. Operating Ratio
3. Operating Profit Ratio
4. Net Profit Ratio
5. Return on Investment

Important Notes:
A liquidity ratio that measures the ability of the enterprise to pay its short-term financial obligations i.e., current liabilities.

Q34. Total Assets Rs. 11,00,000; Fixed Assets Rs. 5,00,000; Capital Employed Rs.10,00,000. There were no Long-term Investments. Calculate Current Ratio.

Answer:

Current Assets = Total Assets – Fixed Assets
Current Assets = Rs. 11,00,000 – Rs. 5,00,000
Current Assets = Rs. 6,00,000
Current Liabilities = Total Assets – Capital Employed
Current Liabilities = Rs. 11,00,000 – Rs. 10,00,000
Current Liabilities = Rs. 1,00,000
Current Ratio = (Current Assets)/(Current Liabilities)
Current Ratio = 6,00,000/1,00,000
Current Ratio = 6/1
Current Ratio = 6 : 1

About Solution:
To find current assets and current liability in this question:
Current Assets = Total Assets – Fixed Assets
Current Liabilities = Total Assets – Capital Employed

Things to Remember:
Liquidity Ratio helps to identify whether the enterprise will be able to meet its short-term financial obligations when they become due for payment.

Important Notes:
Ideal Ratio for liquidity ratio is 2 : 1. High Current Ratio means better liquidity but too high current ratio means poor operational efficiency.

Q35. Capital Employed Rs. 20,00,000; Fixed Assets Rs. 14,00,000; Current Liabilities Rs. 2,00,000. There are no Long-term Investments. Calculate Current Ratio.

Answer:

Current Ratio = Current Assets/Current Liabilities
Current Ratio = 8,00,000/2,00,000 
Current Ratio = 4/1 
Current Ratio = 4 : 1

Total Assets = Capital Employed + Current Liabilities
Total Assets = Rs. 20,00,000 + Rs. 2,00,000
Total Assets = Rs. 22,00,000

Total Assets = Fixed Assets + Current Assets
Rs. 22,00,000 = Rs. 14,00,000 + Current Assets 
Current Assets = Rs. 22,00,000 – Rs. 14,00,000
Current Assets = Rs. 8,00,000

Things to Remember:
Current Assets: These are the assets that are either In the form of Cash and Cash Equivalents or can be converted into Cash and Cash Equivalents within 12 months from the date of Balance Sheet or within the period of operating cycle.

Important Note:
Current Assets include:
1. Short-term loans and advances,
2. Current Investments,
3. Inventories (excluding Loose Tools and Stores and Spares),
4. Trade Receivables (bills receivable and sundry debtors less provision for doubtful debts),
5. Cash and Cash Equivalents (cash in hand, cash at bank, cheques/drafts in hand, etc.)
Other Current Assets (prepaid expenses, interest receivable, etc.)

Q36. From the following Calculate: (i) Current Ratio; and (ii) Quick Ratio:

Answer:

Things to Remember:
Operating Cycle: It is the time between the acquisition of assets for processing and their realisation into Cash and Cash Equivalents. In case the normal operating cycle cannot be identified, it is assumed to be a period of 12 months.

Important Notes:
Working Capital: Where working capital is given, value of current assets and current liabilities can be ascertained using the given current ratio. Working Capital is the excess of Current Assets over Current Liabilities which is expressed as follows:
Working Capital= Current Assets - Current Liabilities; Or
Current Assets = Working Capital + Current Liabilities; Or
Current Liabilities = Current Assets - Working Capital

 Q37. Following is the Balance Sheet of Crescent Chemical Works Limited as at 31st March, 2023:

Q38. Total Assets Rs. 2,60,000; Total Debts Rs. 1,80,000; Current Liabilities Rs. 20,000. Calculate Debt to Equity Ratio.

Answer:

Things to Remember:
Such assets are shown under the head 'Current Assets' in the Balance Sheet and therefore includes:
1. Short-term Loans and Advances,
2. Current Investment,
3. Trade Receivables,
4. Cash and Cash Equivalents
5. Other Current Assets except Prepaid Expenses.
6. Inventories and Prepaid expenses are not included in Liquid assets because inventories takes time to convert in cash and cash equivalents and prepaid expenses are something that has already been paid in advance and cannot be converted into cash.

Important Notes:
Current Liabilities: These are the liabilities that are repayable within 12 months from the date of Balance Sheet or within the period of operating cycle.

Q39. Calculate Debt to Equity Ratio: Equity Share Capital Rs. 5,00,000; General Reserve Rs. 90,000; Accumulated Profits Rs. 50,000; 10% Debentures Rs. 1,30,000; Current Liabilities Rs. 1,00,000.

Answer:

About Solution:
Working Capital= Current Assets - Current Liabilities
Current Assets = Working Capital + Current Liabilities 
Current Liabilities = Current Assets - Working Capital

Things to Remember:
Understanding Liquid or Quick or Acid Test Ratio:
It is a liquidity ratio which measures the ability of the enterprise to meet its short-term financial obligations, i.e., Current Liabilities.

Important Notes:
Understanding Liquid Assets and Current Liabilities for Quick Ratio:
Liquid Assets: These are those assets that are either in the form of Cash and Cash Equivalents or can be converted into Cash and Cash Equivalent in a very short time. These are considered as the most liquid assets.

Q40. From the following information, calculate Debt to Equity Ratio:

Answer:

Things to Remember:
Current Liabilities includes the following items:
1. Short-term borrowings,
2. Short-term provision
3. Trade Payables (bills payable and sundry creditors),
4. Other Current Liabilities (current maturities of long term debts, interest accrued but not due, interest accrued and due, outstanding expenses, unclaimed dividend, calls-in advance, etc.)

Important Notes:
Debt–to–Equity Ratio is a relationship between long-term external equities, i.e., external debts (includes long term borrowings and long-term provisions) and internal equities (Shareholders' Funds) of the enterprise.

Answer:

Things to Remember:
Interest Coverage Ratio:
1. It is a relationship between Net Profit before Interest and Tax and Interest on Long Term Debts.
2. It is calculated to ascertain the amount of profit available to cover interest on long term debts.
3. For lenders a higher Interest Coverage Ratio is considered better as it signifies a higher margin to meet interest cost.

Important Notes:
Interest Coverage Ratio = Profit before interest and tax/Intrest on Long term debt

Q43. From the following information, calculate Debt to Equity Ratio: Total Debts ₹ 6,00,000; Current Liabilities ₹ 2,00,000 and Capital Employed ₹ 6,00,000.

Answer:

Debt to Equity Ratio = Debt/Equity
Debt to Equity Ratio = 4,00,000/2,00,000
Debt to Equity Ratio = 2:1

Total Debts = Non-Current Liabilities + Current Liabilities 
Rs. 6,00,000 = Non-Current Liabilities + Rs. 2,00,000
Non-Current Liabilities = Rs. 6,00,000 - Rs. 2,00,000
Non-Current Liabilities = Rs. 4,00,000

Capital Employed = Equity + Non- Current Liabilities 
Rs. 6,00,000 = Equity + Rs. 4,00,000
Equity = Rs. 6,00,000 - Rs. 4,00,000
Equity = Rs. 2,00,000

Q44. Calculate Debt to Equity Ratio: Total Assets ₹ 14,00,000; Total Debt ₹ 12,00,000; Capital Employed ₹ 10,00,000.

Answer:

Debt to Equity Ratio = Debt / Equity
Debt to Equity Ratio = 8,00,000/2,00,000
Debt to Equity Ratio = 4:1

Equity = Total Assets – Total Debts
Equity = Rs. 14,00,000 – Rs. 12,00,000
Equity = Rs. 2,00,000

Capital Employed = Equity + Debt (Non-Current liabilities) 
Rs. 10,00,000 = Rs. 2,00,000 + Debt (Non-Current liabilities)
Debt (Non-Current liabilities) = Rs. 10,00,000 - Rs. 2,00,000
Debt (Non-Current liabilities) = Rs. 8,00,000

Q45. Capital Employed Rs. 8,00,000; Shareholders' Funds Rs. 2,00,000. Calculate Debt to Equity Ratio.

Answer:

Things to Remember:
Understanding Proprietary Ratio:
1. It is a relationship between proprietor's fund and total assets.
2. It shows the financial strength of the entity.

Important Notes:
Proprietary Ratio is an important ratio for the creditors as it helps them identify the portion of shareholders' funds in the total assets employed in the firm and also the safety margin available to them.

Q46. King Ltd. has Current Ratio of 2.5:1. Its Working Capital is ₹ 1,20,000. Total Assets are of ₹ 3,80,000 and Total Debt of ₹ 2,80,000. Calculate Debt to Equity Ratio.

Answer:

Debt (Non-Current liabilities) = Total Debt - Current Liabilities
Debt (Non-Current liabilities) = Rs. 2,80,000 – Rs. 80,000
Debt (Non-Current liabilities) = Rs. 2,00,000

Equity (Shareholders Fund) = Total Assets – Total Debts
Equity (Shareholders Fund) = Rs. 3,80,000 – Rs. 2,80,000
Equity (Shareholders Fund) = Rs. 1,00,000

Q47. Monica Ltd. has Quick Ratio of 1.5 : 1. Its Working Capital is ₹ 1,20,000 and its inventories are of ₹ 80,000. Total Assets of ₹ 3,80,000 and Total Debts of ₹ 2,80,000. Calculate Debt to Equity Ratio.

Answer:

1.5 (Current Liabilities) = Current Assets – Rs. 80,000
Current Assets = 1.5 (Current Liabilities) + Rs. 80,000

Working Capital = Current Assets – Current Liabilities
Rs. 1,20,000 = Current Assets – Current Liabilities
Rs. 1,20,000 = 1.5 (Current Liabilities) + Rs. 80,000 – Current Liabilities
Rs. 1,20,000 -  Rs. 80,000 = 0.5 (Current Liabilities)
Rs. 40,000 = 0.5 (Current Liabilities)
0.5 (Current Liabilities) = Rs. 40,000
Current Liabilities = 40,000/0.5
Current Liabilities = Rs. 80,000

Debt to Equity Ratio = Debt/Equity
Debt to Equity Ratio = 2,00,000/1,00,000
Debt to Equity Ratio = 2:1

Debt (Non Current Liabilities) = Total Debts – Current Liabilities
Debt (Non Current Liabilities) = Rs. 2,80,000 – Rs. 80,000
Debt (Non Current Liabilities) = Rs. 2,00,000

Shareholder Fund = Total Assets – Total Debts
Shareholder Fund = Rs. 3,80,000 – Rs. 2,80,000
Shareholder Fund = Rs. 1,00,000

Q48. When Debt to Equity Ratio is 2, state giving reason, whether this ratio will increase or decrease or will have no change in each of the following cases:
(i) Sale of Land (Book value Rs. 4,00,000) for Rs. 5,00,000; (ii) Issue of Equity Shares for the purchase of Plant and Machinery worth Rs. 10,00,000; (iii) Issue of Preference Shares for redemption of 13% Debentures, worth Rs. 10,00,000.

Answer:

Debt - Equity Ratio = Debt/Equity = Long-term Loans/Shareholders^' Funds

(i) Sale of land (Book Value Rs. 4,00,000 for Rs. 5,00,000: Sale of Land at a Profit of Rs. 1,00,000 will increase Shareholders’ Funds. Hence Debt- Equity Ratio will decrease.

(ii) Issue of Equity Shares for the Purchase of Plant and Machinery worth Rs. 10,00,000: Issue of Equity Shares for the Purchase  of Plant and Machinery will increase shareholders’ funds, hence the ratio will decrease.

(iii) Issue of Preference Share for redemption of 13% debentures, worth Rs. 1,00,000: Total Long-term debts are decreased and total Shareholders’ Fund are increased the same amount, hence the ratio will decrease.

About Solution:
Formula to find Debt-Equity Ratio:
Debt - Equity Ratio = Debt/Equity
                            or
Debt - Equity Ratio = (Long-term Loans)/(Shareholders^' Funds)

Things to Remember:
Debt-to-equity measures the proportion of external funds and shareholder's invested in the company.

Important Notes:
Debt-to-Equity assesses long-term financial soundness of the enterprise and indicates the extent to which the enterprise depends on borrowed funds for its business.

Q49. Debt to Equity Ratio of a company is 0.5:1. Which of the following suggestions would increase, decrease or not change it?
(i) Issue of Equity Shares: (ii) Cash received from debtors:
(iii) Redemption of debentures;  (iv) Purchased goods on Credit?

Answer:

Let Long-term Loan be = Rs. 50,000 and Shareholders’ Funds = Rs. 1,00,000

Things to Remember:
Inventory Turnover Ratio:
A high ratio shows that more sales are being produced by a rupee of investment in the inventories. On the other hand, a low ratio means inefficient use of investment in inventory, over investment in stocks, etc. A very high ratio indicates overtrading which may result in working capital shortage. Only an optimum Inventory Turnover Ratio ensures adequate working capital and helps firm ear a reasonable margin.

Important Note:
Inventory Turnover Ratio: It measures the number of times an enterprise sells and replaces its inventory and therefore, it is an activity as well as efficiency ratio that measures efficiency of inventory management.

Q50. Assuming That the Debt to Equity Ratio is 2:1, state giving reasons, which of the following transactions would: (i) increase; (ii) Decrease; (iii) Not alter Debt to Equity Ratio:
(i) Issue of new shares for cash.
(ii) Conversion of debentures into equity shares
(iii) Sale of a fixed asset at profit.
(iv) Purchase of a fixed asset on long-term deferred payment basis.
(v) Payment to creditors.

Answer:

Debt to Equity Ratio is 2:1. Reasons are given below for which the following transactions would (i) Increase: (ii) Decrease: (iii) Not alter Debt to Equity Ratio. 
(i) Issue of new shares for cash - will decrease the ratio. 
Reason - If shares are issued then the denominator of the ratio will increase which will decrease the ratio. 
(ii) Conversion of debentures into equity shares - will decrease the ratio. 
Reason - If debentures into equity shares then the denominator of the ratio will increase and numerator will decrease which will decrease the ratio. 
(iii) Sale of fixed assets at profit - will decrease the ratio. 
Reason - If fixed assets are sold at a profit then the denominator of the ratio will increase which will decrease the ratio.
(iv) Purchase of a fixed asset on long-term deferred payment basis - will increase the ratio. 
Reason - If fixed asset is purchased on long-term deferred payment basis then the numerator of the ratio will increase which will increase the ratio. 
(v) Payment to creditors - will not alter the ratio. 
Reason - If payment to creditors is made then it will not affect the debt or equity, hence it will not change the ratio.

About Solution:
Formula to find Debt-Equity Ratio in this question:
Debt - Equity Ratio = Debt/Equity

Things to Remember:
Inventory Turnover Ratio: It ascertains whether the investment in stock is appropriate and that only the required amount is invested in stock.

Important Note:
Direct Expenses: Such an item will be shown separately in the Note to Accounts and may be in form of Employees Benefit Expenses and/or Other Expenses. In case if no direct expenses are given, it is assumed that direct expenses are in
Average Inventory: It is calculated as follows:
Average Inventory = (Opening Inventory + Closing Inventory) + 2

Q51. From the following Balance Sheet of ABC Ltd. as at 31st March, 2019, Calculate Debt to Equity Ratio:

Answer:

Q52. Calculate Total Assets to Debt Ratio from the following information: Long-term Debts Rs. 4,00,000; Total Assets  Rs. 7,70,000.

Answer:

Things to Remember:
Trade Receivables Turnover Ratio:
A higher ratio shows that debts are collected more promptly and a lower ratio shows inefficiency in collection or increased credit period or more investment in debtors.

Important Note:
Trade Receivables Turnover Ratio:
It should be computed keeping in mind that provision for doubtful debts is not deducted from trade receivables since the purpose is to calculate the number of days for which sales are tied up in trade receivables and not to ascertain realizable value of debtors.

Q53. Shareholder’s Funds ₹ 1,60,000; Total Debts ₹ 3,60,000; Current Liabilities ₹ 40,000. Calculate Total Assets to Debt Ratio.

Answer:

Total Assets to Debt Ratio = Total Assets/Debt
Total Assets to Debt Ratio = 5,20,000/3,20,000
Total Assets to Debt Ratio = 1.625:1

Total Assets = Shareholder’s Fund + Total Debts
Total Assets = Rs. 1,60,000 + Rs. 3,60,000
Total Assets = Rs. 5,20,000
Total Debts = Non-Current Liabilities + Current Liabilities

Rs. 3,60,000 = Non-Current Liabilities + Rs. 40,000
Non-Current Liabilities = Rs. 3,60,000 - Rs. 40,000
Non-Current Liabilities = Rs. 3,20,000

Q54. Total Debt Rs. 60,00,000; Shareholder’s Fund Rs. 10,00,000; Reserves and Surplus Rs. 2,50,000; Current Assets Rs. 25,00,000; Working Capital Rs. 5,00,000. Calculate Total Assets to Debt Ratio.

Answer:

Total Assets to Debt Ratio = Total Assets/Debt
Total Assets to Debt Ratio = 70,00,000/40,00,000
Total Assets to Debt Ratio = 1.75:1 

Total Assets = Total Debt + Shareholders Fund
Total Assets = Rs. 60,00,000 + Rs. 10,00,000
Total Assets = Rs. 70,00,000

Working Capital = Current Assets – Current Liabilities
Rs. 50,00,000 = Rs. 25,00,000 – Current Liabilities
Current Liabilities = Rs. 50,00,000 - Rs. 25,00,000
Current Liabilities = Rs. 25,00,000

Total Debt = Non-current Liabilities + Current Liabilities
Rs. 60,00,000 = Non-current Liabilities + Rs. 20,00,000
Non-current Liabilities = Rs. 60,00,000 - Rs. 20,00,000
Non-current Liabilities = Rs. 40,00,000

Q55. Total Debt ₹ 15,00,000; Current Liabilities ₹ 5,00,000; Capital Employed ₹ 15,00,000. Calculate Total Assets to Debt Ratio.

Answer:

Total Assets to Debt Ratio = Total Assets/Debt
Total Assets to Debt Ratio = 20,00,000/10,00,000
Total Assets to Debt Ratio = 2:1

Total Assets = Capital Employed + Current Liabilities
Total Assets = Rs. 15,00,000 + Rs. 5,00,000
Total Assets = Rs. 20,00,000

Total Debt = Non-Current Liabilities + Current Liabilities
Rs. 15,00,000 = Non-Current Liabilities + Rs. 5,00,000
Non-Current Liabilities = Rs. 15,00,000 - Rs. 5,00,000
Non-Current Liabilities = Rs. 10,00,000

Q56. Total Debt ₹ 12,00,000; Shareholder’s Funds ₹ 2,00,000; Reserves and Surplus ₹ 50,000; Current Assets ₹ 5,00,000; Working Capital ₹ 1,00,000; Calculate Total Assets to Debt Ratio.

Answer:

Total Assets to Debt Ratio = Total Assets/Debt
Total Assets to Debt Ratio = 14,00,000/8,00,000
Total Assets to Debt Ratio = 1.75:1

Total Assets = Shareholders Fund + Total Debt
Total Assets = Rs. 2,00,000 + Rs. 12,00,000
Total Assets = Rs. 14,00,000

Working Capital = Current Assets – Current Liabilities
Rs. 1,00,000 = Rs. 5,00,000 – Current Liabilities
Current Liabilities = Rs. 5,00,000 - Rs. 1,00,000
Current Liabilities = Rs. 4,00,000

Total Debt = Non-Current Liabilities + Current Liabilities
Rs. 12,00,000 = Non-Current Liabilities + Rs. 4,00,000
Non-Current Liabilities = Rs. 12,00,000 - Rs. 4,00,000
Non-Current Liabilities = Rs. 8,00,000

Q57. Calculate Total Assets to Debt Ratio from the following information:

Q58. From the following information, calculate Total Assets to Debt Ratio:

Answer:

Total Assets to Debt Ratio = (Total Assets)/Debt
Total Assets to Debt Ratio = 9,00,000/3,00,000
Total Assets to Debt Ratio = 3:1

Debt = Long-term Borrowings + Long term Provisions
Debt = Rs. 1,80,000 + Rs. 1,20,000
Debt = Rs. 3,00,000

Shareholders Fund = Equity Share Capital + Surplus + General Reserve
Shareholders Fund = Rs. 4,00,000 + Rs. 1,00,000 + Rs. 70,000
Shareholders Fund = Rs. 5,70,000

Total Assets = Shareholders Fund + Non Current Liabilities (Debt) + Current Liabilities 
Total Assets = Rs. 5,70,000 + Rs. 3,00,000 + Rs. 30,000
Total Assets = Rs. 9,00,000

Q59. From the following information, calculate Total Assets to Debt Ratio:

Answer:
Total Assets to Debt Ratio = Total Assets/Debt
Total Assets to Debt Ratio = 8,00,000/4,00,000
Total Assets to Debt Ratio = 4:1

Debt = Long-term Borrowings + Long term Provisions
Debt = Rs. 3,00,000 + Rs. 1,00,000
Debt = Rs. 4,00,000

Total Assets = [Fixed Assets (Gross)- Depreciation] + Non-Current Investments + Long term Loan and Advances + Current Assets
Total Assets = [Rs. 6,00,000- Rs. 1,00,000] + Rs. 10,000 + Rs. 40,000 + Rs. 2,50,000
Total Assets = Rs. 5,00,000 + Rs. 10,000 + Rs. 40,000 + Rs. 2,50,000
Total Assets = Rs. 8,00,000

Q60. From the following information, calculate Proprietary Ratio:

Q61. From the following information, calculate Proprietary Ratio:

 

Q63. Calculate Proprietary Ratio, if Total Assets to Debt Ratio is 2 : 1. Debt is ₹ 5,00,000. Equity Shares Capital is 0.5 times of debt. Preference Shares Capital is 25% of equity share capital. Net Profit before tax is ₹ 10,00,000 and rate of tax is 40%.

Answer:

Total Assets to Debt Ratio = 2:1
Debt = Rs. 5,00,000
Total Assets to Debt Ratio = Total Assets/Debt
2 = (Total Assets)/5,00,000
Total Assets = 2 × Rs. 5,00,000
Total Assets = Rs. 10,00,000

Equity share Capital = 0.5 × Rs. 5,00,000
Equity share Capital = Rs. 2,50,000

Preference Share Capital = Equity Share Capital × 25%
Preference Share Capital = Rs. 2,50,000 × 25%
Preference Share Capital = Rs. 62,500

Proprietary Ratio = (Shareholders Fund)/(Total Assets )
Proprietary Ratio = 9,12,500/10,00,000
Proprietary Ratio = 0.9125:1

Net Profit Before tax = Rs. 10,00,000
Tax Rate = 40%
Profit After tax = Rs. 10,00,000 – (10,00,000 × 40%)
Profit After tax = Rs. 10,00,000 – Rs. 4,00,000
Profit After tax = Rs. 6,00,000

Shareholders’ Funds = Equity Share Capital + Preference Share Capital + Profit
Shareholders’ Funds = Rs. 2,50,000 + Rs. 62,500 + Rs. 6,00,000
Shareholders’ Funds = Rs. 9,12,500

Q64. State with reason, whether the Proprietary Ratio will improve, decline or will not change because of the following transactions if Proprietary Ratio is 0.8 : 1:
(i) Obtained a loan of Rs. 5,00,000 from State Bank of India payable after five years.
(ii) Purchased machinery of Rs. 2,00,000 by cheque.
(iii) Redeemed 7% Redeemable Preference Shares Rs. 3,00,000.
(iv) Issued equity shares to the vendor of building purchased for Rs. 7,00,000.
(v) Redeemed 10% redeemable debentures of Rs. 6,00,000.

Answer:

The Proprietary Ratio of a Company is 0.8:1. The following are given reasons for the answers.
Proprietary Ratio = Shareholders' Funds/TotalAssets
Proprietary Ratio = 8,00,000/10,00,000
Proprietary Ratio = 0.8/1
Proprietary Ratio = 0.8:1 (Let the expected figures be)

(i) Obtained a loan of Z 5,00,000 from State Bank of India payable after five years. Rising of long term loan will not affect Shareholders Funds but due to rising of loan the cash or bank balance will increase for which, the amount of total assets will increase. Therefore denominator of the fraction will increase which alternatively decrease the ratio. 
(ii) Purchase of machinery of Z 2,00,000 by cheque. The bank balance will reduce and fixed assets increase by same amount. There will be no effect in the total assets as well as the Shareholders Funds. Therefore no change in the ratio.
(iii) Redeemed 7% Redeemable Preference Shares Z 3,00,000 will reduce Shareholders Funds as well as Total Assets due to payment through bank. Therefore reduction of Z 3,00,000 from both the numerator and denominator will decrease the ratio.
(iv) Issued equity shares to the vendor of building purchased for Rs. 7,00,000 will increase Shareholders Funds as well as Total Assets due to increase in Fixed Assets. Therefore numerator and denominator of the fraction will increase which alternatively increase the ratio. 
(v) Redeemed 10% redeemable debentures of Rs. 6,00,000 will not affect Shareholders Funds but the amount of Total Assets decrease due to payment through bank. Therefore denominator of the fraction will decrease which alternatively increase the ratio.

About Solution:
Formula to Find Proprietary Ratio in this question is:
Proprietary Ratio = (Shareholders^' Funds)/TotalAssets

Things to Remember:
Liquid ratio = Liquid or quick assets /Current liabilities

Important Notes:
Liquid assets = current assets – (stock + prepaid expenses)

Q65. From the following information, calculate:
(a) Proprietary Ratio;
(b) Debt to Equity Ratio; and
(c) Total Assets to Debt Ratio.

Answer:

Total Assets = Non-Current Assets + Current Assets
Total Assets = Rs. 40,00,000 + Rs. 40,00,000
Total Assets = Rs. 80,00,000

Debt = Long term Borrowings + Long term Provision
Debt = Rs. 15,00,000 + Rs. 25,00,000
Debt = Rs. 40,00,000

Total Assets = Equity + Non-Current Liabilities + Current Liabilities
Rs. 80,00,000 = Equity + Rs. 40,00,000 + Rs. 20,00,000
Rs. 80,00,000 = Equity + Rs. 60,00,000
Equity = Rs. 80,00,000 - Rs. 60,00,000
Equity = Rs. 20,00,000

Q66. From the following information, calculate:
(a) Proprietary Ratio;
(b) Debt to Equity Ratio; and
(c) Total Assets to Debt Ratio.

Answer:

Working Note:-

Working Capita = Current Assets – Current Liabilities
Rs. 1,50,000 = Rs. 7,50,000 – Current Liabilities
Current Liabilities = Rs. 7,50,000 – Rs. 1,50,000
Current Liabilities = Rs. 6,00,000

Total Debt = Non-current Liabilities (Debt) + Current Liabilities
Rs. 18,00,000 = Non-current Liabilities (Debt) + Rs. 6,00,0000
Non-current Liabilities (Debt) = Rs. 18,00,000 - Rs. 6,00,0000
Non-current Liabilities (Debt) = Rs. 12,00,000

Shareholders Fund = Capital Employed – Non-Current Liabilities
Shareholders Fund = Rs. 15,00,000 – Rs. 12,00,000
Shareholders Fund = Rs. 3,00,000

Total Assets = Capital Employed + Current Liabilities 
Total Assets = Rs. 15,00,000 + Rs. 6,00,000
Total Assets = Rs. 21,00,000

Q67. If Net Profit before Interest and Tax is Rs. 10,00,000 and interest on Long-term Funds is Rs. 2,00,000, find Interest Coverage Ratio.

Answer:

Things to Remember:
Quick ratio is a measure of the instant debt paying capacity of the business enterprise. It is a measure of the extent to which liquid resources are immediately available to meet current obligations. A quick ratio of 1 : 1 is considered good/favorable for a company.

Important Notes:
Activity ratios measure the efficiency or effectiveness with which a firm manages its resources. These ratios are also called turnover ratios because they indicate the speed at which assets are converted or turned over in sales.

Q68. From the following information, calculate Interest Coverage Ratio: Profit after Tax Rs. 4,25,000; Tax Rs. 75,000; Interest on Long-term Funds Rs. 1,25,000.

Answer:

Things to Remember:
These ratios are expressed as ‘times’ and should always be more than one. Some of the important activity ratios are: 
(i) Stock turnover ratio 
(ii) Debtors turnover ratio 
(iii) Creditors turnover ratio 
(iv) Working capital turnover ratio

Important Notes:
Stock turnover ratio is a ratio between cost of goods sold and the average stock or inventory. Every firm has to maintain a certain level of inventory of finished goods. But the level of inventory should neither be too high nor too low. It evaluates the efficiency with which a firm is able to manage its inventory. This ratio establishes relationship between cost of goods sold and average stock.

Q69. From the following details, calculate Interest Coverage Ratio:
Net Profit after Tax               Rs. 7,00,000
6% Debentures                     Rs. 20,00,000
Tax Rate 30%

Answer:

Interest on Debenture = 6% × Debenture 
Interest on Debenture = 6% × Rs. 20,00,000
Interest on Debenture = Rs. 1,20,000

Profit before Interest and tax = Profit before tax + Interest
Profit before Interest and tax = Rs. 10,00,000 + Rs. 1,20,000
Profit before Interest and tax = Rs. 11,20,000

Q70. From the following information, Calculate Interest Coverage Ratio:
Net Profit after interest and tax ₹ 1,20,000; Rate of Income tax; 40%; 15% Debentures ₹ 1,00,000; 12% Mortgage Loan ₹ 1,00,000.

Answer:

Interest Coverage Ratio = Profit Before Interets and Tax/Interest on Long term loans
Interest Coverage Ratio = 2,2,7,000/27,000
Interest Coverage Ratio = 8.41 times

Let profit before tax be x
Profit after tax = Profit Before tax – Interest
Rs.1,20,000 = x – (40% of x)
Rs.1,20,000 = x – 0.40x
Rs.1,20,000 = 0.60x
0.60x = Rs.1,20,000
x = (Rs.1,20,000)/0.60
x = Rs. 2,00,000
Profit Before tax = Rs. 2,00,000

Interest = 15% Debentures + 12% Mortgage Loan
Interest = 15% × 1,00,000 + 12% × 1,00,000
Interest = 15,000 + 12,000
Interest = 27,000

Profit before interest and tax = Profit Before tax + Interest 
Profit before interest and tax = Rs. 2,00,000 + Rs. 27,000
Profit before interest and tax = Rs. 2,27,000

About Solution:
Formula to Find Proprietary Ratio in this question is:
Proprietary Ratio = (EquityShareCapital + ReservesandSurplus)/(Total Assets)

Things to Remember:
Current Ratio indicates the amount of current assets available for repayment of current liabilities. Higher the ratio, the greater is the short term solvency of a firm and vice a versa. However, a very high ratio or very low ratio is a matter of concern. If the ratio is very high it means the current assets are lying idle. Very low ratio means the short term solvency of the firm is not good. Thus, the ideal current ratio of a company is 2 : 1 i.e. to repay current liabilities, there should be twice current assets.

Important Notes:
Quick ratio is also known as Acid test or Liquid ratio. It is another ratio to test the liability of the concern. This ratio establishes a relationship between quick assets and current liabilities. This ratio measures the ability of the firm to pay its current liabilities. The main purpose of this ratio is to measure the ability of the firm to pay its current liabilities. For the purpose of calculating this ratio, stock and prepaid expenses are not taken into account as these may not be converted into cash in a very short period.

Q71. From the following information, calculate Interest Coverage Ratio:

Answer:

Q71. From the following information, calculate Interest Coverage Ratio:

Answer:

Q72. From the following information, Calculate Debt to Capital Employed Ratio:
                                                                                 Rs.
Shareholder’s Funds                                        24,00,000
Long-term Borrowings (9% Debentures)       12,00,000
Current Liabilities                                             2,00,000
Non-Current Assets                                          28,00,000
Current Assets                                                  10,00,000

Answer:

Debt to Capital Employed Ratio = Long term debt / Capital Employed
Debt to Capital Employed Ratio = 12,00,000/36,00,000
Debt to Capital Employed Ratio = 0.33:1

Long term Debt (9% Debentures) = Rs. 12,00,000
Capital Employed = Shareholders Fund + Long term Borrowings
Capital Employed = Rs. 24,00,000 + Rs. 12,00,000
Capital Employed = Rs. 36,00,000

Q73. From the following information, Calculate Debt to Capital Employed Ratio:

Surplus i.e., Balance in Statement of Profit & Loss: (Rs. 1,00,000)

Answer:

Things to Remember:
Inventory/stock conversion period: It may also be of interest to see average time taken for clearing the stocks. This can be possible by calculating inventory conversion period. This period is calculated by dividing the number of days by inventory turnover

Important Notes:
Stock Turnover Ratio:
i.) If cost of goods sold is not given, the ratio is calculated from the sales. 
ii.) If only closing stock is given, then that may be treated as average stock.

Q74. From the following, calculate ‘Debt to Capital Employed Ratio’:
                                                              Rs.
9% Debenture                                 2,00,000
8% Public Deposits                        5,00,000
Long-term Provisions                    2,00,000
Equity Share Capital                      8,00,000
Reserve and Surplus                     5,00,000

Answer:

Debt to Capital Employed Ratio = Long term Debt/Capital Employed
Debt to Capital Employed Ratio = 9,00,000/22,00,000
Debt to Capital Employed Ratio = 0.41:1

Long term Debts = 9% Debentures + Long term Provisions + 8% Public Deposits
Long term Debts = Rs. 2,00,000 + Rs. 2,00,000 + Rs. 5,00,000
Long term Debts = Rs. 9,00,000

Capital Employed = Equity Share Capital + Reserve and Surplus + 9% Debentures + Long term provisions + 8% Public Deposits
Capital Employed = Rs. 8,00,000 + Rs. 5,00,000 + Rs. 2,00,000 + Rs. 2,00,000 + Rs. 5,00,000
Capital Employed = Rs. 22,00,000

Q75. Calculate Debt to Capital Employed Ratio from the following information:

Answer:

Debt to Capital Employed Ratio = Long-term Debt/Capital Employed
Debt to Capital Employed Ratio = 37,50,000/87,50,000
Debt to Capital Employed Ratio = 0.43:1

Long-term Debts = Long term Borrowings + Long term Provisions
Long-term Debts = Rs. 20,00,000 + Rs. 17,50,000
Long-term Debts = Rs. 37,50,000

Capital Employed = Shareholders fund + Long-term borrowings + Long term Provisions
Capital Employed = Rs. 50,00,000 + Rs. 20,00,000 + Rs. 17,50,000 
Capital Employed = Rs. 87,50,000

About Solution:
Formula to find Inventory or Stock Turnover Ratio:
Inventory or Stock Turnover Ratio = (Cost of Goods Sold)/(Average Inventory)

Things to Remember:
Inventory/stock conversion period: It may also be of interest to see average time taken for clearing the stocks. This can be possible by calculating inventory conversion period. This period is calculated by dividing the number of days by inventory turnover

Important Notes:
Stock Turnover Ratio:
i.) If cost of goods sold is not given, the ratio is calculated from the sales. 
ii.) If only closing stock is given, then that may be treated as average stock.

Q76. Total Debts ₹ 60,00,000; Current Assets ₹ 25,00,000; Non-Current Assets ₹ 95,00,000; Working Capital ₹ 5,00,000.

Answer:

Debt to Capital Employed Ratio = Long-term Debts/Capital Employed
Debt to Capital Employed Ratio = 40,00,000/10,00,000
Debt to Capital Employed Ratio = 0.40:1

Working Capital = Current Assets – Current Liabilities 
Rs. 5,00,000 = Rs. 25,00,000 – Current Liabilities
Current Liabilities = Rs.25,00,000 - Rs. 5,00,000
Current Liabilities = Rs.20,00,000

Long-term Debts = Total Debts – Current Liabilities
Long-term Debts = Rs. 60,00,000 – Rs. 20,00,000
Long-term Debts = Rs. 40,00,000

Capital Employed = Current Assets + Non-current Assets – Current Liabilities
Capital Employed = Rs. 25,00,000 + Rs. 95,00,000 – Rs. 20,00,000
Capital Employed = Rs. 10,00,000

Things to Remember:
Inventory conversion period: The ratio signifies the number of times on an average the inventory or stock is disposed of during the period. The high ratio indicates efficiency and the low ratio indicates inefficiency of stock management.

Important Notes:
Debtors Turnover ratio:- This ratio establishes a relationship between net credit sales and average account receivables i.e. average trade debtors and bill receivables. The objective of computing this ratio is to determine the efficiency with which the trade debtors are managed. This ratio is also known as Ratio of Net Sales to average receivables.

Q77. From the following, Calculate Debt to Capital Employed Ratio:
10% Preference Share Capital ₹ 5,00,000; Equity Share Capital ₹ 15,00,000; Securities Premium ₹ 1,00,000; Reserves and Surplus ₹ 2,00,000; 9% Loan from IDBI ₹ 30,00,000.

Answer:

Important Notes:
In case, figure of net credit sale is not available then it is calculated as if sales are credit sales :
Average debtors = Opening Debtors + Closing Debtors /2

Q78. From the following Balance Sheet of Varun Ltd. as at 31st March, 2023, Calculate Debt to Capital Employed Ratio:

Answer:

Debt to Capital Employed Ratio = Long-term Debt/Capital Employed
Debt to Capital Employed Ratio = 15,00,000/46,00,000
Debt to Capital Employed Ratio = 0.33:1

Capital Employed = Share Capital + Reserve and Surplus + long term Borrowings
Capital Employed = Rs. 20,00,000 + Rs. 11,00,000 + Rs. 15,00,000
Capital Employed = Rs. 46,00,000

Things to Remember:
Debt collection period:-This period refers to an average period for which the credit sales remain unpaid and measures the quality of debtors. Quality of debtors means payment made by debtors within the permissible credit period. It indicates the rapidity at which the money is collected from debtors.

Important Notes:
If opening debtors are not available then closing debtors and bills receivable are taken as average debtors.

Q79. Debt to Capital Employed Ratio of a Company is 0.4:1. State giving reasons, which of the following will improve, reduce or not change the ratio?
(i) Sale of Machinery at a loss of Rs. 50,000.
(ii) Purchase of Stock-in-Trade on Credit of two months for ₹ 80,000.
(iii) Conversion of Debentures into Equity Shares of ₹ 5,00,000.
(iv) Purchase of Fixed Assets for ₹ 4,00,000 on a long term deferred payment basis.

Answer:

(i) Sale of Machinery at a loss of Rs. 50,000.
Debt to Capital Employed Ratio = (Long-term Debt)/(Capital Employed)
Let, Long-term Debt = Rs. 80,000 and Capital Employed = Rs. 2,00,000
Debt to Capital Employed Ratio = 80,000/2,00,000
Debt to Capital Employed Ratio = 0.4:1
Now, Sale of Machinery at a loss of Rs. 50,000 reduces a shareholder fund which is a part of capital employed. Capital Employed will reduce by Rs. 50,000 and there is no change in Long-term debts.
Debt to Capital Employed Ratio = 80,000/(2,00,000-50,000)
Debt to Capital Employed Ratio = 80,000/1,50,000
Debt to Capital Employed Ratio = 0.533:1
Hence, debt to capital employed ratio Improves.

(ii) Purchase of Stock-in-Trade on Credit of two months for ₹ 80,000.
A purchase of Stock in Credit creates current liabilities which are not a part of long-term debt and Capital employed. Hence there is no change in Debt to capital employed ratio.
 
(iii) Conversion of Debentures into Equity Shares of ₹ 5,00,000.
Debt to Capital Employed Ratio = (Long-term Debt)/(Capital Employed)
Let, Long-term Debt = Rs. 6,00,000 and Capital Employed = Rs. 15,00,000
Debt to Capital Employed Ratio = 6,00,000/15,00,000
Debt to Capital Employed Ratio = 0.4:1
Now, converting debentures of Rs. 5,00,000 into equity shares reduces long-term debt by Rs. 5,00,000 
Current long term debt = Rs. 6,00,000 – Rs. 5,00,000 = Rs. 1,00,000
Capital employed unchanged.
Debt to Capital Employed Ratio = 1,00,000/15,00,000
Debt to Capital Employed Ratio = 0.067:1
Hence, Debt to capital employed ratio decreases.

(iv) Purchase of Fixed Assets for ₹ 4,00,000 on a long term deferred payment basis.
Debt to Capital Employed Ratio = (Long-term Debt)/(Capital Employed)
Let, Long-term Debt = Rs. 6,00,000 and Capital Employed = Rs. 15,00,000
Debt to Capital Employed Ratio = 6,00,000/15,00,000
Debt to Capital Employed Ratio = 0.4:1
Now, after the transaction long term debt increases by Rs. 4,00,000 and Capital employed is also increased by Rs. 4,00,000.
Debt to Capital Employed Ratio = (6,00,000+4,00,000)/(15,00,000+4,00,000)
Debt to Capital Employed Ratio = 10,00,000/19,00,000
Debt to Capital Employed Ratio = 0.526:1
Hence, debt to capital employed ratio increased.

Q80. From the following details, calculate Inventory Turnover Ratio:
                                                                                                      Rs.
Cost of Revenue from Operations (Cost of Goods Sold)    9,00,000
Inventory in the beginning of the year                                  2,50,000
Inventory at the close of the year                                          3,50,000

Answer:

Q81. Cost of Revenue from Operations (Cost of Goods Sold) Rs. 5,00,000; Purchases Rs. 5,50,000; Opening Inventory Rs. 1,00,000. Calculate Inventory Turnover Ratio.

Answer:

Working Note:-
Cost of Revenue from Operations = Opening Inventory + Purchases – Closing Inventory
Rs. 5,00,000 = Rs. 1,00,000 + Rs. 5,50,000 – Closing Inventory
Closing Inventory = Rs. 1,00,000 + Rs. 5,50,000 – Rs. 5,00,000
Closing Inventory = Rs. 1,50,000

Q82. Calculate Inventory Turnover Ratio from the following information: 
Opening Inventory is Rs. 50,000; Purchases Rs. 3,90,000; Revenue from Operations, i.e., Net Sales Rs. 6,00,000; Gross Profit Ratio 30%.

Answer:

Working Note:-
(1) Cost of Revenue from Operations = Revenue from Operations – Gross Profit
= Rs. 6,00,000 – Rs. 6,00,000 × 30%
= Rs. 6,00,000 – Rs. 1,80,000
= Rs. 4,20,000

(2) Cost of Revenue from Operations = Opening Inventory + Purchases – Closing Inventory
Rs. 4,20,000 = Rs. 50,000 + Rs. 3,90,000 – Closing Inventory
Closing Inventory = Rs. 50,000 + Rs. 3,90,000 – Rs. 4,20,000
Closing Inventory = Rs. 20,000

Q83. Calculate Inventory Turnover Ratio from the following

Answer:

Q84. Calculate Inventory Turnover Ratio from the following:
                                                                              Rs.
Opening Inventory                                           58,000
Closing Inventory                                            62,000
Revenue from Operations i.e. Net Sales        6,40,000
Gross Profit Ratio 25%

Answer:

Important Notes:
Debtor’s turnover ratio is an indication of the speed with which a company collects its debts. The higher the ratio, the better it is because it indicates that debts are being collected quickly. In general, a high ratio indicates the shorter collection period which implies prompt payment by debtor and a low ratio indicates a longer collection period which implies delayed payment for debtors.

Q85. From the following information, calculate Inventory Turnover Ratio:
                                                              Rs.
Revenue from Operations             16,00,000
Average Inventory                          2,20,000
Gross Loss Ratio 5%

Answer:

Revenue from Operations = Cost of Revenue from Operations – Gross Loss
Revenue from Operations = Cost of Revenue from Operations – Revenue from Operations × 5%
Rs. 16,00,000 = Cost of Revenue from Operations – Rs. 16,00,000 × 5%
Rs. 16,00,000 = Cost of Revenue from Operations – Rs. 80,000
Rs. 16,00,000 + Rs. 80,000 = Cost of Revenue from Operations
Cost of Revenue from Operations = Rs. 16,80,000
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Inventory Turnover Ratio = 16,80,000/2,20,000 
Inventory Turnover Ratio = 7.64 Times

Q86. Revenue from Operations Rs. 4,00,000; Gross Profit Rs. 1,00,000; Closing Inventory Rs. 1,20,000; Excess of Closing Inventory over Opening Inventory Rs. 40,000. Calculate Inventory Turnover Ratio.

Answer:

Things to Remember:
Creditors Turnover Ratio:- It is a ratio between net credit purchases and average account payables (i.e creditors and Bill payables). In the course of business operations, a firm has to make credit purchases. Thus a supplier of goods will be interested in finding out how much time the firm is likely to take in repaying the trade creditors. This ratio helps in finding out the exact time a firm is likely to take in repaying to its trade creditors. This ratio establishes a relationship between credit purchases and average trade creditors and bill payables.

Important Notes:
Calculation Creditors turnover ratio:-
Creditors turnover ratio = Net credit purchases / Average trade creditors or average bill payables

Q87. From the following data, calculate Inventory Turnover Ratio:
Total Sales Rs. 5,00,000; Sales Return Rs. 50,000; Gross Profit Rs. 90,000; Closing Inventory Rs. 1,00,000; Excess of Closing Inventory over Opening Inventory Rs. 20,000.

Answer:

Inventory Turnover Ratio = Cost of goods Sold / Average Inventory
Inventory Turnover Ratio = 3,60,000/90,000
Inventory Turnover Ratio = 4 Times

About Solution:
Cost of Goods Sold = Total Sales – Sales Return – Gross Profit
Cost of Goods Sold = Rs. 5,00,000 – Rs. 50,000 – Rs. 90,000
Cost of Goods Sold = Rs. 3,60,000
Opening Inventory = Closing Inventory– Rs. 20,000
Opening Inventory = Rs. 1,00,000 – Rs. 20,000
Opening Inventory = Rs. 80,000

Things to Remember:
Calculation of Average Creditors:-
Average Creditors = Creditors in the begining + Creditors at the end / 2

Important Notes:
Creditor’s turnover ratio helps in judging the efficiency in getting the benefit of credit purchases offered by suppliers of goods. A high ratio indicates the shorter payment period and a low ratio indicates a longer payment period.

Q88. Rs. 2,00,000 is the Cost of Revenue from Operations (Cost of Goods Sold), during the year. If Inventory Turnover Ratio is 8 times, calculate inventories at the end of the year. Inventories at the end are 1.5 times that of in the beginning.

Answer:

Things to Remember:
Debt payment period This period shows an average period for which the credit purchases remain unpaid or the average credit period actually availed.

Important Notes:
Debt payment period = 12 months or 52 weeks or 365 days /Creditors turnover ratio

Q89. Calculate Inventory Turnover Ratio from the data given Below:

Answer:

Things to Remember:
Working capital turnover ratio indicates the speed at which the working capital is utilized for business operations. It is the velocity of working capital ratio that indicates the number of times the working capital is turned over in the course of a year. This ratio measures the efficiency at which the working capital is being used by a firm. A higher ratio indicates efficient utilisation of working capital and a low ratio indicates the working capital is not properly utilized.

Important Notes:
Working Capital Turnover Ratio = Opening working capital + Closing working capital /2

Q90. Calculate Inventory Turnover Ratio from the following information:
Opening Inventory Rs. 40,000; Purchases Rs. 3,20,000; and Closing Inventory Rs. 1,20,000. State, giving reason, which of the following transactions would (i) increase, (ii) decrease, (iii) neither increase nor decrease the Inventory Turnover Ratio:
(a) Sale of goods for Rs. 40,000 (Cost Rs. 32,000).
(b) Increase in the value of Closing Inventory by Rs. 40,000.
(c) Goods purchased for Rs. 80,000.
(d) Purchases Return Rs. 20,000.
(e) Goods costing Rs. 10,000 withdrawn for personal use.
(f) Goods costing Rs. 20,000 distributed as free samples.

Answer:

Calculation of Inventory turnover ratio from the following information:
Opening Inventory = Rs. 40,000, Purchases = Rs. 3,20,000, Closing Inventory = Rs. 1,20,000

Things to Remember:
Working Capital Turnover Ratio Working capital of a concern is directly related to sales. The current assets like debtors, bill receivables, cash, stock etc. change with the increase or decrease in sales. 

Important Notes:
Working capital = Current Assets – Current Liabilities

Q91. Following figures have been extracted from Shivalika Mills Ltd.:
Inventory in the beginning of the year Rs. 60,000.
Inventory at the end of the year Rs. 1,00,000. 
Inventory Turnover Ratio 8 times.
Selling price 25% above cost.
Compute amount of Gross Profit and Revenue from Operations (Net Sales).

Answer:

Revenue from Operations = Cost of Revenue from Operations + Profit
Revenue from Operations = Cost of Revenue from Operations + Cost of Goods Sold × 25/100
Revenue from Operations = Rs. 6,40,000 + Rs. 6,40,000 × 1/4
Revenue from Operations = Rs. 6,40,000 + Rs. 1,60,000
Revenue from Operations = Rs. 8,00,000
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
= Rs. 8,00,000 – Rs. 6,40,000
= Rs. 1,60,000

Things to Remember:
Debt-equity ratio: The two basic components of the ratio are outsiders’ funds and shareholders’ funds. The outsiders’ funds include all debts/liabilities to outsiders i.e. debentures, long term loans from financial institutions, etc. Shareholders’ funds mean preference share capital, equity share capital, reserves and surplus and fictitious assets like preliminary expenses. This ratio indicates the proportion between shareholders’ funds and the long-term borrowed funds. In India, this ratio may be taken as acceptable if it is 2 : 1. If the debt-equity ratio is more than that, it shows a rather risky financial position from the long term point of view.

Important Notes:
Debt-equity ratio: The purpose of debt equity ratio is to derive an idea of the amount of capital supplied to the concern by the proprietors. This ratio is very useful to assess the soundness of long term financial position of the firm. It also indicates the extent to which the firm depends upon outsiders for its existence. A low debt equity ratio implies the use of more equity than debt.

Q92. From the following information, Calculate Inventory Turnover Ratio: Credit Revenue from Operations ₹ 6,00,000; Cash Revenue from Operations ₹ 2,00,000, Gross Profit 25% of Cost, Closing Inventory was 3 times the Opening Inventory was 10% of cost of Revenue from Operations.

Answer:

Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory
Inventory Turnover Ratio = 6,40,000/1,28,000
Inventory Turnover Ratio = 5 times

Net Revenue from Operation = Credit Revenue from operation + Cash Revenue from operation
Net Revenue from Operation = Rs. 6,00,000 + Rs. 2,00,000
Net Revenue from Operation = Rs. 8,00,000

Let the cost of goods sold be x
Gross Profit = Net Revenue from operation – Cost of Goods Sold
25% of x = Rs. 8,00,000 – x
x + 0.25x = Rs. 8,00,000
1.25x = Rs. 8,00,000
x = (Rs.8,00,000)/1.25
x = Rs. 6,40,000

Opening Inventory = 10% of Cost of Revenue from operations
Opening Inventory = 10% of 6,40,000
Opening Inventory = Rs. 64,000

Closing Inventory = 3 × Opening Inventory 
Closing Inventory = 3 × Rs. 64,000
Closing Inventory = Rs. 1,92,000

Average Inventory = Opening Inventory+Closing Inventory/2
Average Inventory = (64,000+1,92,000)/2
Average Inventory = Rs. 1,28,000

Q93. From the following information, calculate value of Opening Inventory:
Closing Inventory = Rs. 68,000
Total Sales = Rs. 4,80,000 (including Cash Sales Rs. 1,20,000)
Total Purchases = Rs. 3,60,000 (including Credit Purchases Rs. 2,39,200)
Goods are sold at a profit of 25% on cost.

Answer:

Cost of goods sold = Rs. 3,84,000
Cost of goods sold = Opening Inventory + Total Purchases – Closing Inventory
Rs. 3,84,000 = Opening Inventory + Rs. 3,60,000 – Rs. 68,000
Opening Inventory = - Rs. 3,60,000 + Rs. 68,000 + Rs. 3,84,000
Opening Inventory = Rs. 92,000

About Solution:
Formula to find sales:
Sales = Cost of goods Sold + Gross Profit

Things to Remember:
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = Cost of goods Sold / Average Inventory

Important Notes:
Working capital turnover ratio indicates the speed at which the working capital is utilized for business operations.

Q94. From the following information, determine Opening and Closing inventories:
Inventory Turnover Ratio 5 Times, Total sales Rs. 2,00,000, Gross Profit Ratio 25%. Closing Inventory is more by Rs. 4,000 than the Opening Inventory.

Answer:

Important Notes:
Debt-equity ratio It is also otherwise known as external to internal equity ratio. It is calculated to know the relative claims of outsiders and the owners against the firm’s assets. This ratio establishes the relationship between the outsider’s funds and the shareholders fund.

Q95. Inventory Turnover Ratio 5 times; Cost of Revenue from Operations (Cost of Goods Sold) Rs. 18,90,000. Calculate Opening Inventory and Closing Inventory if Inventory at the end is 2.5 times more than that in the beginning.

Answer:

Let opening Inventory be X, There for Closing Inventory be 3.5X
As it is given in the problem that 2.5 times more.

Things to Remember:
The term ‘solvency’ refers to the ability of a concern to meet its long term obligations. The long-term liability of a firm is towards debenture holders, financial institutions providing medium and long term loans and other creditors selling goods on credit. These ratios indicate firm’s ability to meet the fixed interest and its costs and repayment schedules associated with its long term borrowings.

Important Notes:
The following ratios serve the purpose of determining the solvency of the business firm. 
1. Debt equity ratio 
2. Proprietary ratio

Q96. Rs. 3,00,000 is the Cost of Revenue from Operations (Cost of Goods Sold).
Inventory Turnover Ratio 8 times; Inventory in the beginning is 2 times more than the inventory at the end. Calculate value of Opening and Closing Inventories.

Answer:

Let Closing Inventory be X
Therefore Opening Inventory be 3X, as it is 2 times more

Things to Remember:
Proprietary ratio It is also known as equity ratio. This ratio establishes the relationship between shareholders’ funds to total assets of the firm. The shareholders’ fund is the sum of equity share capital, preference share capital, reserves and surpluses. Out of this amount, accumulated losses should be deducted. On the other hand, the total assets mean total resources of the concern

Important Notes:
Formula: Proprietory ratio = (Shareholders' funds )/(Total assets)

Q97. From the following Information, calculate Inventory Turnover Ratio:
Credit Revenue from Operations Rs. 3,00,000; Cash Revenue from Operations Rs. 1,00,000, Gross Profit 25% of Cost, Closing Inventory was 3 times the Opening Inventory. Opening Inventory was 10% of Cost of Revenue from Operations.

Answer:

Total Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Operations
Total Revenue from Operations = Rs. 3,00,000 + Rs. 1,00,000 
Total Revenue from Operations = Rs. 4,00,000
Let Cost of Revenue from Operations be X.
Revenue from Operations = Cost of Revenue from Operations + Gross Profit
Revenue from Operations = Cost of Revenue from Operations + Cost of Revenue from Operations × 25%

About Solution:
Below is the formula of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations)/(Average Inventory)

Things to Remember:
Proprietary ratio throws light on the general financial position of the enterprise. This ratio is of particular importance to the creditors who can ascertain the proportion of shareholders’ funds in the total assets employed in the firm. A high ratio shows that there is safety for creditors of all types. Higher the ratio, the better it is for concerned. A ratio below 50% may be alarming for the creditors since they may have to lose heavily in the event of company’s liquidation on account of heavy losses.

Important Notes:
The main aim of an enterprise is to earn profit which is necessary for the survival and growth of the business enterprise. It is earned with the help of amount invested in business. It is necessary to know how much profit has been earned with the help of the amount invested in the business. This is possible through profitability ratio. These ratios examine the current operating performance and efficiency of the business concern. These ratios are helpful for the management to take remedial measures if there is a declining trend.

Q98. Calculate Trade Receivables Turnover Ratio from the following information:

Total Sales Rs. 1,00,000; Sales Return Rs. 1,500; Cash Sales Rs. 23,500.

Answer:

Things to Remember:
Operating profit helps in examining the overall efficiency of the business. It measures profitability and soundness of the business. Higher the ratio, the better is the profitability of the business. This ratio is also helpful in controlling cash.

Important Notes:
Return on investment ratio (ROI): ROI is the basic profitability ratio. This ratio establishes relationship between net profit (before interest, tax and dividend) and capital employed. It is expressed as a percentage on investment. The term investment here refers to long-term funds invested in business. This investment is called capital employed.

Q99. Closing Trade Receivables ₹ 90,000, Revenue from Operations ₹ 7,20,000, Cash Revenue from Operations ₹ 1,80,000. Provision for Doubtful Debts ₹ 8,000. Calculate Trade Receivables Turnover Ratio.

Answer:

Inventory Turnover Ratio = (Credit Revenue from operation)/(Averag Trade Receivable)
Inventory Turnover Ratio = 5,40,000/90,000
Inventory Turnover Ratio = 6 times

Credit Revenue from Operation = Rs. 7,20,000 – Rs. 1,80,000
Credit Revenue from Operation = Rs. 5,40,000

Q100. Closing Trade Receivables Rs. 1,00,000; Cash Sales being 25% of Credit Sales; Excess of Closing Trade Receivables over Opening Trade Receivables Rs. 40,000; Revenue from Operations, i.e., Net Sales Rs. 6,00,000. Calculate Trade Receivables Turnover Ratio.

Answer:

Things to Remember:
Capital employed = Equity share capital + preference share capital + Reserve and surplus + long term liabilities – fictitious assets – Non trading investment

Important Notes:
Alternative Method to find capital employed:-
Capital employed = (Fixed asset – depreciation) + (Current Asset – Current liabilities)

Q101. Compute Trade Receivables Turnover Ratio from the following:

Answer:

Things to Remember:
ROI ratio judges the overall performance of the concern. It measures how efficiently the sources of the business are being used. In other words, it tells what is the earning capacity of the net assets of the business. Higher the ratio the more efficient is the management and utilization of capital employed.

Important Notes:
If net profit after interest, tax and dividend is given, the amount of interest, tax and dividend should be added back to calculate the net profit before interest, tax and dividend.

Q102. Closing Trade Receivables Rs. 1,20,000, Revenue from Operations Rs. 14,40,000. Provision for Doubtful Debts Rs. 20,000. Calculate Trade Receivables Turnover Ratio.

Answer:

Debtors will not be averaged as only one figure is given in the question. Single figure of debtors in the information is taken as closing debtors. Provision for Doubtful Debts will not be deducted from debtors. 

Things to Remember:
The term solvency ratio means ability of a concern to meet its long-term obligations. The solvency ratios are: 
1. Debt-equity ratio 
2. Proprietary ratio

Important Notes:
The purpose of debt equity ratio is to derive an idea of the amount of capital supplied to the concern by the proprietary.

Q103. Closing Trade Receivables Rs. 4,00,000; Cash Sales being 25% of Credit Sales; Excess of Closing Trade Receivables over Opening Trade Receivables Rs. 2,00,000; Revenue from Operations, i.e., Revenue from Operations, i.e., Net Sales Rs. 15,00,000. Calculate Trade Receivables Turnover Ratio.

Answer:

Things to Remember:
Proprietary ratio establishes relationship between shareholders’ funds to total assets of the firm

Important Notes:
Profitability ratio assesses the overall efficiency of the business concern.

Q104. A firm normally has trade Receivables equal to two months' credit Sales. During the coming year it expects Credit Sales of Rs. 7,20,000 spread evenly over the year (12 months). What is the estimated amount of Trade Receivables at the end of the year?

Answer:

Things to Remember:
 Leverage ratio establishes the relationship between various long term forms of financing such as debentures, preference share capital and equity share capital including reserves and surpluses.

Important Notes:
Capital gearing ratio establishes relationship between equity share capital including reserves and surpluses to preference share capital and other fixed interest bearing loans.

Q105. Mercury Ltd. made Credit Sales of Rs. 4,00,000 during the financial period. If the collection period is 36 days and year is assumed to be 360 days, calculate:
(i) Trade Receivables Turnover Ratio;
(ii) Average Trade Receivables;
(iii) Trade Receivables at the end when Trade Receivables at the end are more than that in the beginning by Rs. 6,000.

Answer:

Let opening Trade Receivables be X and Closing be X + Rs. 6,000

Things to Remember:
Limitations of accounting ratios are 
1. Ignorance of price level charges 
2. Ignorance of qualitative factors 
3. No single concept 
4. Misleading result if based on incorrect accounting data 
5. Difficulties in forecasting

Important Notes:
The important liquidity ratios are 
1. Current ratio 
2. Quick ratio

Q106. Calculate Trade Receivables Turnover Ratio in each of the following alternative cases:
Case 1: Net Credit Sales Rs. 4,00,000; Average Trade Receivables Rs. 1,00,000.
Case 2: Revenue from Operations (Net Sales) Rs. 30,00,000; Cash Revenue from Operations, i.e., Cash Sales Rs. 6,00,000; Opening Trade Receivables Rs. 2,00,000; Closing Trade Receivables Rs. 6,00,000. 
Case 3: Cost of Revenue from Operations or Cost of Goods Sold Rs. 3,00,000; Gross Profit on Cost 25%; Cash Sales 20% of Total Sales; Opening Trade Receivables Rs. 50,000; Closing Trade Receivables Rs. 1,00,000.
Case 4: Cost of Revenue from Operations or Cost of Goods Sold Rs. 4,50,000; Gross Profit on Sales 20%; Cash Sales 25% of Net Credit Sales, Opening Trade Receivables Rs. 90,000; Closing Trade Receivables Rs. 60,000.

Answer:

Total Revenue from Operations = Cost of goods sold + Gross Profit
Total Revenue from Operations = Cost of Goods sold + Cost of goods sold × 25/100
Total Revenue from Operations = Rs. 3,00,000 + Rs. 3,00,000 × 25/100
Total Revenue from Operations = Rs. 3,00,000 + Rs. 75,000
Total Revenue from Operations = Rs. 3,75,000
Total Revenue from Operations = Cash Revenue from Operations + Credit Revenue from Operations
Total Revenue from Operations = Total Revenue from Operations × 20/100 + Credit Revenue from Operations
Rs. 3,75,000 = Rs. 3,75,000 × 20/100 + Credit Revenue from Operations
Credit Revenue from Operations = Rs. 3,00,000

Things to Remember:
Meaning Of Ratio Analysis:
It is a study of relationship among various financial factors in a business. It is a technique of analyzing the financial statements with the help of accounting ratio.

Important Notes:
Ratio Analysis is a process of determining and interpreting relationships between items of financial statements to provide a meaningful understanding of the financial performance and position of an enterprise.

Q107. From the information given below, calculate Trade Receivables Turnover Ratio:
Credit Revenue from Operations, i.e., Credit Sales Rs. 8,00,000; Opening Trade Receivables Rs. 1,20,000; and Closing Trade Receivables Rs. 2,00,000.
State giving reason, which of the following would increase, decrease or not change Trade Receivables Turnover Ratio:
(i) Collection from Trade Receivables Rs. 40,000.
(ii) Credit Revenue from Operations, i.e., Credit Sales Rs. 80,000.
(iii) Sales Return Rs. 20,000.
(iv) Credit Purchase Rs. 1,60,000.

Answer:

Things to Remember:
Objectives of Ratio Analysis:
1. It simplifies understanding of financial information presented in the financial statement.
2. It helps in determining short-term and long-term solvency of the business.
3. It helps in assessing the operating efficiency of the business.

Important Notes:
Tool for analysis of Financial Statements: It helps the users of financial statements to analyses the financial position of an enterprise. Such users can be bankers, investors, creditors, etc. who are concerned about the performance of an enterprise.

Q108. ₹ 1,75,000 is the Credit Revenue from Operations, i.e., Net Credit Sales of an enterprise. If Trade Receivables Turnover Ratio is 8 times, calculate Trade Receivables in the beginning and at the end of the year. Trade Receivables at the end is ₹ 7,000 more than that in the beginning.

Answer:

Things to Remember:
Leverage ratio is otherwise known as capital structure ratio. The term capital structure refers to the relationship between various long term forms of financing such as debentures (long term), preference share capital and equity share capital including reserves and surpluses. Financing the firm’s assets is a very crucial problem in every business and as a rule there should be a proper mix of debt and equity capital in financing the firm’s assets. Leverage or capital structure ratios are calculated to test the long term financial position of a firm. Generally capital gearing ratio is mainly calculated to analyse the leverage or capital structure of the firm

Important Notes:
Capital gearing ratio: The capital gearing ratio is described as the relationship between equity share capital including reserves and surpluses to preference share capital and other fixed interest bearing loans. If preference share capital and other fixed interest bearing loans exceed the equity share capital including reserves, the firm is said to be highly geared. The firm is said to be low geared if preference share capital and other fixed interest bearing loans are less than equity capital and reserves.

Q109. From the following information, calculate Opening and Closing Trade Receivables, if Trade Receivables Turnover Ratio is 3 Times:
(i) Cash Revenue from Operations is 1/3rd of Credit Revenue from Operations.
(ii) Cost of Revenue from Operations is Rs. 3,00,000.
(iii) Gross Profit is 25% of the Revenue from Operations.
(iv) Trade Receivables at the end are 3 Times more than that of in the beginning. 

Answer:

Let Revenue from Operations be X.
Total Revenue from Operations = Cost of Revenue from Operations + Gross Profit
Revenue from Operations = Cost of Revenue from Operations + Revenue from Operations × 25%

Z = Rs. 40,000
Opening Trade Receivables = Rs. 40,000
Closing Trade Receivables = 4 Z = 4 × Rs. 40,000 = Rs. 1,60,000

About Solution:
Formula to find Average Trade Receivables in this question:
Average Trade Receivables = (Opening Trade Receivables+Closing Trade Receivables)/2

Things to Remember:
Inventory/stock conversion period: It may also be of interest to see average time taken for clearing the stocks. This can be possible by calculating inventory conversion period. This period is calculated by dividing the number of days by inventory turnover.

Important Notes:
Inventory/stock conversion period ratio signifies the number of times on an average the inventory or stock is disposed off during the period. The high ratio indicates efficiency and the low ratio indicates inefficiency of stock management.

Q110. Cash Revenue from Operations (Cash Sales) Rs. 2,00,000, Cost of Revenue from Operations or Cost of Goods Sold Rs. 3,50,000; Gross Profit Rs. 1,50,000; Trade Receivables Turnover Ratio 3 Times. Calculate Opening and Closing Trade Receivables in each of the following alternative cases;
Case 1: If Closing Trade Receivables were Rs. 1,00,000 in excess of Opening Trade Receivables.
Case 2: If trade Receivables at the end were 3 times than in the beginning.
Case 3: If Trade Receivables at the end were 3 times more than that of in the beginning.

Answer:

Case 1: 
If Closing Trade Receivables were Rs. 1,00,000 in excess of Opening Trade Receivables:

Opening Trade Receivables = Rs. 50,000
Therefore Closing Trade Receivables = X + Rs. 1,00,000
= Rs. 50,000 + Rs. 1,00,000 
= Rs. 1,50,000

Case 2:
If Trade Receivables at the end are 3 times than in the beginning:
Let Opening Trade Receivables be X and Closing Trade Receivables = 3X
We can start with Average Trade Receivables:
Average Trade Receivables = (Opening Trade Receivables+Closig Trade Receivables)/2
Rs. 1,00,000 = (X+3X)/2
Rs. 1,00,000 = 4X/2
Opening Trade Receivables = Rs. 50,000
Therefore Closing Trade Receivables = 3x = 3 × Rs. 50,000 = Rs. 1,50,000

Case 3:
If debtors at the end were 3 times more than that in the beginning:
Let opening Trade Receivables be X and Closing Trade Receivables be 4X
We can start with average Trade Receivables:
Average Trade Receivables = (Opening Trade Receivables+Closing Trade Receivbles)/2
Rs. 1,00,000 = (X + 4X)/2
Rs. 1,00,000 × 2 = 5X
Rs. 2,00,000 = 5X
Rs. 2,00,000/5 = X
Opening Trade Receivables = Rs. 40,000
Therefore Closing Trade Receivables = 4X = 4 × Rs. 40,000 = Rs. 1,60,000

About Solution:
We can find total sales by below formula:-
Total Sales = Cost of Goods Sold + Gross Profit
Total Sales = Rs. 3,50,000 + Rs. 1,50,000
Total Sales = Rs. 5,00,000

Credit Sales = Total Sales – Cash Sales
Credit Sales = Rs. 5,00,000 – Rs. 2,00,000
Credit Sales = Rs. 3,00,000

Things to Remember:
Some of the important activity ratios are:
(i) Stock turnover ratio
(ii) Debtors turnover ratio
(iii) Creditors turnover ratio
(iv) Working capital turnover ratio

Important Notes:
Stock turnover ratio: Stock turnover ratio is a ratio between cost of goods sold and the average stock or inventory. Every firm has to maintain a certain level of inventory of finished goods.

Q111. Calculate Trade Payables Turnover Ratio and Average Debt payment Period from the following information:

Total Purchases Rs. 21,00,000; Purchases Return Rs. 1,00,000; Cash Purchases Rs. 4,00,000.

Answer:

Things to Remember:
Ratio Analysis simplifies understanding of accounting information presented in the financial statement. Calculation of ratios summarizes briefly the results of detailed and complicated information.

Important Notes:
Ratio Analysis operating efficiency can be determined by assessing and evaluating liquidity, solvency and profitability of an enterprise. Calculation of ratios helps in determining and evaluating such aspects.

Q112. Calculate Trade payables Turnover Ratio from the following information:
Opening Creditors Rs. 1,25,000; Opening Bills Payable Rs. 10,000; Closing Creditors Rs. 90,000; Closing bills Payable Rs. 5,000; Purchases Rs. 9,50,000; Cash Purchases Rs. 1,00,000; Purchases Return Rs. 45,000.

Answer:

Things to Remember:
Ratio Analysis Assists in Forecasting: Calculation, analysis and comparison of ratios helps in business planning and forecasting. This is because the trend of ratios being calculated acts as a guide for future planning.

Important Notes:
Ratio Analysis Calculation and analysis of various ratios help to identify and interpret the favorable and unfavorable ratios which can are used to identify the weak areas or unfavorable factors in the enterprise. Enterprise can then work upon such areas or factors to improve the performance.

Q113. Calculate Trade Payables Turnover Ratio for the year 2018-19 in each of the alternative cases:
Case 1: Closing Trade Payables Rs. 45,000; Net Purchases Rs. 3,60,000; Purchases Return Rs. 60,000; Cash Purchases Rs. 90,000.
Case 2: Opening Trade Payables Rs. 15,000; Closing Trade Payables Rs. 45,000; Net Purchases Rs. 3,60,000. 
Case 3: Closing Trade Payables Rs. 45,000; Net Purchases Rs. 3,60,000.
Case 4: Closing Trade Payables (including Rs. 25,000 due to a supplier of machinery) Rs. 55,000; Net Credit Purchases Rs. 3,60,000.

Answer:

Things to Remember:
Ratio Analysis Facilitates Inter-firm and Intra-firm Comparison: When a firm compares its performance with that of other firms or with its industry standards in general, it is known as Inter-firm Comparison or Cross Sectional Analysis. On the other hand, if the performance of different units is belonging to the same firm is to be compared, it is known as Intra-firm Comparison. Accounting ratios are widely used for such comparisons.

Important Notes:
Since, ratios are calculated based on the financial information, if the information available is not correct ratios calculated using such information will also be incorrect. Therefore, such ratios are not completely reliable to make any future decisions for an enterprise.

Q114. Closing Trade Payables ₹ 5,40,000, Net Purchases ₹ 43,20,000. Cash Purchases ₹ 10,80,000. Calculate Trade Payables Turnover Ratio.

Answer:

Trade Payables Turnover Ratio = Net Credit Purchases/Average Trade Payable
Trade Payables Turnover Ratio = 32,40,000/5,40,000
Trade Payables Turnover Ratio = 6 times

Net Credit Purchases = Net Purchases – Cash Purchases
Net Credit Purchases = Rs. 43,20,000 – Rs. 10,80,000
Net Credit Purchases = Rs. 32,40,000

Q115. From the following information, Calculate Opening and Closing Trade Payables: 
Cash Purchases 25% of Total Purchases; Revenue from Operations ₹ 3,00,000; Gross Profit 25% on Revenue from Operations; Opening Inventory ₹ 75,000; Closing Inventory ₹ 1,50,000; Trade Payables Turnover Ratio 3 Times; Closing Trade Payables were ₹ 75,000 in excess of Opening Trade Payables.

Answer:

Q116. Calculate Working Capital Turnover Ratio from the following information:

Answer:

Working Capital Turnover Ratio = Revenue from Operation/Working Capital
Working Capital Turnover Ratio = 24,00,000/6,00,000
Working Capital Turnover Ratio = 4 times

Working Capital = Current Assets – Current Liabilities 
Working Capital = Rs. 10,00,000 – Rs. 4,00,000
Working Capital = Rs. 6,00,000

Q117. From the following information, calculate Working Capital Turnover Ratio:

Answer:

Things to Remember:
Calculation of ratios takes into consideration only quantitative factors and all the related qualitative factors are ignored, which may be important for future decision making of an enterprise.

Important Notes:
In order to determine whether a ratio is favorable or adverse, there should be a standard with which the ratio can be compared. However, there is no single standard against which the ratio can be compared.

Q118. Revenue from Operations: Cash Sales Rs. 5,00,000; Credit Sales Rs. 6,00,000; Sales Return Rs. 1,00,000. Current Assets Rs. 3,00,000; Current Liabilities Rs. 1,00,000. Calculate Working Capital Turnover Ratio.

Answer:

Things to Remember:
Non Comparable: It is possible that different firms belonging to the same industry may follow different policies and procedures for the purpose of accounting. The amounts computed using such different policies and procedures will also be different. Therefore, ratios calculated by such firms will not be comparable as the information used in calculating such ratios by the different firms is not the same.

Important Notes:
Price Level Changes Ignored: It is necessary to understand that comparability of the ratios depends upon the change in the price levels. However, such change in price levels is not considered in accounting variables from which ratios are computed.

Q119. Equity Share Capital Rs. 15,00,000; Gross Profit on Revenue from Operations, i.e., Net Sales 33(1/3)%; Cost Revenue from Operations or Cost of Goods Sold Rs. 20,00,000; Current Assets Rs. 10,00,000; Current Liabilities Rs. 2,50,000. Calculate Working Capital Turnover Ratio.

Answer:

Things to Remember:
Window Dressing: If the accounts are manipulated in order to window dress the financial performance and position of the business, the information available for computing ratios will not be accurate. This will lead to incorrect ratios being computed which in turn will affect the decisions taken based on analysis of such incorrect ratios.

Important Notes:
Personal Bias: Since, preparation of financial statements is highly influenced by personal judgments, accounting ratios computed based on such information is also not free from such limitation.

Q120. Gross Profit at 25% on cost; Gross profit Rs. 5,00,000; Equity Share Capital Rs. 10,00,000; Reserves and Surplus  2,00,000; Long-term Loan  3,00,000; Fixed Assets (Net) Rs. 10,00,000. Calculate Working Capital Turnover Ratio.

Answer:

Things to Remember:
Liquidity (short-term solvency): These are the ratios which show the ability of the enterprise to meet its short-term financial obligations. It includes:
1. Current Ratio
2. Quick Ratio

Important Notes:
Solvency (long-term solvency): These are the ratios which assess the long-term financial position of the enterprise. They assess the ability to meet the long-term financial obligations of the enterprise. It includes:-
1. Debt to Equity Ratio
2. Total Assets to Debt Ratio
3. Proprietary Ratio
4. Interest Coverage Ratio

Q121. Capital Employed ₹ 12,00,000; Net Fixed Assets ₹ 8,00,000; Cost of Goods sold or Cost of Revenue from Operations ₹ 40,00,000; Gross Profit is 20% on Cost. Calculate Working Capital Turnover Ratio.

Answer:

Gross Profit = Revenue from Operation – Cost of Revenue from operation
20% of 40,00,000 = Revenue from Operation – Rs. 40,00,000
Rs. 8,00,000 = Revenue from Operation – Rs. 40,00,000
Revenue from Operation = Rs. 40,00,000 + Rs. 8,00,000
Revenue from Operation = Rs. 48,00,000

Capital Employed + Current Liabilities = Net Fixed Assets + Current Assets
Rs. 12,00,000 + Current Liabilities = Rs. 8,00,000 + Current Assets
Current Assets - Current Liabilities = Rs. 12,00,000 - Rs. 8,00,000
Current Assets - Current Liabilities = Rs. 4,00,000
Working Capital = Rs. 4,00,000

Q122. Calculate Working Capital Turnover Ratio from the following information: 
Revenue from Operations Rs. 15,00,000; Current Assets Rs. 6,25,000; Total Assets Rs. 10,00,000; Non-current Liabilities Rs. 5,00,000, Shareholders' Funds Rs. 2,50,000.

Answer:

Working Capital Turnover Ratio = (Revenue from Operations)/(Working Capital)
Working Capital Turnover Ratio = 15,00,000/3,75,000
Working Capital Turnover Ratio = 4 Times
Current Liabilities = Total Assets – Shareholders’ Fund – non-current Liabilities
Current Liabilities = Rs. 10,00,000 – Rs. 2,50,000 – Rs.5,00,000
Current Liabilities = Rs. 2,50,000

Working Capital = Current Assets – Current Liabilities
Working Capital = Rs. 6,25,000 – Rs. 2,50,000
Working Capital = Rs. 3,75,000

About Solution:
Working capital turnover ratio indicates the speed at which the working capital is utilized for business operations. It is the velocity of working capital ratio that indicates the number of times the working capital is turned over in the course of a year. This ratio measures the efficiency at which the working capital is being used by a firm. A higher ratio indicates efficient utilisation of working capital and a low ratio indicates the working capital is not properly utilized.

Things to Remember:
Meaning and Computation of Current Ratio:
1. It is a ratio which calculates the relationship between the current assets and current liabilities.
2. It is a liquidity ratio that measures the ability of the enterprise to pay its short-term financial obligations i.e., current liabilities.
3. It helps to identify whether the enterprise will be able to meet its short-term financial obligations when they become due for payment.
4. It is expressed as a pure ratio.

Important Notes:
Ideal Ratio for current ratio = 2 : 1. High Current Ratio means better liquidity but too high current ratio means poor operational efficiency.

 Q123. A company earns Gross Profit of 25% on cost. For the year ended 31st March, 2017 its Gross Profit was Rs. 5,00,000; Equity Share Capital of the company was Rs. 10,00,000; Reserves and Surplus Rs. 2,00,000; Long-term Loan Rs. 3,00,000 and Non-current Assets were Rs. 10,00,000. Compute the 'Working Capital Turnover Ratio' of the company.

Answer:

Revenue from Operations = Cost of revenue from Operations + Gross Profit
= Gross Profit × Reverse of Rate of Return + Gross Profit
= Rs. 5,00,000 × 100/25 × Rs. 5,00,000
= Rs. 20,00,000 + Rs. 5,00,000
= Rs. 25,00,000
Working Capital = Equity Share Capital + Reserves and Surplus + Long term Loan – Non-current Assets
= Rs. 10,00,000 – Rs. 2,00,000 + Rs. 3,00,000 – Rs. 10,00,000
= Rs. 5,00,000

About Solution:
If the figure of cost of revenue from operations is not given, then the figure of revenue from operations (sales) can be used. On the other hand if opening working capital is not given then working capital at the year-end will be used.

Things to Remember:
Current Assets: These are the assets that are either in the form of Cash and Cash Equivalents or can be converted into Cash and Cash Equivalents within 12 months from the date of Balance Sheet or within the period of operating cycle.

Important Notes:
Current Assets includes the following items:    
1. Short-term loans and advances,
2. Current Investments,
3. Inventories (excluding Loose Tools and Stores and Spares),
4. Trade Receivables (bills receivable and sundry debtors less provision for doubtful debts),
5. Cash and Cash Equivalents (cash in hand, cash at bank, cheques/drafts in hand, etc.)
6. Other Current Assets (prepaid expenses, interest receivable, etc.)

Q124. Net Fixed Assets ₹ 5,00,000; Revenue from Operations ₹ 25,00,000. Calculate Fixed Assets Turnover Ratio.

Answer:

Things to Remember:
The important profitability ratios are:
(i) Gross profit ratio 
(ii) Net profit ratio 
(iii) Operating profit ratio 
(iv) Return on investment ratio

Important Notes:
Gross profit ratio:  It expresses the relationship of gross profit to net sales. It is expressed in percentage.

Q125. Fixed Assets (at Cost) ₹ 7,00,000, Accumulated Depreciation ₹ 1,00,000, Credit Revenue from Operations ₹ 17,00,000, Cash Revenue from Operations ₹ 1,00,000. Calculate Fixed Assets Turnover Ratio.

Answer:

Fixed Assets Turnover Ratio = Revenue from operation / Net fixed assets
Fixed Assets Turnover Ratio = 18,00,000/6,00,000
Fixed Assets Turnover Ratio = 3 times

Revenue from Operation = Credit Revenue from operation + Cash Revenue from Operation
Revenue from Operation = Rs. 17,00,000 + Rs. 1,00,000
Revenue from Operation = Rs. 18,00,000

Net Fixed Assets = Fixed Assets (at cost) – Accumulated Depreciation
Net Fixed Assets = Rs. 7,00,000 – Rs. 1,00,000
Net Fixed Assets = Rs. 6,00,000

Things to Remember:
Gross profit ratio shows the margin of profit. A high gross profit ratio is a great satisfaction to the management. It represents the low cost of goods sold. Higher the rate of gross profit, lower the cost of goods sold.

Important Notes:
Net profit ratio: A ratio of net profit to sales is called Net profit ratio. It indicates sales margin on sales. This is expressed as a percentage. The main objective of calculating this ratio is to determine the overall profitability.

Q126. Capital Employed ₹ 2,50,000, Working Capital ₹ 50,000, Cost of Revenue from Operations ₹ 8,00,000, Gross Profit ₹ 2,00,000. Calculate Fixed Assets Turnover Ratio.

Answer:

Fixed Assets Turnover Ratio = (Revenue from operation)/(Net Fixed Assets)
Fixed Assets Turnover Ratio = 10,00,000/2,00,000
Fixed Assets Turnover Ratio = 5 times

Capital Employed + Current Liabilities = Net Fixed Assets + Current Assets
Net Fixed Assets = Capital Employed - Current Liabilities + Current Assets 
Net Fixed Assets = Capital Employed – (Current Assets - Current Liabilities)
Net Fixed Assets = Rs. 2,50,000 + Rs. 50,000
Net Fixed Assets = Rs. 2,00,000

Q127. Following information is of Raja Ltd. for 2 years. Calculate Fixed Assets Turnover Ratio:

Answer:

About Solution:
In the absence of Revenue from operation we can use, Cost of Revenue from Operation.

Things to Remember:
Net profit ratio determines overall efficiency of the business. It indicates the extent to which management has been effective in reducing the operational expenses. Higher the net profit ratio, better it is for the business.

Important Notes:
Operating profit ratio: Operating profit is an indicator of operational efficiencies. It reveals only overall efficiency. It establishes relationship between operating profit and net sales. This ratio is expressed as a percentage.

Q128. Capital Employed ₹ 30,00,000; Working Capital ₹ 5,00,000; Cost of Revenue from Operations ₹ 40,00,000; Gross Profit 25% of Cost. Calculate Fixed Assets Turnover Ratio. 

Answer:

Net Fixed Assets = Capital Employed – Working Capital
Net Fixed Assets = Rs. 30,00,000 – Rs. 5,00,000
Net Fixed Assets = Rs. 25,00,000

Gross Profit = Revenue from Operation – Cost of Revenue from Operation
25% of Rs. 40,00,000 = Revenue from Operation – Rs. 40,00,000
10,00,000 = Revenue from Operation – Rs. 40,00,000
Revenue from Operation = Rs. 40,00,000 + Rs. 10,00,000
Revenue from Operation = Rs. 50,00,000

Things to Remember:
Net profit ratio determines overall efficiency of the business. It indicates the extent to which management has been effective in reducing the operational expenses. Higher the net profit ratio, better it is for the business.

Important Notes:
Operating profit ratio: Operating profit is an indicator of operational efficiencies. It reveals only overall efficiency. It establishes relationship between operating profit and net sales. This ratio is expressed as a percentage.

Q129. Based on the following information, calculate Net Assets or Capital Employed Turnover Ratio: Shareholder’s Funds ₹ 20,00,000; Equity Share Capital ₹ 10,00,000; Reserves and Surplus ₹ 10,00,000; 8% Debentures ₹ 10,00,000 and Revenue from Operations ₹ 75,00,000.

Answer:

Capital Employed = Shareholder Fund + 8% Debentures
Capital Employed = Rs. 20,00,000 + Rs. 10,00,000
Capital Employed = Rs. 30,00,000

Things to Remember:
Capital gearing ratio is very important ratio. Gearing should be kept in such a way that the company is able to maintain a steady rate of dividend. High gearing ratio is not good for a new company or a company of which future earnings are uncertain.

Important Notes:
Limitation of accounting ratios:
1. Ignorance of qualitative aspect
2. Ignorance of price level changes
3. No single concept
4. Misleading results if based on incorrect accounting data

Q130. Property, Plant and Equipment and Intangible Assets (at cost) ₹ 30,00,000; Accumulated Depreciation ₹ 5,00,000; Trade Investments ₹ 2,50,000; Current Assets ₹ 11,00,000; Current Liabilities ₹ 8,50,000; Cash Revenue from Operations ₹ 10,00,000; Credit Revenue from Operations ₹ 40,00,000. Calculate Net Assets Turnover Ratio.

Answer:

Net Assets = Property, Plant and Equipment and Intangible Assets (at Cost) – Accumulated Depreciation + Trade Investments + Current Assets – Current Liabilities
Net Assets = Rs. 30,00,000 – Rs. 5,00,000 + Rs. 2,50,000 + Rs. 11,00,000 – Rs. 8,50,000
Net Assets = Rs. 30,00,000

Revenue from operation = Cash revenue from operation + Credit revenue from operation
Revenue from operation = Rs. 10,00,000 + Rs. 40,00,000
Revenue from operation = Rs. 50,00,000

Q131. Fixed Assets ₹ 10,00,000; Working Capital ₹ 5,00,000; Cost of Revenue from Operations ₹ 50,00,000; Gross Profit 20% of Cost. Calculate Net Assets or Capital Employed Turnover Ratio.

Answer:

Net Assets Turnover Ratio = Revenue from operation / Capital employed
Net Assets Turnover Ratio = 60,00,000/15,00,000
Net Assets Turnover Ratio = 4 times

Gross Profit = Revenue from Operation – Cost of Revenue from operation
20% of Rs. 50,00,000 = Revenue from Operation – Rs. 50,00,000
Rs. 10,00,000 = Revenue from Operation – Rs. 50,00,000
Revenue from Operation = Rs. 50,00,000 + Rs. 10,00,000
Revenue from Operation = Rs. 60,00,000

Capital Employed + Current Liabilities = Net Fixed Assets + Current Assets
Capital Employed = Net Fixed Assets + Current Assets - Current Liabilities
Capital Employed = Net Fixed Assets + Working Capital
Capital Employed = Rs. 10,00,000 + Rs. 5,00,000
Capital Employed = Rs. 15,00,000

Things to Remember:
Current Liabilities: These are the liabilities that are repayable within 12 months from the date of Balance Sheet or within the period of operating cycle.

Important Notes:
Current Liabilities includes the following items:
a. Short-term borrowings,
b. Short-term provisions,
c. Trade Payables (bills payable and sundry creditors),
d. Other Current Liabilities (current maturities of long term debts, interest accrued but not due, interest accrued and due, outstanding expenses, unclaimed dividend, calls-in-advance, etc.)

Q132. Shareholder’s Funds ₹ 10,00,000; Long-term Debts ₹ 20,00,000; Gross Profit at 20% on Cost was ₹ 20,00,000. Calculate Net Assets or Capital Employed Turnover Ratio.

Answer:

Q133. From the following Balance Sheet of Akhil Ltd. as at 31st March, 2023, calculate (i) Net Assets Turnover Ratio and (ii) Fixed Assets Turnover Ratio:

Revenue from Operation for the year was Rs. 45,00,000.

Answer:

Q134. From the following, calculate Gross Profit Ratio:
Gross Profit: Rs. 50,000; Revenue from Operations Rs. 5,00,000; Sales Return: Rs. 50,000.

Answer:

Things to Remember:
Operating Cycle: It is the time between the acquisition of assets for processing and their realization into Cash and Cash Equivalents. In case the normal operating cycle cannot be identified, it is assumed to be a period of 12 months.

Important Notes:
Working Capital: Where working capital is given, value of current assets and current liabilities can be ascertained using the given current ratio. Working Capital is the excess of Current Assets over Current Liabilities which is expressed as follows:
Working Capital= Current Assets - Current Liabilities; 
                                Or
Current Assets = Working Capital + Current Liabilities; 
                                Or
Current Liabilities = Current Assets - Working Capital

Q135. Compute Gross Profit Ratio from the following information:
Cost of Revenue from Operations (Cost of Goods Sold) ₹ 5,40,000; Revenue from Operations (Net Sales) ₹ 6,00,000.

Answer:

Gross Profit = Revenue from operation – Cost of Revenue from operation
Gross Profit = Rs. 6,00,000 – Rs. 5,40,000
Gross Profit = Rs. 60,000

Q136. Compute Gross Profit Ratio from the following information:
Revenue from Operations, i.e., Net Sales = Rs. 4,00,000; Gross Profit 25% on Cost.

Answer:

Things to Remember:
Understanding Liquid or Quick or Acid Test Ratio:
1. It is a liquidity ratio which measures the ability of the enterprise to meet its short-term financial obligations, i.e., Current Liabilities.
2. It is a relationship of liquid assets with current liabilities.

Important Notes:
Formula for Quick Ratio:-
Quick Ratio = Liquid Assets / Currnet Liabilities

Q137. Calculate Gross Profit Ratio from the following data:
Cash Sales are 20% of Total Sales; Credit Sales are Rs. 5,00,000; Purchases are Rs. 4,00,000; Excess of Closing Inventory over Opening Inventory Rs. 25,000.

Answer:

Closing Inventory = Opening Inventory + Purchases – Closing Inventory
= Rs. 1,00,000 + Rs. 4,00,000 – Rs. 1,25,000
= Rs. 3,75,000
Gross Profit = Sales – Cost of Goods Sold
= Rs. 6,25,000 – Rs. 3,75,000
= Rs. 2,50,000

About Solution:
Gross profit ratio shows the margin of profit. A high gross profit ratio is a great satisfaction to the management. It represents the low cost of revenue from operations. Higher the rate of gross profit, lower the cost of revenue from operations.

Things to Remember:
Liquid Assets: These are those assets that are either in the form of Cash and Cash Equivalents or can be converted into Cash and Cash Equivalent in a very short time. These are considered as the most liquid assets. Such assets are shown under the head 'Current Assets'.

Important Notes:
Liquid Assets: In the Balance Sheet and therefore includes:
1. Short-term Loans and Advances,
2. Current Investment,
3. Trade Receivables,
4. Cash and Cash Equivalents
5. Other Current Assets except Prepaid Expenses.
6. Inventories and Prepaid expenses are not included in Liquid assets because inventories takes time to convert in cash and cash equivalents and prepaid expenses are something that has already been paid in advance and cannot be converted into cash.

Q138. From the following information, calculate Gross Profit Ratio:

Answer:

About Solution:
Cash Sales = Credit Sales × 1/4
Cash Sales = Rs. 10,00,000 × 1/4
Cash Sales = Rs. 2,50,000

Total Sales = Cash Sales + Credit Sales
Total Sales = Rs. 2,50,000 + Rs. 10,00,000
Total Sales = Rs. 12,50,000

Cost of Revenue from Operations = Purchases + Decrease in Inventory – Returns Outward + Carriage Inwards + Wages
Cost of Revenue from Operations = Rs. 6,00,000 + Rs. 20,000 – Rs. 20,000 + Rs. 1,00,000
Cost of Revenue from Operations = Rs. 7,20,000

Gross Profit = Revenue from operation – Cost of Revenue from Operations
Gross Profit = Rs. 12,50,000 – Rs. 7,20,000
Gross Profit = Rs. 5,30,000

Things to Remember:
Current Liabilities: These are the liabilities that are repayable within 12 months from the date of Balance Sheet or within the period of operating cycle.

Important Notes:
Current Liabilities includes the following items:
1. Short-term borrowings,
2. Short-term provisions on Private Limited
3. Trade Payables (bills payable and sundry creditors),
4. Other Current Liabilities (current maturities of long term debts, interest accrued but not due, interest accrued and due, outstanding expenses, unclaimed dividend, calls-in-advance, etc.)

Q139. From the following information, calculate Gross Profit Ratio:

Answer:

Revenue from Operation = Credit Sales + Cash Sales
Revenue from Operation = Rs. 8,00,000 + Rs. 2,00,000
Revenue from Operation = Rs. 10,00,000

Cost of Goods Sold = Purchases (Cash + Credit) – Return outward + Wages + Carriage Inwards + Decreases in Inventory
Cost of Goods Sold = (3,60,000 + 40,000) – 20,000 + 20,000 + 8,000 + 1,22,000
Cost of Goods Sold = Rs. 5,30,000

Gross Profit = Revenue from operation – Cost of Goods Sold
Gross Profit = Rs. 10,00,000 – Rs. 5,30,000
Gross Profit = Rs. 4,70,000

Q140. Opening Inventory ₹ 2,00,000; Closing Inventory ₹ 1,20,000. Inventory Turnover Ratio 8 Times; Selling price 25% above cost. Calculate Gross Profit Ratio.

Answer:

Revenue from Operation = Cost of goods sold + (25% of Cost of Goods sold)
Revenue from Operation = Rs. 12,80,000 + (25% of Rs. 12,80,000)
Revenue from Operation = Rs. 12,80,000 + Rs. 3,20,000
Revenue from Operation = Rs. 16,00,000

Gross Profit = 25% of Rs. 12,80,000
Gross Profit = Rs. 3,20,000

Q141. A Trader Carries an Average Inventory of ₹ 1,00,000. His Inventory Turnover Ratio is 8 Times. He sells goods at a profit of 25% of cost. Calculate Gross Profit Ratio.

Answer:

8 × Rs. 1,00,000 = Cost of Goods sold
Cost of Goods sold = Rs. 8,00,000

Revenue from Operation = Cost of goods sold + (25% of Cost of Goods sold)
Revenue from Operation = Rs. 8,00,000 + (25% of Rs. 8,00,000)
Revenue from Operation = Rs. 8,00,000 + Rs. 2,00,000
Revenue from Operation = Rs. 10,00,000

Gross Profit = 25% of Rs. 8,00,000
Gross Profit = Rs. 2,00,000

Q142. Calculate Gross Profit Ratio from the following data:
Average Inventory Rs. 3,20,000; Inventory Turnover Ratio 8 Times; Average Trade Receivables Rs. 4,00,000; Trade Receivables Turnover Ratio 6 Times; Cash Sales 25% of Net Sales.

Answer:

Net Revenue from Operations = Rs. 24,00,000 × 4/3
Net Revenue from Operations = Rs. 32,00,000
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
= Rs. 32,00,000 – Rs. 25,60,000 
= Rs. 6,40,000

About Solution:
It expresses the relationship of gross profit to revenue from operations (net sales). It is expressed in percentage.

Things to Remember:
Debt-To-Equity Ratio: It is a relationship between long-term external equities, i.e., external debts (includes long-term borrowings and long-term provisions) and internal equities (Shareholders' Funds) of the enterprise.

Important Notes:
Debt-To-Equity Ratio measures the proportion of external funds and shareholder's invested in the company.

Q143. (i) Revenue from Operations: Cash Sales Rs. 4,20,000; Credit Sales Rs. 6,00,000; Return Rs. 20,000. Cost of Revenue from Operations or Cost of Goods Sold Rs. 8,00,000. Calculate Gross Profit Ratio.
(ii) Average Inventory Rs. 1,60,000; Inventory Turnover Ratio is 6 Times; Selling Price 25% above cost. Calculate Gross Profit Ratio.
(iii) Opening Inventory Rs. 1,00,000; Closing Inventory Rs. 60,000; Inventory Turnover Ratio 8 Times; Selling Price 25% above cost. Calculate Gross Profit Ratio.

Answer:

= 1,60,000
Sales = Cost of goods sold + Gross Profit 
Sales = Rs. 6,40,000 + Rs. 1,60,000
Sales = Rs. 8,00,000

About Solution:
Gross profit ratio shows the margin of profit. A high gross profit ratio is a great satisfaction to the management. It represents the low cost of revenue from operations. Higher the rate of gross profit, lower the cost of revenue from operations.

Things to Remember:
Debt-To-Equity Ratio assesses long-term financial soundness of the enterprise and indicates the extent to which the enterprise depends on borrowed funds for its business.

Important Notes:
Debt-To-Equity Ratio is expressed as a Pure Ratio

 Q144. Gross Profit Ratio of a company is 25%. State giving reason, which of the following transactions will (a) increase or (b) decrease or (c) not alter the Gross Profit Ratio.
(i) Purchases of Stock-in-Trade Rs. 50,000.
(ii) Purchases Return Rs. 15,000.
(iii) Cash Sale of Stock-in-Trade Rs. 40,000.
(iv) Stock-in-Trade costing Rs. 20,000 withdrawn for personal use.
(v) Stock-in-Trade costing Rs. 15,000 distributed as free sample.

Answer:

(i) Purchases of Stock-in-Trade Rs. 50,000- will not alter the Gross Profit Ratio.
Reason- Purchases of Stock-in-Trade will increase purchase and closing inventory but there will be no change in gross profit and gross profit ratio.

(ii) Purchases Return Rs. 15,000- will not alter the Gross Profit Ratio.
Reason- Purchases return will increase purchases return and reduce closing inventory but there will be no change in profit and gross profit ratio.

(iii) Cash Sales of Stock-in-trade Rs. 40,000- will not alter the gross profit Ratio.
Reason- Cash sale of Stock-in-Trade will increase sales and reduce closing inventory but there will be no change in gross profit and gross profit ratio as the inventory is sold at cost price.

(iv) Stock-in-Trade costing Rs. 20,000 withdrawn for personal use – will not alter the gross profit Ratio.
Reason- Stock-in-Trade costing Rs. 20,000 withdrawn for personal use will increase drawings and reduce closing inventory but there will be no change in gross profit and gross profit ratio.

(v) Stock-in-Trade costing Rs. 15,000 distributed as free samples – will not alter the gross profit Ratio.
Reason – Stock-in-Trade costing Rs. 15,000 distributed as free samples will increase advertisement expenses and reduce closing inventory but there will be no change in gross profit and gross profit ratio.

Important Notes:
Long term Borrowings: It is shown as long-term borrowings under Non-current Liabilities if they are payable after 12 months from the date of Balance Sheet or after the operating cycle period.

Q145. Revenue from Operations ₹ 12,00,000; Cost of Revenue from Operations ₹ 5,00,000. Operating Cost ₹ 6,00,000. Calculate Operating Ratio.
Answer:

Things to Remember:
If an amount of borrowings out of Long Term Borrowings is payable within 12 months from the date of Balance Sheet or operating cycle period, then such amount is shown under 'Current Maturities of Long Term Debts' under Current Liabilities and will not be considered while calculating Debt to Equity ratio.

Important Notes:
Long term Provisions: It is classified or shown as Non-current liabilities if they are payable after 12 months from the date of Balance Sheet or after the period of Operating Cycle.

Q146. Cost of Revenue from Operations (Cost of Goods Sold) Rs. 3,00,000. Operating Expenses Rs. 1,20,000. Revenue from Operations: Cash Sales Rs. 5,20,000; Return Rs. 20,000. Calculate Operating Ratio.
Answer:

Things to Remember:
If an amount of borrowings out of Long Term Borrowings is payable within 12 months from the date of Balance Sheet or operating cycle period, then such amount is shown under 'Current Maturities of Long Term Debts' under Current Liabilities and will not be considered while calculating Debt to Equity ratio.

Important Notes:
Long term Provisions: It is classified or shown as Non-current liabilities if they are payable after 12 months from the date of Balance Sheet or after the period of Operating Cycle.

Q147. Operating Ratio 92%; Operating Expenses Rs. 94,000; Revenue from Operations Rs. 6,00,000; Sales Return Rs. 40,000. Calculate Cost of Revenue from Operations (Cost of Goods Sold).

Answer:

Things to Remember:
They are to be considered while computing Debt to Equity ratio.
Debt = Long-term Borrowings +Long-term Provisions 
or
Debt = Total Debt - Current Liabilities

Important Notes:
Formula for capital Employed (Liability approach):-
Capital Employed = Debt + Equity or Non-Current Assets + Working Capital - Fictitious

Q148. From the following information, calculate Operating Ratio:

Answer:

]

About Solution:
Formula to find out Operating Ratio:
Operating Ratio = (Cost of Goods sold+Operating Expenses)/(Revenue from Operations) × 100

Things to Remember:
Total Assets to Debt Ratio:
a. It is a relationship between total assets and long-term debts of the enterprise.
b. It measures the extent to which debt (Long-term) is covered by the assets.
c. It measures the 'Safety Margin' available to the lenders of the long-term debts.
d. A higher ratio means higher safety for lenders and a lower ratio means lower safety for lenders.

Important Notes:
Total Assets: These include Non-current and Current assets as follows:
Non-Current Assets: This will include: Fixed assets (tangible and intangible assets), Non-Current Investments, Long term Loans and Advances.
Current Assets: This will include: Cash and Cash Equivalent, Inventories, Prepaid Expenses, Current Investment etc. 

 Q149. Calculate Cost of Revenue from Operations from the following information:
Revenue from Operations Rs. 12,00,000; Operating Ratio 75%; Operating Expenses Rs. 1,00,000.

Answer:

Things to Remember:
Current Assets: This will include:
1. Current Investments,
2. Inventories (including spare parts and loose tools),
3. Trade Receivables,
4. Cash and Cash Equivalents,
5. Short-term Loans and Advances,

Important Notes:
Debts: This will include:
Long-term Borrowings,
Long-term Provisions

Q150. Calculate Operating Ratio from the following information:
Operating Cost Rs. 6,80,000; Gross Profit 25%; Operating Expenses Rs. 80,000.

Answer:

Things to Remember:
Proprietary Ratio:
a. It is a relationship between proprietor's fund and total assets.
b. It shows the financial strength of the entity.

Important Notes:
Proprietary Ratio is an important ratio for the creditors as it helps them identify the portion of shareholders' funds in the total assets employed in the firm and also the safety margin available to them.

Q151. (i) Cost of Revenue from Operations (Cost of Goods Sold) Rs. 2,20,000; Revenue from Operations (Net Sales) Rs. 3,20,000; Selling Expenses Rs. 12,000; Office Expenses Rs. 8,000; Depreciation Rs. 6,000. Calculate Operating Ratio.
(ii) Revenue from Operations, Cash Sales Rs. 4,00,000; Credit Sales Rs. 1,00,000; Gross Profit Rs. 1,00,000; Office and Selling Expenses Rs. 50,000. Calculate Operating Ratio.

Answer:

Things to Remember:
Non-Current Assets: Tangible Assets + Intangible Assets + Non-Current Trade Investments *Long-term Loans and Advances.

Important Notes:
Working Capital = Current Assets - Current Liabilities

 Q152. Calculate Operating Profit Ratio from the Following:

Answer:

Operating Net Profit = Revenue from Operations (Net Sales) – Cost of Revenue from Operations – Office and Administration Expenses
= Rs. 5,00,000 – Rs. 2,00,000 – Rs. 50,000
= Rs. 2,50,000

Things to Remember:
Proprietors' Funds: This can be computed using either of the 2 approaches available as follows:
Liabilities Approach: In this approach,
Proprietors' funds = Share Capital (Equity + Preference) + Reserves and Surplus.

Assets Approach: In this approach,
Proprietors' funds = Non-current Assets + Working Capital (i.e. Current Assets - Current Liabilities) - Non-current Liabilities.

Important Notes:
Non-Current Assets: This will include: Fixed assets (tangible and intangible assets), Non-Current Investments, Long term Loans and Advances.

 Q153. Calculate Operating Profit Ratio from the following information:

Answer:

Cost of Revenue from Operations = Opening Inventory + Purchases – Closing Inventory
= Rs. 1,00,000 + Rs. 10,00,000 – Rs. 15,000
= Rs. 9,50,000

Operating Net Profit = Revenue from Operations – Cost of Revenue from Operations – Administrative and Selling Expenses
= Rs. 14,70,000 – Rs. 9,50,000 – Rs. 1,70,000
= Rs. 3,50,000

Q154. Revenue from Operations Rs. 9,00,000; Gross Profit 25% on Cost; Operating Expenses Rs. 45,000. Calculate Operating Profit Ratio.

Answer:

Things to Remember:
Inventory Turnover Ratio high ratio shows that more sales are being produced by a rupee of investment in the inventories. On the other hand, a low ratio means inefficient use of investment in inventory, over investment in stocks, etc. A very high ratio indicates overtrading which may result in working capital shortage. Only an optimum Inventory Turnover Ratio ensures adequate working capital and helps firm ear a reasonable margin.

Important Notes:
Closing Inventory In case of manufacturing Entity: Cost of Revenue from Operations = Cost of Materials Consumed + Purchases of Stock-in-Trade + Changes in Inventories of Finished Goods, WIP & Stock-in-Trade + Direct Expenses

 Q155. Operating Cost Rs. 3,40,000; Gross Profit Ratio 20%; Operating Expenses Rs. 20,000. Calculate Operating Profit Ratio.
Answer:

Cost of Revenue from Operations = Operating Cost – Operating Expenses
= Rs. 3,40,000 – Rs. 20,000
= Rs. 3,20,000

Gross Profit = (3,20,000 × 20)/80 = Rs. 80,000
Revenue from Operations = Cost of Revenue from Operations + Gross Profit
= Rs. 3,20,000 + Rs. 80,000
= Rs. 4,00,000

Operating Profit = Revenue from Operations – Operating Cost
= Rs. 4,00,000 – Rs. 3,00,000
= Rs. 60,000

Q156. What will be the Operating Profit Ratio, if Operating Ratio is 82.59%?

Answer:

Operating Profit = Total Sales – (Cost of Goods Sold + Operating Expenses)
If Sales will be 100% and Operating Ratio is 82.59% then:
Operating Profit Ratio = Sales Ratio – Operating Ratio
Operating Profit Ratio = 100% - 82.59% 
Operating Profit Ratio = 17.41%

About Solution:
Formula to find out Operating Profit:
Operating Profit = Total Sales – (Cost of Goods Sold + Operating Expenses)

Things to Remember:
Current Assets: This will include:
1. Current Investments,
2. Inventories (including spare parts and loose tools),
3. Trade Receivables,
4. Cash and Cash Equivalents.
5. Short-term Loans and Advances,
6. Other Current Assets

Important Notes:
Interest Coverage Ratio:
1. It is a relationship between Net Profit before Interest and Tax and Interest on Long Term Debts.
2. It is calculated to ascertain the amount of profit available to cover interest on long term debts.

Q157. Calculate Operating Profit Ratio, in each of the following alternative cases:
Case 1:  Revenue from Operations (Net Sales) Rs. 10,00,000; Operating Profit Rs. 1,50,000.
Case 2:  Revenue from Operations (Net Sales) Rs. 6,00,000; Operating Cost Rs. 5,10,000.
Case 3: Revenue from Operations (Net Sales) Rs. 3,60,000; Gross Profit 20% on Sales; Operating Expenses Rs. 18,000
Case 4: Revenue from Operations (Net Sales) Rs. 4,50,000; Cost of Revenue from Operations Rs.3,60,000; Operating Expenses Rs. 22,500.
Case 5: Cost of Goods Sold, i.e., Cost of Revenue from Operations Rs. 8,00,000; Gross Profit 20% on Sales; Operating Expenses Rs. 50,000.

Answer:

Working Notes:-
Net Sales = Cost of goods sold + Gross profit
Net Sales = Cost of goods sold + Net sales × 20/100

Rs. 3,60,000 = Cost of goods sold + Rs. 3,60,000 × 20/100
Rs. 3,60,000 = Cost of goods sold + Rs. 72,000

Cost of goods sold = Rs. 3,60,000 – Rs. 72,000
Cost of goods sold = Rs. 2,88,000

Operating Profit = Net Sales – Cost of goods sold – Operating Expenses
= Rs. 3,60,000 – Rs. 2,88,000 – Rs. 18,000
= Rs. 54,000

Things to Remember:
Understanding Inventory Turnover Ratio:
1. It is a relationship between Cost of Revenue from Operations, i.e., Cost of Goods Sold and average inventory carried during that period.
2. It ascertains whether the investment in stock is appropriate and that only the required amount is invested in stock.

Important Notes:
Inventory Turnover Ratio measures the number of times an enterprise sells and replaces its inventory and therefore, it is an activity as well as efficiency ratio that measures efficiency of inventory management.

Q158. Operating Profit Ratio of Star Ltd. is 20%. State, giving reason, which of the following transactions will (i) increase, (ii) decrease or (iii) not alter the Operating Profit Ratio:
(a) Purchase of Stock-in-trade Rs. 1,00,000.
(b) Purchase returns Rs. 20,000
(c) Revenue from Operations on sale of Stock-in-trade Rs. 1,25,000.
(d) Stock-in-trade costing Rs. 25,000 withdrawn for personal use.
Assuming that operating cost is variable i.e. varies with Revenue from Operations.

Answer:

(a) Purchase of Stock-in-trade Rs. 1,00,000 – Not alter the operating Profit 
Reason:- Both Purchases and Closing Inventory will increase by Rs. 1,00,000 so cost of revenue from operations will not be affected. Hence, Gross profit ratio will remain same.

(b) Purchase returns Rs. 20,000 - Not alter the operating Profit
Reason:- Both purchases and closing inventory will decrease by Rs 20,000; so, cost of revenue from operations will not be affected. Hence, Gross Profit Ratio will remain same.

(c) Revenue from Operations on sale of Stock-in-trade Rs. 1,25,000 – Not alter the operating Profit
Reason:- Revenue from operations will increase by Rs. 1,25,000 and Gross Profit will increase. so, both revenue from operations and gross profit will increase. So, Gross Profit Ratio will remain same.

(d) Stock-in-trade costing Rs. 25,000 withdrawn for personal use. - Not alter the operating Profit
Reason:- Both purchases and closing inventory will decrease by Rs 25,000; so, cost of revenue from operations will not be affected. Hence, Gross Profit Ratio will remain same.

Q159. Cash Sales Rs. 2,20,000; Credit Sales Rs. 3,00,000; Sales Return Rs. 20,000; Gross Profit Rs. 1,00,000; Operating Expenses Rs.  25,000; Non-operating incomes Rs. 30,000; Non-operating Expenses Rs. 5,000. Calculate Net Profit Ratio.

Answer:

Net Sales = Cash Sales + Credit Sales – Sales Return
= Rs. 2,20,000 + Rs.3,00,000 – Rs. 20,000
= Rs. 5,00,000

Net Profit = Gross Profit – Operating Expenses + Non-Operating Income – Non-Operating Expenses
= Rs. 1,00,000 – Rs. 25,000 + Rs. 30,000 – Rs. 5,000 
= Rs. 1,00,000

About Solution:
Net profit ratio determines overall efficiency of the business. It indicates the extent to which management has been effective in reducing the operational expenses. Higher the net profit ratio, better it is for the business.

Things to Remember:
Trade Receivables Turnover ratio:
1. It is the relationship between Credit Revenue from Operations (i.e., Net Credit Sales) and Average Trade Receivables (i. e., Average of debtors and bi IIS receivable of the year).
2. It indicates the number of times trade receivables are turned over in a year in relation to credit sales.

Important Notes:
Trade Receivables Turnover ratio a higher ratio shows that debts are collected more promptly and a lower ratio shows inefficiency in collection or increased credit period or more investment in debtors.

Q160. Revenue from Operations, i.e., Net Sales Rs. 12,00,000 and Net Profit Rs. 1,20,000. Calculate Net Profit Ratio.

Answer:

About Solution:
A ratio of net profit to revenue from operations (sales) is called Net profit ratio. It indicates sales margin on sales. This is expressed as a percentage. The main objective of calculating this ratio is to determine the overall profitability.

Things to Remember:
Trade Receivables Turnover Ratio should be computed keeping in mind that provision for doubtful debts is not deducted from trade receivables since the purpose is to calculate the number of days for which sales are tied up in trade receivables and not to ascertain realizable value of debtors.

Important Notes:
Trade Receivables Turnover Ratio It identifies how quickly trade receivables are converted into Cash and Cash Equivalents and therefore, indicates the efficiency in collection of amounts due against trade receivables.

Q161. Revenue from Operations, i.e., Net Sales Rs. 8,20,000; Return Rs. 10,000; Cost of Revenue from Operations (Cost of Goods Sold) Rs. 5,20,000; Operating Expenses Rs. 2,09,000; Interest on Debentures Rs. 40,500; Gain (Profit) on Sale of a Fixed Asset Rs. 81,000. Calculate Net Profit Ratio.

Answer:

Working Note:-
Revenue from Operations = Rs. 8,20,000
Net Profit = Revenue from Operations – Cost of Revenue from Operations – Operating Expenses – Interest on Debentures + Profit on Sale of a Fixed Asset
= Rs. 8,20,000 – Rs. 5,20,000 – Rs. 2,09,000 – Rs. 40,500 + Rs. 81,000
= Rs. 1,31,500

About Solution:
Calculation of Net Profit:-
Net Profit = Revenue from Operations – Cost of Revenue from Operations – Operating Expenses – Interest on Debentures + Profit on Sale of a Fixed Asset

Things to Remember:
Average Collection Period or Debt Collection Period:
1. It is a ratio which provides an approximation of the average time that it takes to collect debtors.
2. It is computed by dividing 365 (days) or 12 (months) by the Trade Receivables Turnover Ratio.

Important Notes:
Trade Payables Turnover Ratio:
1. It is a relationship between the net credit purchases and total payables or average payables.
2. It identifies the number of times the creditors are turned over in relation to credit purchases.

Q162. Revenue from Operations Rs. 4,00,000; Gross Profit Ratio 25%; Operating Ratio 90%. Non-operating Expenses Rs. 2,000; Non-operating Income Rs. 22,000. Calculate Net Profit Ratio.

Answer:

Working Note:-
Cost of Revenue from Operations + Operating Expenses
= Revenue from Operations × 90%
= Rs. 4,00,000 × 90% = Rs. 3,60,000
Net Profit = Revenue from Operations – Cost of Revenue from Operations – Operating Expenses – Non-operating Expenses + Non-operating income
= Rs. 4,00,000 – Rs. 3,60,000 – Rs. 2,000 + Rs. 22,000 = Rs. 60,000

Things to Remember:
Working Capital Turnover Ratio:
1. It is a relationship between working capital and revenue from operations.
2. It shows the number of times a unit of Rupee invested in working capital produces sales.
3. It helps to ascertain whether or not working capital has been effectively used in generating revenue.

Important Notes:
Formula for Working Capital Turnover Ratio:-
Working Capital Turnover Ratio =Revenue from Operations/Working Capital

Q163. Net Profit before Interest and Tax Rs. 2,50,000; Capital Employed Rs. 10,00,000. Calculate Return on Investment.

Answer:

Things to Remember:
Gross Profit = Revenue from Operations ( i.e. Net Sales) - Cost of Revenue from Operations (COGS)

Important Notes:
Operating Ratio:
a. It is a relationship between Operating Costs and Revenue from Operations.
b. It is the proportion of Cost of Revenue from Operations and Operating Expenses to Revenue from Operations.
c. It helps in assessing the operational efficiency of an entity.

Q164. Net Profit before Interest and Tax Rs. 6,00,000; Net Fixed Assets Rs. 20,00,000; Net Working Capital Rs. 10,00,000; Current Assets Rs. 11,00,000. Calculate Return on Investment.

Answer:

Things to Remember:
Operating Expenses= Office Expenses + Administrative Expenses + Selling & Distribution Expenses + Employee Benefit Expenses + Depreciation & Amortization Expenses

Important Notes:
Operating Profit Ratio:
1. It is the relationship between Operating Profit and Revenue from Operations i.e., Net
2. It determines the operational efficiency of the business/An increase in the ratio shows improvement in the operational efficiency of the entity

Q165. Net Profit before Interest and Tax Rs. 4,00,000; 15% Long-term Debt Rs. 8,00,000; Shareholders' Funds Rs. 4,00,000. Calculate Return on Investment.

Answer:

Things to Remember:
Net Profit Ratio:
1. It is a relationship between Net Profit and Revenue from Operations i.e., Net Sales.
2. It helps in determining the operational efficiency of the business.
3. It indicates the actual status of business, as higher the Net Profit Ratio, better the business.

Important Notes:
Ratio Analysis is a quantitative analysis of data present in a financial statement. It shows the relationship between items present in Balance sheet and the Income Statement. It helps in calculating operational efficiency, solvency and determining profitability of a firm. Ratio is a statistical measure which helps in comparing relationship between two or more figures. Analyzing ratio presents vital pieces of information to accounting users about the firm's financial position, performance and viability. It also helps in setting up new policies and framework by the management.

Q166. Net Profit after interest but before tax ₹ 1,40,000; 15% Long-term Debts ₹ 4,00,000; Shareholders Funds ₹ 2,40,000; Tax Rate 50%. Calculate Return on Capital Employed.

Answer:

Interest = 15% of Long term Debt
Interest = 15% of Rs. 4,00,000
Interest = Rs. 60,000

Net profit before Interest and Tax = Net Profit after interest and before tax+ Interest 
Net profit before Interest and Tax = Rs. 1,40,000 + Rs. 60,000
Net profit before Interest and Tax = Rs. 2,00,000

Capital Employed = Shareholders Fund + Long term Debt
Capital Employed = Rs. 2,40,000 + Rs. 4,00,000
Capital Employed = Rs. 6,40,000

Q167. Y Ltd.'s profit after interest and tax was Rs.  1,00,000. Its Current Assets were Rs.  4,00,000; Current Liabilities Rs.  2,00,000; Fixed Assets Rs.  6,00,000 and 10% Long-term Debt Rs.  4,00,000. The rate of tax was 20%. Calculate 'Return on Investment' of Y Ltd.

Answer:

Profit after interest and Tax = Rs. (1,25,000 + 40,000) = Rs. 1,65,000
Capital Employed = Fixed Assets + Current Assets – Current Liabilities
= (Rs. 6,00,000 + Rs. 4,00,000) – 2,00,000 
= Rs. 8,00,000

Things to Remember:
Trade Receivables Turnover Ratio: Debtors turnover ratio is also known as Receivables Turnover Ratio is a measure used to check how quickly a credit sale is converted into cash. It shows efficiency of a business firm in collecting debts from customers.

Important Notes:
Trade Payables Turnover Ratio: It is also known as Creditor's turnover ratio or account payable turnover ratio and is a liquidity ratio that measures the average number of times a firm pays its creditors in the course of an accounting period. It is used to measure short term liquidity of the firm.

Q168. Calculate Return on Investment (ROI) from the following details: Net Profit after Tax Rs. 6,50,000; Rate of Income Tax 50%; 10% Debentures of Rs. 100 each Rs. 10,00,000; Fixed Assets at cost Rs. 22,50,000; Accumulated Depreciation on Fixed Assets up to date Rs. 2,50,000; Current Assets Rs. 12,00,000; Current Liabilities Rs. 4,00,000.

Answer:

Net Profit before Interest, Tax and Dividend = Net Profit after Tax + 10% Debentures Interest + Income Tax + Preference Dividend
Net Profit before Interest, Tax and Dividend= Rs. 6,50,000 + Rs. 10,00,000 × 10/100 + Rs. 6,50,000 × 100/50 × 50/100 + 0
Net Profit before Interest, Tax and Dividend= Rs. 6,50,000 + Rs. 1,00,000 + Rs. 6,50,000 + 0
Net Profit before Interest, Tax and Dividend= Rs. 14,00,000

Capital Employed = Fixed Assets – Accumulated Depreciation on Fixed Assets up to date + Current Assets – Current liabilities
Capital Employed= Rs. 22,50,000 – RS. 2,50,000 + Rs. 12,00,000 – Rs. 4,00,000 
Capital Employed= Rs. 28,00,000

About Solution:
Formula for Capital Employed:-
Capital Employed = Fixed Assets – Accumulated Depreciation on Fixed Assets up to date + Current Assets – Current liabilities

Things to Remember:
Working Capital: It is calculated using following formula: 
Working Capital = Current Assets - Current Liabilities

Important Notes:
Gross Profit Ratio:
1. It is a relationship between the Gross Profit and Revenue from Operations (i.e., Net Sales).
2. A change either in Revenue from Operations (i.e., Net Sales) or Cost of Revenue from Operations (i.e., Cost of goods sold) or both will have an impact on this ratio.

 Q169. From the following information’s, calculate Return on Investment (or Return on Capital Employed):

Answer:

Working Note:-
Net Profit before Interest, Tax and Dividend = Net Profit before Tax + Interest on 10% Long-term Borrowings

= Rs. 6,00,000 + Rs. 20,00,000 × 10/100
= Rs. 6,00,000 + Rs. 2,00,000 
= Rs. 8,00,000

Capital Employed = Share Capital + Reserve and Surplus + 10% Long-term Borrowings
= Rs. 5,00,000 + Rs. 2,50,000 + Rs. 20,00,000 
= Rs. 27,50,000 

Point of Knowledge:-
Other Method to Calculate Capital Employed 
Capital Employed = Net Fixed Assets + Non-Current Trade Investments + Current Assets – Current Liabilities

= Rs. 22,50,000 + Rs. 2,50,000 + Rs. 11,00,000 – Rs. 8,50,000
= Rs. 27,50,000

About Solution:-
Other Method to Calculate Capital Employed 
Capital Employed = Net Fixed Assets + Non-Current Trade Investments + Current Assets – Current Liabilities

= Rs. 22,50,000 + Rs. 2,50,000 + Rs. 11,00,000 – Rs. 8,50,000
= Rs. 27,50,000

Things to Remember:
Profitability: These ratios show the profitability of the enterprise. It includes:
1. Gross Profit Ratio
2. Operating Ratio
3. Operating Profit Ratio
4. Net Profit Ratio
5. Return on Investment

Important Notes:
Current Ratio: It is a ratio which calculates the relationship between the current assets and current liabilities. It is a liquidity ratio that measures the ability of the enterprise to pay its short-term financial obligations i.e., current liabilities

Q170. State with reason whether the following transactions will increase, decrease or not change the 'Return on Investment' Ratio:
(i) Purchase of machinery worth Rs.10,00,000 by issue of equity shares.
(ii) Charging depreciation of Rs. 25,000 on machinery.
(iii) Redemption of debentures by cheque Rs. 2,00,000.
(iv) Conversion of 9% Debentures of Rs. 1,00,000 into equity shares.

Answer:

(i) Purchase of machinery worth Rs. 10,00,000 by issue of equity shares. This transaction will affect the value of the denominator of the ratio as we are issuing equity shares. There will be no effect on the numerator of the fraction in ratio. Therefore denominator of the fraction will increase which alternatively decrease the ratio.
(ii) Charging depreciation of Rs. 25,000 on machinery. The net profit in the numerator of the fraction will decrease due to depreciation charge. There will be no effect on the denominator. Therefore due to only decrease in numerator the ratio will decrease.
(iii) Redemption of debentures by cheque Rs. 2,00,000 will reduce capital employed or denominator of the ratio. There will be no effect on the profit on numerator. Therefore denominator of the fraction will decrease which alternatively increase the ratio.
(iv) Conversion of 9% Debentures of Rs. 1,00,000 into equity shares. The conversion of debentures into equity shares will not change the capital employed in the denominator of the ratio. Therefore there will be no change in ratio.

Things to Remember:
Liquid Ratio: It deals with the relationship between liquid assets and current liabilities. This ratio determines if the firm has sufficient funds for paying off the current liabilities on an immediate basis.

Important Notes:
Liquids Assets = Current Assets — Stock — Prepaid Expenses

Q171. Calculate Revenue from Operations of BN Ltd. from the following information:

Goods were sold at a profit of 25% on cost.

Answer:

Cost of Goods Sold = 6 × Rs. 2,00,000
Cost of Goods Sold = Rs. 12,00,000

Gross Profit = Revenue from Operation – Cost of Goods Sold
25% of Rs. 12,00,000 = Revenue from Operation – Rs. 12,00,000
Rs. 3,00,000 = Revenue from Operation – Rs. 12,00,000
Revenue from Operation = Rs. 12,00,000 + Rs. 3,00,000
Revenue from Operation = Rs. 15,00,000

Q172. Opening Inventory Rs. 80,000; Purchases Rs. 4,30,900; Direct Expenses Rs. 4,000; Closing Inventory Rs. 1,60,000; Administrative Expenses Rs. 21,100; Selling and Distribution Expenses Rs. 40,000; Revenue from Operations, i.e., Net Sales Rs. 10,00,000. Calculate Inventory Turnover Ratio; Gross Profit Ratio; and Opening Ratio.

Answer:

Things to Remember:
Liquid Ratio: It is helpful in determining if a firm has funds that can be sufficient to pay off liabilities. It does not include stock or prepaid expenses as both these are not easily converted to cash. A ratio of 1:1 is ideal for maintaining the liquid ratio.

Important Notes:
A firm's solvency position can be best studied with the help of group of ratios called as Solvency Ratios. These ratios measure the financial position of the firm by measuring its ability to pay long term liabilities, these long term liabilities include principal amount payments on due date and interest payments on a regular basis.

Q173. Following information is given about a company:

From the above information, calculate following ratios:
(i) Gross Profit Ratio,
(ii) Inventory Turnover Ratio, and 
(iii) Trade Receivables Turnover Ratio.

Answer:

Things to Remember:
Debt-Equity Ratio: This ratio shows the relationship between owner funds (equity) and borrowed funds (debt). A lower debt-equity ratio provides more security to the people who are lending to the business. It also shows that a company is able to meet long term dues or responsibilities.

Important Notes:
Interest Coverage Ratio: This ratio is used to determine the easiness with which a company is able to pay interest on the outstanding debts. It is calculated by dividing earnings before interest and taxes with interest payments. Having a higher interest coverage ratio means that company is able to meet its obligations skillfully.

Q174. From the following Balance Sheet of Global Ltd., you are required to calculate Return on Investment for the year 2018-19:

Additional Information: Net Profit before Tax for the year 2018-19 is Rs. 9,72,000.

Answer:

Things to Remember:
Working Capital Turnover Ratio: Working capital turnover ratio is used to measure the efficiency of a company in using its working capital to support the sales.

Important Notes:
Debt-Equity Ratio: This ratio shows the relationship between owner funds (equity) and borrowed funds (debt). A lower debt-equity ratio provides more security to the people who are lending to the business. It also shows that a company is able to meet long term dues or responsibilities

Q176. Calculate following ratios on the basis of the following information:
(i) Gross Profit Ratio;
(ii) Current Ratio;
(iii) Acid Test Ratio; and 
(iv) Inventory Turnover Ratio

Answer:

Things to Remember:
Price Earnings Ratio: A profitability ratio that is used by an investor to check for share price of the company which can be undervalued or overvalued. It also indicates an expectation about the company earning and payback period for the investors.

Important Notes:
Price Earnings Ratio = Market Price of Share + Earnings per share

Q177. Calculate following ratios on the basis of the given information:
(i) Current Ratio;
(ii) Acid Test Ratio;
(iii) Operating Ratio; and 
(iv) Gross Profit Ratio.

Answer:

Things to Remember:
Return on capital employed: This ratio is all about the returns earned by the company from the funds invested in the business by its owners. A high ratio is indicative of a better position for the company.

Important Notes:
Return on capital employed = Net Operating Profit + Capital Employed x 100

Q178. From the information given below, calculate any three of the following ratio:
(i) Gross Profit Ratio;
(ii) Working Capital Turnover Ratio:
(iii) Debt to Equity Ratio; and 
(iv) Proprietary Ratio.

Answer:

Things to Remember:
Gross Profit: Gross profit ratio or GP ratio is a profitability ratio that deals with the relationship between gross profit and the total net sales revenue. This ratio is used to evaluate the operational performance of the business.

Important Notes:
Gross Profit = Net Sales — Cost of Goods Sold
Net Sales = Total Sales — Sales Return
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses — Closing Stock

Q179. On the basis of the following information calculate: 
(i) Debt to Equity Ratio; and 
(ii) Working Capital Turnover Ratio.
Information:

Answer:

Things to Remember:
Net Profit: This is a profitability ratio that deals with relationship between net profit after tax and net sales. It is calculated by dividing the net profit (after tax) by net sales.

Important Notes:
Inventory = Current Assets -Liquid Assets

 Q180. From the following, calculate (a) Debt to Equity Ratio; (b) Total Assets to Debt Ratio; and (c) Proprietary Ratio:

Answer:

Things to Remember:
The ratio analysis is based on quantitative aspect. It totally ignores qualitative aspect which is sometimes more important than quantitative aspect.

Important Notes:
Price level changes make the comparison of figures difficult over a period of time. Before any comparison is made, proper adjustments for price level changes must be made.

Q181. From the following information related to Naveen Ltd., calculate (a) Return on Investment and (b) Total Assets to Debt Ratio:
Information: Fixed Assets Rs. 75,00,000; Current Assets Rs. 40,00,000; Current Liabilities Rs. 27,00,000; 12% Debentures Rs. 80,00,000 and Net Profit before Interest, Tax and Dividend Rs. 14,50,000.

Answer:

Things to Remember:
Advantages of Ratio Analysis:
1. Tool for analysis of Financial Statements
2. Simplifies Accounting Data Assessment of Operating
3. Efficiency of Business
4. Assists in Forecasting

Important Notes:
Liquidity (short-term solvency): These are the ratios which show the ability of the enterprise to meet its short-term financial obligations. It includes:
1. Current Ratio
2. Quick Ratio

Q182. From the following information, Calculate:
(i) Gross Profit Ratio;
(ii) Working Capital Turnover Ratio; and
(iii) Proprietary Ratio.

Answer:

Gross Profit = Revenue from operation – Cost of Goods Sold
Gross Profit = Rs. 5,25,000 – Rs. 6,80,000
Gross Profit = Rs. -1,55,000

Revenue from Operation = Cash Sales + Credit Sales
Revenue from Operation = (Rs. 3,00,000 × 75%) + Rs. 3,00,000
Revenue from Operation = Rs. 2,25,000 + Rs. 3,00,000
Revenue from Operation = Rs. 5,25,000
 

Proprietors Funds = Paid up Capital + Net Profit for the year 
Proprietors Funds = Rs. 8,00,000 + Rs. 1,55,000 
Proprietors Funds = Rs. 9,55,000

Total Assets = Paid up Capital + Net Profit for the year + 9% Debentures + Current liabilities
Total Assets = Rs.8,00,000 + Rs.1,55,000 + Rs. 3,40,000 + Rs. 2,90,000
Total Assets = Rs.15,85,000

Old Questions

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

Current Liabilities = Current Assets – Working Capital