TS Grewal Solution Class 12 Chapter 4 Accounting Ratios

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.

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.

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.

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.
 

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.
 

Question 52. From the following information, calculate Total Assets to Debt Ratio:

Question 53. From the following information, calculate Proprietary Ratio:

 

Proprietary Ratio = (Shareholders' Funds)/(Total Assets)

Proprietary Ratio = (Equity Share Capital +Preference Share Capital+ Reserves and Surplus)/(Total Assets)

Proprietary Ratio = (3,00,000+1,50,000+75,000)/(7,50,000) = (5,25,000)/(7,50,000) = 0.70:1

Question 55. Calculate Proprietary Ratio from the following:

Question 75. 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
Inventory Turnover Ratio = (Cost of Revenue from Operations)/(Average Inventory)
8 = (Rs.3,00,000)/((Opening Inventory+Closing Inventory)  ÷ 2)
8 = Rs. ( 3,00,000)/((3X+X)  ÷ 2)
8/1 = Rs. ( 3,00,000 × 2)/4X
8 × 4X = Rs. 6,00,000
X = 6,00,000/32
X = 18,750
Therefore Opening Inventory = 3 × X = 3 × 18,750 = Rs. 56,250

Q76. 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:

Working Capital:-
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%

Q77. Calculate Inventory Turnover Ratio in each of the following alternative cases:
Case 1: Cash Sales 25% of Credit Sales; Credit Sales Rs. 3,00,000; Gross Profit 20% on Revenue from Operations, i.e., Net Sales; Closing Inventory Rs. 1,60,000; Opening Inventory Rs. 40,000.
Case 2: Cash Sales 20% of Total Sales; Credit Sales Rs. 4,50,000; Gross Profit 25% on Cost; Opening Inventory Rs. 37,500; Closing Inventory Rs. 1,12,500.
Answer:
Credit Sales = Rs. 3,00,000
Case 1:
Cash Sales = Credit Sales × 25/100
= Rs. 3,00,000 × 25/100
= Rs. 75,000
Total Sales = Cash Sales + Credit Sales
= Rs. 75,000 + Rs. 3,00,000
= Rs. 3,75,000
Total Sales = Cost of goods sold + Gross Profit
Total sales = Cost of goods sold + Total Sales × 20/100
Rs. 3,75,000 = Cost of goods sold + 3,75,000 × 20/100
Cost of goods sold = Rs. 3,75,000 – Rs. 75,000
Cost of goods sold = Rs. 3,00,000

Q78. From the following Statement of Profit and Loss for the year ended 31st March, 2019 of Rex Ltd., calculate Inventory Turnover Ratio:

Answer:

Q79. Credit Revenue from Operations, i.e., Net Credit Sales for the year Rs. 1,20,000, Debtors Rs.12,000, Bill’s Receivable Rs. 8,000. Calculate Trade Receivables Turnover Ratio.
Answer:

Q80. Calculate Trade Receivables Turnover Ratio from the following information:

Answer:

Q81. 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:

Q82. Compute Trade Receivables Turnover Ratio from the following:

Answer:

Q83. Rs. 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 Rs. 7,000 more than that in the beginning.
Answer:
Let Trade Receivables in the beginning be X
Therefore Trade Receivables at the end is X + 7,000

Q84. From the following particulars, determine Trade Receivables Turnover Ratio:

Answer:

Debtors will not be averages as only figure is given in the question. Single figure of debtors in the information is taken as closing debtors.

Q85. 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. 

Q86. 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:

Q87. 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:

Q88. A limited company 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

Rs. 40,000 × 2 = 2X + Rs. 6,000
Rs. 80,000 – Rs. 6,000 = 2X
Rs. 74,000 = 2X
X = 74,000/2
X = 37,000
Opening Trade Receivables = Rs. 37,000
Closing Trade Receivables = X + Rs. 6,000 = Rs. 37,000 + Rs. 6,000 = Rs. 43,000

Q89. Cash Revenue from Operations (Cash Sales) Rs. 2,00,000, Cost of Revenue from Operations or Cost of Goods Solds 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
Working Notes:-
Total Sales = Cost of Goods Sold + Gross Profit
= Rs. 3,50,000 + Rs. 1,50,000
= Rs. 5,00,000
Credit Sales = Total Sales – Cash Sales
= Rs. 5,00,000 – Rs. 2,00,000
= Rs. 3,00,000

Q90. 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

Q91. 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:

Working Note:-
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

Working Note:-
Total Sales = Cost of goods sold + Gross Profit
Total Sales = Cost of goods sold + Total Sales × 20/100 (Let total Sales be X)
X = Rs. 4,50,000 + X/5
X - X/5 = Rs. 4,50,000
5X-X/5 = Rs. 4,50,000
4X/5 = Rs. 4,50,000
X = Rs. 4,50,000 × 5/4
Total Sales = Rs. 5,62,500
Total Sales = 25/100 × Credit Sales + Credit Sales
Rs. 5,62,500 = Y/4 + Y (Let Y be credit Sales)
Rs. 5,62,500 = Y+4Y/4
Rs. 5,62,500 = 5Y/4
Y = Rs. 5,62,500 × 4/5
Net Credit Sales = Rs. 4,50,000

Q92. 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:

(iv) Credit purchases of goods will increase cost of goods sold and closing creditors. It has nothing to do with net credit sales or closing debtors or average debtors or average debtors. So this transactions will not change the trade Receivables Turnover Ratio.

Q93. 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:

Q94. 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:

Q95. 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:

Answer:

Q97. 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:

Q98. Equity Share Capital Rs. 15,00,000; Gross Profit on Revenue from Operations, i.e., Net Sales 331/3%; 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:

Working Note:-
Revenue from Operations = Cost of Goods Sold or Cost of Revenue from Operations + Gross Profit
X = Cost of goods sold + X/3 (Let Revenue from Operations be X)
X = Rs. 20,00,000 + X/3
X - X/3 = Rs. 20,00,000
3X-X/3 = Rs. 20,00,000
2X/3 = Rs. 20,00,000
X = 20,00,000 × 3/2
Revenue from Operations = Rs. 30,00,000

Q99. 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:

Working Note:-
Gross Profit = Cost of Revenue from Operations × 25/100
Rs. 5,00,000 = Cost of Revenue from Operations × 1/4
Cost of Revenue from Operations = Rs. 20,00,000
Revenue from Operations = Cost of Revenue from Operations + Gross Profit
= Rs. 20,00,000 + Rs. 5,00,000
= Rs. 25,00,000
Working Capital = Equity Share Capital + Reserves and Surplus + Long term Loan – Fixed Assets
= Rs. 10,00,000 + Rs. 2,00,000 + Rs. 3,00,000 – Rs. 10,00,000
= Rs. 5,00,000

Q100. Capital Employed Rs. 12,00,000; Net Fixed Assets Rs. 8,00,000; Cost of Goods Sold or Cost of Revenue from Operations Rs. 40,00,000; Gross Profit is 20% on Cost. Calculate Working Capital Turnover Ratio.
Answer:

Working Notes:-
Revenue from Operations = Cost of Revenue from Operations + Gross Profit
Sales = Cost of Revenue from Operations + Cost of Revenue from Operations × 20/100
Revenue from Operations = Rs. 40,00,000 + Rs. 40,00,000 × 1/5
Revenue from Operations = Rs. 40,00,000 + Rs. 8,00,000
Revenue from Operations = Rs. 48,00,000
Working Capital = Capital Employed – Net Fixed Assets
= Rs. 12,00,000 – Rs. 8,00,000
= Rs. 4,00,000

Q101. Calculate Working Capital Turnover Ratio from the following information:
Revenue from Operations Rs. 30,00,000; Current Assets Rs. 12,50,000; Total Assets Rs. 20,00,000; Non-current Liabilities Rs. 10,00,000, Shareholders' Funds Rs. 5,00,000.
Answer:

Working Notes:-
Current Liabilities = Total Assets – Shareholders’ Fund – non-current Liabilities
= Rs. 20,00,000 – Rs. 5,00,000 – Rs. 10,00,000
= Rs. 5,00,000
Working Capital = Current Assets – Current Liabilities
= Rs. 12,50,000 – Rs. 5,00,000
= Rs. 7,50,000 

Q102. 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:

Working Note:-
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

Q103. Compute Gross Profit Ratio from the following information:
Cost of Revenue from Operations (Cost of Goods Sold) Rs. 5,40,000; Revenue from Operations (Net Sales) Rs. 6,00,000.
Answer:

Q104. 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:

Q105. 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:

Working Note:-
Revenue from Operations = Cost of Revenue from Operations + Gross Profit
Cost of Revenue from Operations + Cost of Revenue from Operations × 25/100 = Sales
Rs. 4,00,000 = X + X/4
Rs. 4,00,000 = 4X + X/4
Rs. 4,00,000 = 5X/4
X = Rs. 4,00,000 × 4/5
Cost of Revenue from Operations = Rs. 3,20,000
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
= Rs. 4,00,000 – Rs. 3,20,000
= Rs. 80,000

Q106. 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:

Sales = Rs. 6,25,000 
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

Q107. From the following information, calculate Gross Profit Ratio:

Answer:

Working Note:-
Cash Sales = Credit Sales × 1/4
= Rs. 5,00,000 × 1/4
= Rs. 1,25,000
Total Sales = Cash Sales + Credit Sales
= Rs. 1,25,000 + Rs. 5,00,000
= Rs. 6,25,000
Cost of Revenue from Operations = Purchases + Decrease in Inventory – Returns Outward + Carriage Inwards + Wages
= Rs. 3,00,000 + Rs. 10,000 – Rs. 10,000 + Rs. 50,000
= Rs. 3,60,000
Gross Profit = Total Sales – Cost of Revenue from Operations
= Rs. 6,25,000 – Rs. 3,60,000
= Rs. 2,65,000

 

Q124. Revenue from Operations, i.e., Net Sales Rs. 6,00,000 and Net Profit Rs.60,000. Calculate Net Profit Ratio.
Answer:

Q137. From the following information, calculate any two of the following ratios:
(i) Current Ratio; 
(ii) Debt to Equity Ratio; and
(iii) Operating Ratio.
Revenue from Operations (Net Sales) Rs. 1,00,000; cost of Revenue from Operations (Cost of Goods Sold) was 80% of sales; Equity Share Capital Rs. 7,00,000; General Reserve Rs. 3,00,000; Operating Expenses Rs. 10,000; Quick Assets Rs. 6,00,000; 9% Debentures Rs. 5,00,000; Closing Inventory Rs. 50,000; Prepaid Expenses Rs. 10,000 and Current Liabilities Rs. 4,00,000.
Answer:

Q138. From the following information, calculate Inventory Turnover Ratio; Operating Ratio and Working Capital Turnover Ratio:
Opening Inventory Rs. 28,000; Closing Inventory Rs. 22,000; Purchases Rs. 46,000; Revenue from Operations, i.e., Net Sales Rs. 80,000; Return Rs. 10,000; Carriage Inwards Rs. 4,000; Office Expenses Rs. 4,000; Selling and Distribution Expenses Rs. 2,000; Working Capital Rs. 40,000.
Answer:

Q139. From the following calculate:
(a) Current Ratio; and
(b) Working Capital Turnover Ratio.

Answer:

Q146. Calculate Current Ratio, Quick Ratio and Debt to Equity Ratio from the figures given below:

Answer:

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:

Rs. 24,00,000 = Credit Revenue from Operations
Net Revenue from Operations = Credit Revenue from Operations + Cash Revenue from Operations
X = Rs. 24,00,000 + X/4 (Let Net Revenue from Operations be X)
X - X/4 = Rs. 24,00,000
4X-X/4 = Rs. 24,00,000
3X/4 = Rs. 24,00,000
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:

6 Times × Rs. 1,60,000 = Cost of Revenue from Operations
Cost of Revenue from Operations = Rs. 9,60,000
Sales = Cost of goods sold + Gross Profit 
= Cost of Goods sold + Cost of goods sold × 25/100
= Rs. 9,60,00 + Rs. 9,60,000 × 25/100
= Rs. 9,60,000 + Rs. 2,40,000 
= Rs. 1,20,000 
Sales = Cost of goods sold + Gross Profit 
Rs. 12,00,000 = Rs. 9,60,000 + Gross Profit
Gross Profit = Rs. 2,40,000

8 Times × Rs. 80,000 = Cost of Revenue from Operations
Cost of Revenue from Operations = Rs. 6,40,000
Gross Profit = Cost of Goods Sold × 25/100
= Rs. 6,40,000 × 25/100
= 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. 

 Q'149. 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:

Gross Profit = Rs. 9,00,000 × 25/100 = Rs. 1,80,000
Operating Profit = Gross Profit – Operating Expenses

= Rs. 1,80,000 – Rs. 45,000 
= Rs. 1,35,000

About Solution:
Formula for Operating Profit Ratio:-
Operating Profit Ratio = Operating Profit / Revenue from Operations × 100

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

Total Sales = Cost of goods sold + Gross Profit
Total Sales = Cost of goods sold + Total Sales × 20/100

X = Rs. 8,00,000 + X/5
X - X/5 = Rs. 8,00,000
5X-X/5 = Rs. 8,00,000
X = Rs. 8,00,000 × 5/4
X = Rs. 10,00,000

Total Sales = Rs. 10,00,000
Net Sales = Rs. 10,00,000

About Solution:
Formula for Operating Profit Ratio:-
Operating Profit Ratio = Operating Profit / Net Sales × 100

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:

Working Notes:-
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:

Working Note:-
Net Profit before Interest, Tax and Dividend
= Net Profit after Tax + 10% Debentures Interest + Income Tax + Preference Dividend
= Rs. 6,50,000 + Rs. 10,00,000 × 10/100 + Rs. 6,50,000 × 100/50 × 50/100 + 0
= Rs. 6,50,000 + Rs. 1,00,000 + Rs. 6,50,000 + 0
= Rs. 14,00,000
Capital Employed = Fixed Assets – Accumulated Depreciation on Fixed Assets up to date + Current Assets – Current liabilities
Rs. 22,50,000 – RS. 2,50,000 + Rs. 12,00,000 – Rs. 4,00,000 = 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:

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.

 Q175. Following is the Balance Sheet of the Bharati Ltd. as at 31st March, 2019:

You are required to Calculate Return on Investment for the year 2018-19 with reference to Opening Capital Employed.
Answer:

Things to Remember:
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.

Important Notes:
Current Ratio: Current ratio helps in determining a firm's ability to pay off the current liabilities on time. If there are more of current assets as compared to current liabilities, it provides a source of security to the creditors. The ideal ratio is 2:1 (Current Assets: Current Liabilities).

 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