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Ratio Problems 2

The document provides information about the balance sheets and income statement of JKL Limited for the years ending March 31, 2015 and March 31, 2016. It asks to calculate various ratios for JKL Limited for 2015-16, including inventory turnover ratio, financial leverage, return on capital employed, return on equity, and average collection period. It also asks to comment on the financial position of JKL Limited. The response calculates the requested ratios and notes that JKL Limited's profitability is declining due to increased expenses while its liquidity and leverage are becoming adverse.

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Vivek Mathi
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335 views7 pages

Ratio Problems 2

The document provides information about the balance sheets and income statement of JKL Limited for the years ending March 31, 2015 and March 31, 2016. It asks to calculate various ratios for JKL Limited for 2015-16, including inventory turnover ratio, financial leverage, return on capital employed, return on equity, and average collection period. It also asks to comment on the financial position of JKL Limited. The response calculates the requested ratios and notes that JKL Limited's profitability is declining due to increased expenses while its liquidity and leverage are becoming adverse.

Uploaded by

Vivek Mathi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Ratio Analysis – Problems part 2 - MAA

Problem 3
JKL Limited has the following Balance Sheets as on March 31, 2015 and March 31, 2016:
Balance Sheet
` in lakhs
March 31, 2016 March 31, 2015
Sources of Funds:
Shareholders Funds 2,377 1,472
Loan Funds 3,570 3,083
5,947 4,555
Applications of Funds:
Fixed Assets 3,466 2,900
Cash and bank 489 470
Debtors 1,495 1,168
Stock 2,867 2,407
Other Current Assets 1,567 1,404
Less: Current Liabilities (3,937) (3,794)
5,947 4,555

The Income Statement of the JKL Ltd. for the year ended is as follows:
` in lakhs
March 31, 2016 March 31, 2015
Sales 22,165 13,882
Less: Cost of Goods sold 20,860 12,544
Gross Profit 1,305 1,338
Less: Selling, General and Administrative 1,135 752
expenses
Earnings before Interest and Tax (EBIT) 170 586
Interest Expense 113 105
Profits before Tax 57 481
Tax 23 192
Profits after Tax (PAT) 34 289

Required:
(i) Calculate for the year 2015-16:
(a) Inventory turnover ratio
(b) Financial Leverage
(c) Return on Capital Employed (ROCE)
(d) Return on Equity (ROE)
(e) Average Collection period.
(ii) Give a brief comment on the Financial Position of JKL Limited.
Answer
Ratios for the year 2015-2016
(i) (a) Inventory turnover ratio
COGS 20,860
= = = 7.91
Average Inventory (2,867 + 2,407)
2
(b) Financial leverage
2015-16 2014-15
EBIT 170 586
= = =
EBIT - I 57 481
= 2.98 = 1.22
(c) ROCE
EBIT (1-t) 57 (1-0.4) 34.2
= = = x 100 = 0.651 %
Average Capital Employed 5,947 + 4,535 5251
( )
2
[Here Return on Capital Employed (ROCE) is calculated after Tax]
(d) ROE
Profits after tax 34 34
= = = = 1.77%
Average shareholders' funds (2,377 + 1,472) 1,924.5
2

(e) Average Collection Period*


22,165
Average Sales per day = = ` 60.73 lakhs
365
(1,495 + 1,168)
Average Debtors 2 1331.5
Average collection period = = = =22 days
Average sales per day 60.73 60.73
*Note: In the above solution, 1 year = 365 days has been assumed. Alternatively, it may
be solved on the basis of 1 year = 360 days.
(ii) Brief Comment on the financial position of JKL Ltd.
The profitability of operations of the company are showing sharp decline due to increase in
operating expenses. The financial and operating leverages are becoming adverse.
The liquidity of the company is under great stress.

Problem 4
The following accounting information and financial ratios of M Limited relate to the year ended 31st
March, 2016 :
Inventory Turnover Ratio 6 Times
Creditors Turnover Ratio 10 Times
Debtors Turnover Ratio 8 Times
Current Ratio 2.4

Gross Profit Ratio 25%


Total sales Rs. 30,00,000; cash sales 25% of credit sales; cash purchases ` 2,30,000; working
capital ` 2,80,000; closing inventory is ` 80,000 more than opening inventory.
You are required to calculate:
(i) Average Inventory
(ii) Purchases
(iii) Average Debtors
(iv) Average Creditors
(v) Average Payment Period
(vi) Average Collection Period
(vii) Current Assets
(viii) Current Liabilities.
Answer
(i) Computation of Average Inventory
Gross Profit = 25% of ` 30, 00,000 = ` 7,50,000
Cost of goods sold (COGS) = Sales - Gross Profit = ` 30,00,000 – ` 7,50,000
= ` 22,50,000
COGS
Inventory Turnover Ratio =
Average Inventory
` 22,50,000
6 =
Average inventory
Average inventory = ` 3,75,000
(ii) Computation of Purchases
Purchases = COGS + (Closing Stock – Opening Stock) = ` 22,50,000 + 80,000*
Purchases = ` 23,30,000
* Increase in Stock = Closing Stock – Opening Stock = ` 80,000
(iii) Computation of Average Debtors
25
Let Credit Sales be ` 100, Cash sales = x 100 = ` 25
100
Total Sales = 100 + 25= ` 125
Total sales is ` 125 credit sales is ` 100
` 30,00,000 x 100
If total sales is ` 30,00,000, then credit sales is =
125
Credit Sales = ` 24,00,000
Cash Sales = (` 30,00,000 – ` 24,00,000) = ` 6,00,000
Net Credit Sales ` 24,00,000
Debtors Turnover Ratio = =8= =8
Average debtors Average debtors
` 24,00,000
Average Debtors =
8
Average Debtors = ` 3,00,000
(iv) Computation of Average Creditors
Credit Purchases = Purchases – Cash Purchases
= ` 23,30,000 – ` 2,30,000 = ` 21,00,000
Credit Purchases
Creditors Turnover Ratio =
Average Creditors
21,00,000
10 =
Average Creditors
Average Creditors = ` 2,10,000
(v) Computation of Average Payment Period
Average Creditors
Average Payment Period =
Average Daily Credit Purchases
` 2,10,000 ` 2,10,000
= Æ =
Credit Purchases ö 21,00,000
365 365
` 2,10,000
= x 365* = 36.5 days
` 21,00,000
Alternatively
Average Payment Period = 365/Creditors Turnover Ratio
365 *
= = 36.5 days
10
(vi) Computation of Average Collection Period
Average Debtors ` 3,00,000
Average Collection Period = × 365 * = × 365 = 45.625 days
Net Credit Sales ` 24,00,000
Alternatively
365*
Average collection period =
Debtors Turnover Ratio
365
= = 45.625 days
8
* 1 year is taken as 365 days.
(vii) Computation of Current Assets
Current Assets (CA)
Current Ratio = = 2.4
Current Liabilities (CL)
2.4 Current Liabilities = Current Assets or CL = CA/2.4
Further, Working capital = Current Assets – Current liabilities
So, ` 2,80,000 = CA-CA/2.4
` 2,80,000 = 1.4 CA/2.4 Or, 1.4 CA = ` 16,72,000
CA = ` 4,80,000
(viii) Computation of Current Liabilities
4,80,000
Current liabilities = = ` 2,00,000
2.4

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