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RATIO ANALYSIS
Ratio is a mathematical expression of relationship between two interdependent or
interrelated items. The term “Ratio” is defined as “the indicated quotient of two mathematical
expressions and as the relationship between two or more things.
Accounting Ratio:
When the ratios are calculated on the basis of accounting information, they are called
accounting ratios. In other words, both the items of a ratio are taken from financial statements (i.e.,
profit and loss account and balance sheet), the ratio is called as an accounting ratio or financial
ratio. Thus, an accounting ratio is expressed as mathematical relationship between two accounting
figures. The term accounting ratio is used to describe the significant relationship which exists
between the figures shown in the balance sheet, in the statement of Profit and Loss A/c, in a
budgetary control system or in any part of the accounting organization.
Accounting ratios can be expressed in any of the following forms.
1. Pure Ratios: A Pure ratio always expressed as a quotient.
Example : All liquid ratios are expressed as pure ratios. Current Ratio expresses the
relationship between Current Assets and Current Liabilities, is 2. It can be expressed as 2:1.
2. Percentage Ratios: Percentage ratios are always expressed as percentage of one item of
another item. These ratios are expressed in percentages.
Example: All profitability ratios are expressed in the form of percentage ratios. Gross profit
ratio explains the relationship between Gross profit and Sales. It will be expressed in
percentage like 25% or 30%.
3. Times : The relationship between some items always expressed in terms of time, by
comparing one item with another.
Examples: Generally, all Turnover Ratios are expressed in terms of time (multiplicity).
Stock Turnover Ratio make an attempt to study how many number of times the stock is
converted into cost of goods sold or sales in an accounting year. It is expressed in times like 5
times or 7 times etc.
4. Fraction: Sometimes the ratios are expressed as fractions.
Example : The ratio of fixed assets to share capital is ¾ or 0.75 or 2/3 or 0.67
5. Sometimes the ratios are expressed in terms of days.
Example : Average collection period, Average payment period always expressed in days or
months like 75 days or 2.5 months etc.
Ratio Analysis:
Ratio analysis act as the most important tool to the management to analyse the financial
statements. A single accounting figure of financial statements may not communicate any
meaningful information. Accounting information becomes very useful when it is expressed as a
relative to another figure. The ratio analysis is a process of determining and interpreting the
relationship between the items of financial statements to provide a meaningful understanding of the
performance and the financial position of an enterprise.
“Ratio analysis is a study of relationship among various financial factors in a business” --- Myers.
Thus, the ratio analysis is the process of determining and interpreting the relationship between
the items of financial statements called Profit and Loss A/c and Balance Sheet. The fundamental
objective is to provide meaningful relationship to understand the financial information. Ratio
analysis simplifies, summarizes and rearranges the accounting information of financial statements.
OBJECTIVES OF RATIO ANALYSIS:
Computation of Financial ratios is treated as true test of the profitability, efficiency and financial
soundness of the firm. The following are the objectives of ratio analysis
(1) Measuring the profitability: Profitability means the profit earning capacity of the business.
Profitability can be measured by Gross Profit ratio, Operating Profit ratio, Net Profit ratio,
Expenses ratio and Other Ratios. If these ratios showed a declining trend, the management
should take corrective measures.
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(2) Measuring financial position: Short-term and long-term financial position of the business
can be measured by calculating the liquidity and solvency ratios. If the short-term or long-
term financial position is not good, then the management will take corrective measures.
(3) Determining operational efficiency: Operational efficiency of the business can be
determined by calculating operating / activity ratios.
(4) Facilitating comparative analysis: The present performance can be compared with the past
performance to find out the reasons. The comparison of performance of the firm with the
performance of other competitive firms is possible.
(5) Indicating overall efficiency: The Profit and Loss Account shows the amount of net profit
earned and the Balance Sheet shows the amount of various assets, liabilities and capital. But
the profitability or overall efficiency can be measured by calculating the financial ratios.
(6) Budgeting and forecasting: Ratio analysis helps in financial forecasting and planning. Ratios
calculated for a number of years will work as a guide for the future.
UTILITIES, USES OR ROLE OF RATIO ANALYSIS
To the management
1. Ratio analysis helps the management to assess the performance of the business concern. It
will improve the management functions such as planning, coordination and control.
2. Some ratios are calculated for a number of years. These are work as guide to the
management. Meaningful conclusions can be drawn from these ratios.
3. The financial strengths and weaknesses of the business concern can be ascertained through
the financial ratios.
4. If financial position is weak, better co-ordination is formulated by the top management for
improving the efficiency.
5. Standard norms or ideal values of ratios can be used for finding variations or deviations.
Such variations can be found by comparing the actual with the standards so as to take a
corrective action at the right time.
To Shareholders / Investors:
1. The safety of investment can be estimated by the shareholders with the help of ratios.
2. Long term solvency ratios ensure the growth of the business concern and the possibility of
getting back their investments.
To Creditors:
1. Creditors can assess the financial position with the accounting ratios, thereby they can
ascertain whether the payment can received in time or not.
2. When the short-term solvency ratios are in satisfactory condition, the creditors can extent
the credit facilities to the business enterprise.
To Employees:
1. The ratio analysis is the most useful tool to the employees. It helps in assessing the financial
position to know whether they will get wages, salaries and perquisites in time.
2. They can study the growth of the firm through long-term solvency ratios, to decide to
continue or shift to other organization.
ADVANTAGES OF RATIO ANALYSIS:
1. Forecasting and Planning: The trend in costs, sales, profits and other facts can be computed
with the help of ratios of relevant accounting figures of last few years. This trend analysis
may be useful for forecasting and planning the future business activities.
2. Budgeting: Budget means an estimate of future activities on the basis of past experience.
Accounting ratios help to estimate budgeted figures.
3. Measures Operating Efficiency: With the help of ratio analysis, the degree of efficiency in the
form of the management and utilization of its assets or resources will be assessed. A set of
activity ratios measures the operational efficiency.
4. Communication: Ratios are effective means of communication and play a vital role in
informing the position and progress made by the business concern to the owners or the other
interested parties.
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5. Inter-firm Comparison: Comparison of performance of two or more firms through the ratio
analysis is possible. Thereby the inefficient firms can adopt suitable measures for improving
their efficiency. The best way of inter-firm comparison is to compare the relevant ratios of the
organization with the average ratios of the industry.
6. Study of Liquidity Position: Ratio analysis helps to assess the liquidity position i.e., short-
term debt paying ability of the firm. Liquidity ratios reveal the ability of the firm to pay to the
creditors and other suppliers of short-term loans.
7. Assessing of Long-term Solvency Position: Ratio analysis is also used to assess the long-term
debt-paying capacity of the firm. Long-term solvency position of the organization will be
evaluated by calculating the leverage ratios like Debt-Equity Ratio, Proprietary Ratio, Fixed
Assets Ratio etc.
8. Assessing of Overall Profitability: The overall profitability of the organization can be
assessed with the help of profitability ratios. The profitability ratios provide meaningful
information about the reasonable return on equity, return on capital employed, operating
profit of the business.
9. Helps in Decision-making:
Ratio analysis helps the management in decision making process. Accounting ratios provide
useful information to take decisions like whether to supply goods on credit to the firm,
whether bank loans will be made available etc.
10. Simplification of Financial Statements:
Simplification of accounting information provided by the financial statements is the primary
objective of ratio analysis. Ratio analysis simplifies the accounting information.
LIMITATIONS OF RATIO ANALYSIS:
1. Limitations of Financial Statements:
Ratios are calculated with the help of the information available in the financial statements.
But financial statements suffer from a number of limitations, therefore, the quality of ratio
analysis is not reliable.
Historical Information:
Financial statements always provide historical information. They do not reflect current
conditions. The ratios calculated with such historical information may not useful in predicting
the future.
2. Different Accounting Policies:
Different accounting policies regarding valuation of inventories, charging of depreciation etc.
make the accounting data and accounting ratios of two firms not-comparable.
3. Lack of Standard of Comparison:
No fixed standards can be laid down for ratios. For example, current ratio is said to be ideal if
Current Assets are twice the Current Liabilities. But this conclusion may not be justifiable in
case of those concerns which have adequate arrangements with their bankers for providing
funds when they require, it may be perfectly ideal if the Current Assets are equal to or slightly
more than the Current Liabilities.
4. Quantitative Analysis:
Ratios are tools of quantitative analysis only and qualitative factors are ignored while
computing the ratios. All the qualitative factors, though they have greater impact on the
profitability, are not considered.

5. Window-Dressing:
The term ‘window-dressing’ means presenting the financial statements in such a way to show
a better position than what it actually is. Ratios computed from such balance sheet cannot be
used for knowing the financial position of the business.
6. Changes in Price Level:
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Fixed assets are always showed at cost in the position statement. Hence, it does not consider
the changes in price level.
Classification of Accounting Ratios
Classification of accounting ratios depends upon the objectives for which they are calculated.
Neither the number of ratios are limited nor the purpose of the ratio analysis is uniform. Therefore,
the set of ratios required will depends upon the purpose of analysis, the type of data available to the
analysis etc. The accounting ratios are classified on the following basis.
TRADITIONAL CLASSIFICATION:
The traditional classification is on the basis of data of the financial statements. Under this
classification the ratios are classified into the following
Traditional Classification of Ratios

Balance Sheet Ratios Profit & Loss A/c Ratios Composite OR Mixed
OR OR OR
Position Statement Ratios Revenue / Income Statement Ratios Inter-Statement Ratios

I. Balance Sheet Ratios: The ratios which are calculated with the help of information
available in the Balance Sheet are called Balance Sheet Ratios. These ratios also known as
Position Statement Ratios. In other words, the Balance Sheet Ratios measure relationship
between various items of the balance sheet. The fundamental objective of these ratios is to
study the financial position of the organization both in short-term and long-term. The
following are the important balance sheet ratios
a. Current Ratio
b. Liquid Ratio / Acid Test Ratio / Quick Ratio
c. Absolute Liquid Ratio / Super Quick Ratio
d. Debt – Equity Ratio
e. Proprietary Ratio
f. Capital Gearing Ratio
g. Fixed Assets Ratio
h. Total Assets to Debt Ratio
II. Profit & Loss A/c Ratios: The ratios calculated with the help of information available in
the Profit and Loss A/c are called Profit and loss account ratios. These are also known as
Revenue ratios or Income statement ratios. The basic objective of calculation of these
ratios is to measure the operational efficiency. Therefore, these ratios are also known as
operational ratios. These ratios establish the relationship between operating income and
operating expenses. The most commonly used profit and loss account ratios are as follows
a. Gross Profit Ratio
b. Operating Ratio
c. Operating profit ratio
d. Net profit ratio
e. Expenses ratio
f. Interest coverage ratio.
III. Composite or Mixed Ratios: The ratios calculated with the help of information available
in both the financial statements i.e., Profit and Loss A/c and Balance Sheet are called
composite or mixed or inter-statement ratios. In other words, one component of a ratio will
be taken from the Profit and Loss A/c and another from the balance sheet. Therefore, these
ratios measure the relationship between the operational items and the items of balance sheet.
The following are the most commonly used composite ratios.
a. Stock Turnover Ratio
b. Debtors Turnover Ratio
c. Creditors Turnover Ratio
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d. Fixed Assets Turnover Ratio

e. Return on Equity
f. Return on Shareholders’ Funds
g. Return on Capital Employed
h. Capital Turnover Ratio
i. Working Capital Turnover Ratio
j. Return on Total Assets.
k. Total Assets Turnover Ratio.

FUNCTIONAL CLASSIFICATION OF RATIOS:

On the basis of functions/tests or according to the needs of the users of financial statements
the ratios are classified into Liquid Ratios, Profitability Ratios, Activity Ratios and Solvency Ratios.
The classification of ratios according to the purpose of calculation is known as functional
classification.
Functional Classification of Ratios

Liquidity Ratios Solvency Ratios Activity/ Turnover Ratios Profitability Ratios

I.Liquidity Ratios: The ratios calculated to measure the short-term solvency position of the firm are
called liquidity ratios. The term liquidity means, the firm’s ability to meet its short-term or
current obligations. In other words, liquidity means short-term solvency. Liquidity ratios
assess the firm’s capacity to repay its short-term or Current Liabilities. These ratios also
assess whether the working capital has been efficiently utilized or not. Liquidity ratios
adjudge the short-term solvency i.e., whether the Current Assets are sufficient to meet its
short-term obligations. The following are the most important short-term solvency or liquidity
ratios.
1. Current Ratio: Current Ratio is also known as working capital ratio. Current Ratio is the
best CURRENT ASSETS  CURRENT LIABILITIES
The assets which can be convertible
The liabilities
into cash
which
within
are to
onebeoperating
met or paid
period
within
areone
called
operating
currentperiod
assets.or cycle. T
Stock/ inventory Sundry Creditors
Sundry debtors Bills payable
Bills receivable Bank overdraft
Cash at bank Provision for taxation
Cash in hand Proposed dividends
Short-term loans&advances O/s expenses
Accrued incomes Incomes received in advance
Prepaid expenses
measure of short-term solvency. This is the most commonly used short-term liquidity
position ratio. The components of Current Ratio are Current Assets and Current Liabilities. It
measures whether Current Assets are sufficient to meet the Current Liabilities or not. In
other words, it measures the relationship between Current Assets and Current Liabilities.
Current Ratio is calculated with the help of the following formula.
Current Ratio Current Assets
= Current Liabilities
The standard norm of Current Ratio is 2:1. In other
words, for every one rupee of Current Liabilities the firm should maintain two rupees of current
assets. The Current Ratio should be neither too high nor too low, both have adverse effect on the
operations. Too high Current Ratio implies that heavily invested in Current Assets which is not a
good sign and not desirable for the firm point of view. But it is very desirable from the creditor
point of view. This implies improper or underutilization of resources. On the other hand, too low
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ratio is also not desirable. It implies the firm is facing risk and the firm is not able to pay its
short-term obligations.
2. Quick QUICK ASSETS  QUICK LIABILITIES
Ratio: The assets which can be quickly convertible intoThe
cash.
liabilities
These include
which are
thetofollowing.
be met within short period
Quick Sundry debtors Sundry Creditors
Ratio is Bills receivable Bills payable
also known Cash at bank Provision for taxation
as Liquid Cash in hand Proposed dividends
Ratio or Short-term loans&advances O/s expenses
Acid Test OR Incomes received in advance
Quick assets = Current Assets – Stock- Prepaid expenses – Accrued incomesOR
Ratio. This
Quick liabilities = Current Liabilities - Bank overdraf
ratio is
calculated by considering the quick assets and the quick liabilities or Current Liabilities. It
measures the relationship between the quick assets and the quick liabilities or Current
Liabilities. The Quick Ratio is said to be more conservative measure of short-term liquidity
position than the Current Ratio as it considers the most liquid assets. This ratio is an indicator
of short-term solvency of the company. The standard norm of Quick Ratio is 1:1. A high
liquid ratio indicates that the firm is quite able to pay-off its current obligations without any
problem. A low liquid ratio indicates the firm is not in a position to meet its current
obligations i.e., the firm’s liquidity position is not sound enough. It is expressed as follows:
Quick Ratio Quick Assets Quick Assets
OR
= Current Liabilities Quick Liabilities
3. Absolute Liquid Ratio: Absolute Liquid ratio is also known as Super Quick Ratio or Cash
Ratio. This ratio measures the absolute liquidity of the business. It considers only cash and
near cash items available within the firm. This ratio is calculated as follows:
Absolute Liquid Ratio Cash in hand + Cash at Bank + Marketable Securities
= Current Liabilities
An ideal absolute liquid ratio is 1:2 or 0.5:1. It implies 50 paise cash and near cash items are
to be maintained against the each rupee of Current Liabilities.
1) From the following particulars, calculate liquidity ratios.
Current investments Rs.40,000, Inventories Rs.5,000, Trade receivables Rs.2,000, Short-
term borrowings Rs.20,000, Trade payables Rs.2,500, Prepaid expenses Rs.2,000, Short-
term provisions Rs.3,000, other Current Liabilities Rs.5,000, Short-term loans and advances
Rs.4,000, Tangible fixed assets Rs.1,00,000, Cash and cash equivalents Rs.10,000, Advance
tax Rs.5,000.
2) Following is the balance sheet of Brama Co Ltd as on 31st March 2020. (Rs.000)
Liabilities Rs. Assets Rs.
Share capital 250 Land and buildings 175
5% Debentures 100 Plant and machinery 125
Bank loan 75 Cash at bank 40
Creditors 40 Debtors 45
Bills payable 25 Bills receivables 52
Outstanding expenses 2 Stock 50
Prepaid expenses 5
0 0
Calculate a) Current Ratio, b) Acid Test Ratio, c) Absolute Liquid Ratio.
3) Calculate
a) If Current Ratio is 2.5 times and Current Liabilities are Rs.20,000 calculate current assets.
b) If Current Assets are Rs.1,20,000 and Current Ratio is three times, calculate Current
Liabilities.
c) If Current Liabilities are Rs.30,000, Current Ratio is 2.25 times and Liquid ratio is 1.25
times, Calculate current assets, liquid assets and stock in trade.
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d) A limited company has Current Ratio of 3.5 and Acid test ratio of 2:1. If inventory is
Rs.30,000. Find out its total Current Assets and Current Liabilities.
II. SOLVENCY RATIOS:
Solvency ratios are also known as leverage ratios. Leverage ratios are the ratios which
measures the long-term stability and structure of the firm. The term solvency refers the
financial capability of the firm to repay its outside liabilities which are long-term in nature.
The term long-term liabilities include debentures, loans from financial institutions and other
long-term borrowings from the outsiders. To measure the long-term solvency position the
leverage ratios like Debt-equity ratio, Proprietary ratio, Fixed assets ratio, Interest coverage
ratios etc., are calculated. The following are the objectives
i) To ascertain the capability of the firm in honour the long-term obligations (repayment of
debt and interest thereon).
ii) To ensure long-term financial stability of the business.
iii) To measure the relationship between the internal and external equity.
1) Debt – Equity Ratio: This ratio is also LONG-TERM DEBT SHAREHOLDERS’ FUNDS
known as External – Internal Equity Debentures Equity share capital
Ratio. It measures the relationship Long-term loans Preference share capital
between the external debt and the Long-term provisions Reserves and surplus
internal equity. In other words, it studies (-) Fictitious assets
the relationship between the borrowed OR
CAPITAL EMPLOYED Non-Current Assets +
capital and the owned capital. It is
Shareholders’ funds +
calculated to judge the long-term Long-term debts Current Assets –
Non-Current Liabilities – Current Liabilities
financial policy of the business. It
consider the components of capital structure. The ideal debt equity ratio as per the first
formula is 2:1 and as per the second formula it is 2:3. The high debt equity ratio indicates
less protection to the creditors and vice versa. But a higher debt equity ratio is not considered
as good for the business point of view. A low ratio is not desirable in the shareholders point
of view. It is expressed as
Long-term debt
Debt – Equity Ratio =
Shareholders’ funds
OR
Long-term debt
Debt – Equity Ratio =
Capital employed
2) Fixed Assets Ratio or Fixed Assets to Capital Employed Ratio: This ratio study the
relationship between the fixed assets and the long-term funds. It explains whether the firm
has raised adequate long-term funds to meet its fixed assets requirements. The ideal fixed
assets ratio is 0.67. If the ratio is less than one it is good for the firm. It is expressed as
Fixed Assets Fixed Assets
Ratio= Capital employed
3) Total Assets to Debt Ratio: This ratio measures the relationship between the total assets and
the debt. The ideal ratio is 2:1. It explain the coverage of total assets by the total debt of the
company.
Total Assets Total Assets
Ratio= Debt
4) Proprietary Ratio: The proprietary ratio measures the relationship between the proprietor
funds and the total assets. It study the proportion of shareholders’ funds in financing the
assets. The higher the ratio the more safety will be the creditors. As per the creditors point of
view the ideal ratio will be more than 50%. If the ratio is less than 50%, there will be risk for
the accounts payable. It is expressed as
Proprietary Shareholders’ funds
Ratio= Total Assets
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5) Capital Gearing Ratio: The ratio calculated to measure the relationship between the fixed
interest-bearing securities and the shareholders’ funds is called capital gearing ratio. It is
expressed as follows
Capital Gearing Fixed interest-bearing securities
Ratio= Equity shareholders’ funds
Fixed interest-bearing securities = Preference Share Capital + Debentures
Equity shareholders’ funds = Equity Share Capital + Reserves and Surplus – Fictitious
Assets – Non-business assets
If the capital gearing ratio is more than one, the firm is said to be highly geared up. The high
ratio indicates the major portion of the capital structure is contributed by the fixed interest-
bearing securities. When this ratio is exactly one, the firm is said to be evenly geared. If it is
less than one the firm is said to be low geared. However, too much dependence on debt
capital is not desirable as they do not share business risk.
6) Interest Coverage Ratio: This ratio is EBIT (Operating profit)
calculated to know the coverage or cushion Sales – Variable cost – Fixed cost
available for fixed interest payment on debt. It OR
measures the relationship between the net profit Profit after tax + Tax + Debenture interest
before interest and taxes (PBIT) / earnings before interest and taxes (EBIT) and the amount of
interest payable on debt. It is calculated as follows
Interest Coverage Ratio PBIT / EBIT
= Interest
The high ratio indicates that the business is stable and low ratio indicates that there is a
business risk. In other words, a high interest coverage ratio implies that an enterprise can
easily meet its interest obligations and a low ratio indicates excessive use of debt or inefficient
operations.

4) The following information is extracted from the books of XYZ Ltd.

Long-term borrowings Rs.2,00,000, Long-term provisions Rs.1,00,000, Current Liabilities
Rs.50,000, Non-Current Assets Rs.3,60,000, and Current Assets Rs.90,000. Calculate a)
Debt-Equity Ratio, b) Total assets to Debt Ratio, c) Proprietary Ratio and d) Fixed assets to
debt ratio.
5) The following is the balance sheet o f a limited company as on 31 st March 2020 (SVU May
2019)
Liabilities Rs. Assets Rs.
Share capital 2,00,000 Land and buildings 1,40,000
Profit and loss A/c 30,000 Plant and machinery 3,50,000
General reserve 40,000 Stock in trade 2,00,000
12% Debentures 4,20,000 Sundry debtors 1,00,000
Sundry creditors 1,00,000 Bills receivables 10,000
Bills payables 50,000 Cash at Bank 40,000
8,40,000 8,40,000
Calculate: a) Current Ratio, b) Quick Ratio, c) Debt-equity Ratio, d) Proprietary Ratio
6) The following balance sheet of XYZ Co Ltd for the year ending 31 st December 2020 was as
follows
Liabilities Rs. Assets Rs.
Share capital (Rs.10 per 1,50,000 Goodwill 90,000
share)
Reserves 30,000 Fixed assets 2,10,000
Profit and loss A/c 45,000 Inventory 45,000
General loans 1,20,000 Advances 15,000
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Creditors 75,000 Cash balance 45,000

Provision for taxation 30,000 Bank balance 45,000
4,50,000 4,50,000
Sales during the year Rs.8,40,000
Calculate the following ratios (a) Current Ratio (b) Liquid Ratio (c) Debt Equity Ratio (d)
Fixed assets to current assets ratio (SVU May 2020)
7) From the following balance sheet of Popular & Co as on 31-3-2020. Calculate (a) Liquid
Ratio, (b) Current Ratio, (c) Fixed Assets Ratio and (d) Debt-Equity Ratio.
Liabilities Rs. Assets Rs.
Equity share capital 1,00,000 Fixed assets 1,80,000
9% Preference share capital 50,000 Stores 25,000
8% Debentures 50,000 Debtors 55,000
Reserves 20,000 Bills receivable 3,000
Creditors 45,000 Bank 2,000
2,65,000 2,65,000
8) Following are the liabilities and assets of a limited company on 31st March 2020.
Liabilities Rs. Assets Rs.
Share capital 6,00,000 Land and buildings 4,00,000
General reserve 1,20,000 Plant and machinery 10,70,000
Profit and Loss A/c 90,000 Stock 4,50,000
10% Debentures 12,60,000 Debtors 4,50,000
Sundry creditors 3,00,000 Bills receivable 30,000
Bills payable 1,50,000 Cash at bank 1,20,000
25,20,000 25,20,000
Calculate: a) Current Ratio, b) Quick Ratio, c) Debt-equity Ratio, d) Proprietary Ratio and
e) Capital Gearing Ratio.
9) Following is the balance sheet of a Ramya Ltd on 31-12-2020 (SVU Sep 2020)
Liabilities Rs. Assets Rs.
Capital 5,00,000 Buildings 3,00,000
Reserve 75,000 Plant 6,00,000
Profit and loss A/c 50,000 Stock 3,00,000
12% Debentures 5,75,000 Debtors 1,50,000
Creditors 1,75,000 Bills receivable 90,000
Bills payable 1,25,000 Cash at bank 60,000
15,00,000 15,00,000
Calculate: a) Current Ratio, b) Quick Ratio, c) Debt-equity Ratio, d) Proprietary Ratio
10) The balance sheet of XYZ Ltd for the year ended 31-3-2020 is given below.
Liabilities Rs. Assets Rs.
Equity share capital 5,00,000 Land and buildings 1,00,000
Preference share capital 2,00,000 Machinery 4,00,000
General reserve 1,00,000 Furniture 50,000
Secured loans 3,00,000 Inventory 3,00,000
Sundry creditors 1,00,000 Sundry debtors 3,00,000
Cash and bank balance 50,000
12,00,000 12,00,000
Calculate : a) Current Ratio, b) Proprietary Ratio, c) Debt-Equity Ratio and d) Capital
Gearing Ratio.
III. TURNOVER RATIOS:
Turnover Ratios are also known as Activity Ratios or Performance Ratios or Velocity Ratios.
The term turnover means sales. All business activities are revolved around sales. Therefore,
all the Turnover Ratios are calculated to sales or cost of goods sold. Turnover Ratios are
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always expressed in times. The greater the ratio more will be efficiency of assets usage. The
lower ratio indicates underutilization of resources. The organization should plan for the
efficient use of the assets or resources to improve the overall efficiency. The following are
the important Turnover Ratios:
1) Capital Turnover Ratio or Sales to Capital Employed Ratio: The ratio calculated to
measure the relationship between the capital employed and the turnover or sales is called
Capital Turnover Ratio. This ratio indicates the firm’s ability to convert the capital employed
into sales. The higher the ratio is, the more efficient is the utilization of owners’ funds and
long-term borrowings i.e., capital employed. It is calculated with the following formula.
Capital Turnover Ratio Sales
= Capital employed
Capital employed = Shareholders’ funds + Long-term liabilities
2) Fixed Assets Turnover Ratio (or) Sales to Fixed Assets Ratio: The ratio which measures
the relationship between the sales and the fixed assets is known as Fixed Assets Turnover
Ratio. It reveals the efficiency of assets usage. The higher the efficiency of usage of assets
more will be sales and vice versa. This ratio expresses the number of times the fixed assets
are being turned-over in an accounting period. It is calculated in the following manner.
Fixed Assets Turnover Ratio Sales
= Net Fixed Assets
Net fixed assets = Fixed assets at cost – Depreciation
3) Working Capital Turnover Ratio (or) Sales to Working capital Ratio:
The ratio constructed to study the relationship between the working capital and the sales is
known as Working Capital Turnover Ratio. This ratio shows the number of times the
working capital being converted into sales in an accounting year. The higher the ratio is, the
more will the profits. It also measures the efficiency of use of working capital. Too high
ratio indicates overtrading and it may be caused to financial problems. But too low ratio
indicates that the working capital is not efficiently utilized. It is expressed as under
Working Capital Turnover Ratio Sales
= Net working capital
Net working capital = Current Assets – Current Liabilities
4) Total Assets Turnover Ratio (or) Sales to Total Assets Ratio: This ratio measures the
efficiency of totals assets usage. It measures the efficiency of the management, how many
number of times the total assets are turned over during the accounting period.
Total Assets Turnover Ratio Sales
= Total Assets
Total assets = Fixed Assets + Current assets.
5) Inventory Turnover Ratio: Inventory Turnover Ratio is also known as Stock Turnover
Ratio. This ratio establishes the relationship between the average inventory/ stock and the
cost of goods sold. It measures how speedily the stock is converted into sales or cost of
goods sold. In other words, how many number of times the finished stock to turned over in
an accounting period. The higher the ratio is the more will be the sales and profits. The high
ratio is desirable. Low ratio is not desirable as it accumulates the stock of finished goods and
becomes obsolete. This will lead to wasteful investment in stock. Stock Turnover Ratio is
expressed as follows.
Stock Turnover Ratio Cost of goods sold
= Average investment
Cost of goods sold = Sales – Gross profit
OR
Cost of Goods sold = Opening stock + Purchases + Direct expenses + manufacturing
expenses – Closing stock.
Opening stock + Closing stock
Average investment =
2
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6) Debtors Turnover Ratio: The ratio established to measure the relationship between the
credit sales and the average debtors or average accounts receivable is called Debtors Turnover
Ratio. It indicates the number of times that the debtors to turned over in each year on an
average. The high ratio is desirable for the business as it generates regular cash inflow. The
following is the formula
Debtors Turnover Ratio Credit Sales
= Average debtors (Accounts Receivables)
Average debtors Opening debtors + Closing debtors
= 2
In absence of the credit sales and opening and closing debtors, this ratio will be calculated
with the following formula.
Debtors Turnover Ratio Sales
= Debtors (Accounts Receivables)
Debtors’ velocity or Average Collection Period: This is the ratio which measures the
average number of days or months it takes to collect the amount from the debtors. It indicates
on an average that the credit sales are pending or uncollected by the organization.
Debtors’ Velocity Number of days in a year (OR Debtors
X 365
= Debtors Turnover Ratio ) Credit sales
The debtors’ velocity between 45 days to 60 days should be considered as normal.
7) Creditors Turnover Ratio: The ratio which establishes the relationship between the credit
purchases and the average creditors or average accounts payable is called Creditors Turnover
Ratio. It indicates the number of times that the creditors to turned over in an accounting year
on an average. The low ratio is desirable for the business. The following is the formula
Creditors Turnover Ratio Credit Purchases
= Average Creditor (or) Accounts payables
Average Creditors Opening Creditors + Closing Creditors
= 2
In absence of credit purchases and opening and closing creditors, total purchases and closing
creditors will be considered
Creditors Turnover Ratio Purchases
= Creditors (Accounts payable)
Creditors Velocity (or) Average Payment Period: This is the ratio which measures the
average number of days it takes to pay the amount to creditors. It indicates on an average, the
credit purchases are pending or unpaid by the organization.
Creditors’ Velocity Number of days in a year (OR Creditors
X 365
= Creditors Turnover Ratio ) Credit purchases
The creditors’ velocity between 60 to 90 days should be considered as normal.
8) The following is the balance sheet of Sai Srinivas Ltd as at 31st March 2020.
Liabilities Rs. Assets Rs.
Equity share capital 5,00,00 Land and buildings 3,15,000
0
Reserves 1,40,00 Marchinery 2,25,000
0
Surplus account 1,00,00 Stock 2,25,000
0
Bills payable 50,000 Sundry debtors 60,000
Other Current 1,35,00 Cash 50,000
Liabilities 0
Bills receivable 50,000
9,25,00 9,25,000
0
 12

Calculate a) Sales to Capital employed, b) Sales to Fixed assets, c) Sales to Working capital,
d) Sales to Total assets, e) Stock Turnover Ratio, f) Receivable Turnover Ratio, and g)
Creditors Turnover Ratio. The following additional information is available.
a) Credit sales Rs.12,75,000, b) Cost of goods sold Rs.7,60,000, c) Average Inventory
Rs.1,90,000, d) Average Accounts receivable Rs.1,30,000, e) Average accounts payable
Rs.1,20,000, and f) Purchases Rs.9,60,000.
9) The following are the extracts from the financial statements of Sravya Ltd as on 31 st March
2019 and 2020 respectively.
Items 31-3-2019 (Rs.) 31-3-2020 (Rs.)
Stock 10,000 25,000
Debtors 20,000 20,000
Bills receivable 10,000 5,000
Advances 2,000 ---
Cash in hand 18,000 15,000
Bills payable 15,000 20,000
Creditors 25,000 30,000
Bank overdraft --- 2,000
9% debentures 5,00,000 5,00,000
Sales for the 3,50,000 3,00,000
year
Gross profit 70,000 50,000
You are required to compute for both the years a) Current Ratio, b) Liquid Ratio, c) Stock
Turnover Ratio, d) stock to working capital ratio and e) No. of days outstanding of debtors.
10) The following are the extracts from the financial statements of Saranya Ltd as on 31 st March
2019 and 2020 respectively.
Items 31-3-2019 (Rs.) 31-3-2020 (Rs.)
Stock 20,000 50,000
Debtors 40,000 40,000
Bills receivable 20,000 10,000
Advances 4,000 ---
Cash in hand 36,000 30,000
Bills payable 30,000 40,000
Creditors 50,000 60,000
Bank overdraft --- 4,000
9% debentures 10,00,000 10,00,000
Sales for the 7,00,000 6,00,000
year
Gross profit 1,40,000 1,00,000
You are required to compute for both the years a) Current Ratio, b) Liquid Ratio, c) Stock
Turnover Ratio, d) stock to working capital ratio and e) No. of days outstanding of debtors.
11) The following are the extracts from the financial statements of Swetha Ltd as on 31 st March
2019 and 2020 respectively.
Items 31-3-2019 (Rs.) 31-3-2020 (Rs.)
Stock 15,000 37,500
Debtors 30,000 30,000
Bills receivable 15,000 7,500
Advances 3,000 ---
Cash in hand 27,000 22,500
Bills payable 22,500 30,000
Creditors 37,500 45,000
Bank overdraft --- 3,000
 13

9% debentures 7,50,000 7,50,000

Sales for the 5,25,000 4,50,000
year
Gross profit 1,05,000 75,000
You are required to compute for both the years a) Current Ratio, b) Liquid Ratio, c) Stock
Turnover Ratio, d) stock to working capital ratio and e) No. of days outstanding of debtors.
12) The following are the extracts from the financial statements of Krishna Ltd as on 31 st March
2019 and 2020 respectively.
Items 31-3-2019 (Rs.) 31-3-2020 (Rs.)
Stock 40,000 1,00,000
Debtors 80,000 80,000
Bills receivable 40,000 20,000
Advances 8,000 ---
Cash in hand 72,000 60,000
Bills payable 60,000 80,000
Creditors 1,00,000 1,20,000
Bank overdraft --- 8,000
9% debentures 20,00,000 20,00,000
Sales for the 14,00,000 12,00,000
year
Gross profit 2,80,000 2,00,000
You are required to compute for both the years a) Current Ratio, b) Liquid Ratio, c) Stock
Turnover Ratio, d) stock to working capital ratio and e) No. of days outstanding of debtors.
IV. PROFITABILITY RATIOS:
The profitability or financial performance is mainly concerned with the income statement
(i.e., profit and loss account). There is a close relationship between the profits earned and the
efficiency of utilization of resources.
The ratios established with a view to measure the operational efficiency of the management
are called profitability ratios. These ratios measure the capacity of the firm. These ratios
reflect the final result of the operations. The profitability ratios are classified into a)
Profitability ratios based on sales, and b) Profitability ratios related to overall return on
investment.
A. Profitability ratios based on Sales: The following are the commonly used profitability
ratios based on sales.
a) Gross Profit Ratio: Gross Profit Ratio establishes the relationship between the sales and
the gross profit. It is the ratio of gross profit to net sales and expressed as a percentage. It
reveals the amount of gross profit for each rupee of sale. The higher the ratio, the greater
will be the margin and vice-versa. The firm should maintain adequate amount of gross
profit to meet the operating expenses, dividends, return on proprietary funds and build up
the reserves. It should be used as an important test to measure the profitability and the
managerial efficiency. 20% to 30% of Gross profit ratio may be considered as normal.
Gross Profit
Gross Profit Ratio = X 100
Net Sales
b) Operating Ratio: Operating Ratio measures the relationship between the operating
expenses / operating cost and the sales. The term operating expenses include cost of
goods sold and other operating expenses such as administrative expenses, selling expenses
and distribution expenses. All non-operating expenses or non-business expenses are
excluded. The lower the ratio is the higher is the profitability. 80% to 90% may be
considered as normal.
Operating Ratio Operating Expenses
X 100
= Net Sales
 14

Cost of Goods Sold + Other Operating

Operating Ratio
Expenses X 100
=
Net Sales
Cost of goods sold = Opening stock + Purchases + Manufacturing expenses + Direct
expenses – Closing stock
Other operating expenses = Administrative expenses + Selling and Distribution expenses
+ Depreciation.
c) Operating Profit Ratio: The ratio established to study the relationship between the profit
before interest and tax (EBIT) and the sales. In order to arrive at EBIT all non-operating
incomes and non-operating expenses are excluded. The higher the ratio is, the more will
be the profits. It is expressed as follows.
Operating profit or
Operating Profit Ratio
EBIT X 100
=
Net Sales
Operating profit = Sales – Cost of Goods sold – Operating expenses
Or
Operating profit = Gross profit – Operating expenses
Or
Operating profit = Net profit + Non-operating expenses – Non-operating incomes
d) Net Profit Ratio: Net Profit Ratio is the ratio which measures the relationship between
the net profit after taxes and the net sales. This ratio measures the overall efficiency of the
management. The higher the ratio, the greater will be the profitability and return to the
shareholders. This ratio is used as a tool to control the cost of production. 10% and above
may be considered as the normal of this ratio. It is expressed as follows
Net Profit Ratio Net Profit After Taxes
X 100
= Net Sales
e) Expenses Ratio: These ratios are calculated to ascertain the relationship that exist
between the operating expenses and the net sales. The following are some expenses ratios
Cost of Goods Sold
Cost of Goods Sold Ratio = X 100
Net Sales
Administrative Expenses Ratio Administrative Expenses
X 100
= Net Sales
Selling & Distribution Expenses Ratio Selling and Distribution Expenses
X 100
= Net Sales

B. Profitability Ratios related to Overall Return on Investment (OR) Overall

Profitability Ratios
a) Return on Investment: Return on Investment is the most important ratio of all financial
ratios. It reveals the percentage of return on funds invested in the business by owners. It
shows the overall utilization of funds by the business enterprise. Return on Investment is
expressed as
Return on Investment Net Profit After Taxes
X 100
= Investment
The ROI is further classified into three categories such as Return on Capital Employed,
Return on Assets and Return on Equity or Net Worth.
1) Return on Capital Employed: Return on Capital Employed is a version of ROI. It is
also known as overall profitability ratio or ROI. The ratio which measures the
relationship between the Net Profit Before Interest and Taxes (EBIT) and the Capital
employed. It describes whether the amount of capital employed has been effectively used
or not. Therefore, it is considered as an index to the operational efficiency. The higher
 15

the ratio is, the more is the efficient use of capital employed, the better is the management
efficiency and profitability.
Net Profit before Interest and Taxes or
Return on Capital Employed = EBIT X 100
Capital employed
Net profit before interest and taxes (EBIT) = Net Profit After Taxes + Interest + Tax
Capital employed
Liabilities side approach Assets side approach
Particulars Rs. Rs. Particulars Rs.
Equity share capital xxx Non-Current Assets xxx
Preference share capital xxx Current Assets xxx
Reserves and surplus xxx Trade investments xxx
Non-Current Liabilities xxx xxx
Long-term provisions xxx Less: Current Liabilities xxx
xxx Capital employed xxx
Less: Fictitious Assets xxx
Non- trade investments xxx xxx
Capital employed xxx
2) Return on Shareholders’ Funds or Return on Net Worth: This ratio establishes the
relationship between the net profit after taxes and the shareholders’ funds. It shows
whether shareholders’ funds in the firm generates a reasonable return or not. It should be
higher than the ROI, otherwise, it implies that company’s funds have not been employed
profitably. It is also known as Return on Net Worth. It is expressed as follows:
Return on Shareholders’ Funds Net Profit After Taxes
X 100
= Shareholders’ Funds
Shareholders’ Funds = Equity share capital + Preference share capital + Reserves and
surplus – Fictitious assets – Non-business investments/ assets.
3) Return on Equity : This ratio explain the relationship between the Net Profit After
Taxes and preference share dividend and the equity shareholders’ funds. Return on
Equity measures the profitability on equity funds invested in the firm. It shows the
percentage of net profits to equity shareholders. This is calculated in the following way.
Net Profit After Taxes – Preference
Return on Equity Shareholders’ Funds
Dividend X 100
=
Equity Shareholders funds
Equity shareholders’ funds = Shareholders funds – Preference share capital
Or
Equity shareholders’ funds = Equity share capital + Reserves and surplus – Fictitious
assets – Non-business investments/ assets.
4) Return on Assets: This ratio is calculated to measure the profit after taxes against the
amount invested in total assets. It reveals whether the total assets utilized efficiently or
not.
Net Profit After
Return on Total Assets
Taxes X 100
=
Total Assets
Total assets = Non-Current Assets + Current Assets

13) The following is the income statement of Ajay Ltd for the year ended 31st March 2020
Particulars Rs.
Sales 5,00,000
Less : Cost of goods sold 3,00,000
Gross profit 2,00,000
Less: Operating expenses 1,20,000
 16

Operating profit 80,000

Add: Non-operating incomes 12,000
92,000
Less: Non-operating 4,000
expenses
Net profit before tax 88,000
Less: Tax 50% 44,000
Net profit after tax 44,000
Calculate: a) Gross Profit Ratio, b) Operating Ratio, c) Operating profit ratio and d) Net profit
ratio
14) From the following information calculate (SVU Sep 2020)
a) Gross profit ratio
b) Net operation profit ratio
c) Net profit ratio
Particulars Rs.
Net sales 5,00,000
Cost of goods sold 3,50,000
Selling expenses 12,000
Administration expenses 8,000
Interest income 5,000
Loss on the sale of old machine 12,000

15) From the following data, calculate (SVU May 2020)

a) Gross profit ratio
b) Return on total assets
c) Inventory turnover ratio
d) Working capital turnover ratio
Rs. Rs.
Sales 25,20,00 Current liabilities 6,00,000
0
Net profit 3,60,000 Cost of Goods sold 19,20,000
Fixed assets 14,40,00 Other current assets 7,60,000
0
Net worth 15,00,00 Inventory 8,00,000
0

16) Following is the profit & loss A/c of Electronic company for the year ending 31 st March 2020.
(Rs.000)
Particulars Rs. Particulars Rs.
To Opening stock 100 By Sales 560
To Purchases 350 By Closing stock 100
To Wages 9
To Gross profit c/d 201
0 0
To Administrative expenses 20 By Gross profit b/d 201
To Selling & Distribution expenses 89 By Interest on investments 10
To Non-Operating expenses 30 By Profit on sale of investment 8
To Net profit 80
219 219
Calculate : a) Gross Profit Ratio, b) Net Profit Ratio, c) Operating Ratio, d) Operating profit
ratio and e) Administrative Expenses Ratio
 17

17) Alpha Manufacturing Co has drawn up the following profit and loss account for the year
ending 31st March 2020.
Particulars Rs. Particulars Rs.
To Opening stock 26,000 By Sales 1,60,000
To Purchases 80,000 By Closing stock 38,000
To Wages 24,000
To Manufacturing Expenses 16,000
To Gross profit c/d 52,000
0 1,98,000
To Administrative expenses 22,800 By Gross profit b/d 52,000
To Selling & Distribution expenses 4,000 By Compensation for
To General expenses 1,200 Acquisition of land 4,800
To Value of furniture (loss by fire) 800
To Net profit 28,000
56,800 56,800
Calculate : a) Gross Profit Ratio, b) Net Profit Ratio, c) Operating Ratio, d) Operating profit
ratio and e) Administrative Expenses Ratio
18) The following are the summarized profit and loss account for the year ended 31st March 2020
Particulars Rs. Particulars Rs.
To Opening stock 10,000 By Sales 1,00,000
To Purchases 55,000 By Closing stock 15,000
To Gross profit c/d 50,000
1,15,000 1,15,000
To Operating expenses 18,000 By Gross profit b/d 50,000
To Selling expenses 12,000
To Net profit 20,000
50,000 50,000
You are required to calculate
i) Stock Turnover Ratio
ii) Gross profit ratio
iii) Net profit ratio (SVU May 2019)
19) The following are the summarized profit and loss account for the year ended 31 st December
2020, and balance sheet as on that date:
Particulars Rs. Particulars Rs.
To Opening stock 50,000 By Sales 5,00,000
To Purchases 2,75,000 By Closing stock 75,000
To Gross profit c/d 2,50,000
5,75,000 5,75,000
To Administrative expenses 75,000 By Gross profit b/d 2,50,000
To Interest 15,000
To Selling expenses 60,000
To Net profit 1,00,000
2,50,000 2,50,000
Balance sheet
Liabilities Rs. Assets Rs.
Capital 5,00,00 Land and buildings 2,50,000
0
Profit and Loss A/c 1,00,00 Plant and machinery 1,50,000
0
Creditors 1,25,00 Stock 75,000
0
 18

Bills payable 75,000 Sundry debtors 75,000

Bills receivable 62,500
Cash in hand & bank 87,500
Furniture 1,00,000
8,00,00 8,00,000
0
Additional information :
a) Average debts Rs.62,500
b) Average credit purchases Rs.4,00,000
You are required to calculate
i) Stock Turnover Ratio
ii) Current ratio
iii) Quick Ratio
iv) Operating ratio, and
v) Return on equity.
20) The following are the summarized profit and loss account for the year ended 31 st December
2020, and balance sheet as on that date: Trading and profit and loss account for the year ended
31st December 2020
Particulars Rs. Particulars Rs.
To Opening stock 5,80,000 By Sales 30,00,000
To Purchases 24,40,000 By Closing stock 6,20,000
To Gross profit c/d 6,00,000
36,20,000 36,20,000
To Sundry expenses 3,20,000 By Gross profit b/d 6,00,000
To Net profit 2,80,000
5,00,000 5,00,000
Balance sheet as on 31-12-2020
Liabilities Rs. Assets Rs.
Share capital 28,00,000 Net fixed assets 22,00,000
Reserves and surplus 2,00,000 Stock 6,20,000
Profit for the year 2,80,000 Debtors 3,20,000
Bank overdraft 1,40,000 Cash 8,80,000
Creditors 6,00,000
40,20,000 40,20,000
Calculate
i) Stock Turnover Ratio
ii) Current ratio
iii) Quick Ratio
iv) Gross profit ratio
v) Debtors Turnover Ratio
vi) Operating ratio, and
vii) Net profit to paid-up capital or Return on equity.
21) The following are the summarized profit and loss account for the year ended 31 st December
2020, and balance sheet as on that date: Trading and profit and loss account for the year ended
31st December 2020
Particulars Rs. Particulars Rs.
To Opening stock 11,60,000 By Sales 60,00,000
To Purchases 48,80,000 By Closing stock 12,40,000
To Gross profit c/d 12,00,000
72,40,000 72,40,000
To Sundry expenses 6,40,000 By Gross profit b/d 12,00,000
 19

To Net profit 5,60,000

12,00,000 12,00,000
Balance sheet as on 31-12-2019
Liabilities Rs. Assets Rs.
Share capital 56,00,000 Net fixed assets 44,00,000
Reserves and surplus 4,00,000 Stock 12,40,000
Profit for the year 5,60,000 Debtors 6,40,000
Bank overdraft 2,80,000 Cash 17,60,000
Creditors 12,00,000
80,40,000 80,40,000
Calculate
i) Stock Turnover Ratio
ii) Current ratio
iii) Quick Ratio
iv) Gross profit ratio
v) Debtors Turnover Ratio
vi) Operating ratio, and
vii) Net profit to paid-up capital or Return on equity.
22) The financial statements of a company contain the following information for the year ending
31st March 2020.
Particulars Rs.
Cash 1,60,000
Sundry debtors 4,00,000
Short-term 3,20,000
investments
Stock 21,60,000
Prepaid expenses 10,000
Total Current Assets 30,50,000
Current Liabilities 10,00,000
10% Debentures 16,00,000
Equity share capital 20,00,000
Retained earnings 8,00,000
st
Statement of profit for the year ended 31 March 2020
Particulars Rs.
Sales (20% cash sales) 40,00,000
Less: Cost of goods sold 28,00,000
Profit before interest and 12,00,000
tax
Less: Interest 1,60,000
Profit before tax 10,40,000
Less: Tax @30% 3,12,000
Profit after tax 7,28,000
You are required to calculate
a) Quick Ratio
b) Debt – Equity Ratio
c) Return on capital employed, and
d) Average collection period (assuming 360 days in a year)
23) From the following particulars, prepare the balance sheet of Dhan Dhanya Ltd.
Current ratio : 2
Working capital : Rs.4,00,000
Capital block (employed) to Current Assets : 3:2
 20

Fixed assets to turnover : 1:3

Cash sales / share capital : 1:2
Debentures /share capital :1:2
Stock velocity : 3 months
Creditors velocity : 2 months
Debtors velocity : 3 months
Gross profit ratio : 25% (to sales)
Reserve : 2.5% of turnover.
24) From the following information pertaining to ABC Ltd. prepare its trading, profit and loss
account for the year ended 31st March 2020 and summarized balance sheet as at that date.
Current Ratio =2.5
Quick Ratio (Quick assets/Quick liabilities) = 1.3
Proprietary ratio (Fixed assets /Proprietary funds) =0.6
Gross profit to sales ratio = 10%
Debtors velocity = 40 days
Sales = Rs.7,30,000
Working capital = Rs.1,20,000
Bank overdraft = Rs.15,000
Share capital = Rs.2,50,000
Closing stock = 10% more than opening stock , Net profit = 10% of proprietary funds.