INTER CA FINANCIAL MANAGEMENT

FINANCIAL ANALYSIS AND PLANNING

– RATIO ANALYSIS

THEORY SECTION

Meaning and Objective

Ratio is relationship between two variables to arrive at a meaningful result. Absolute
figures do not communicate any meaningful result and hence the need for ratios. Ratios
also help in comparing the performance of the company with that of its competitors as
well as with the company's own performance of last year.

Scope
In this chapter we will learn to:
(a) Calculate ratios from the given financial statements.
(b) Prepare Financial Statements from the given ratios.
(c) Calculate ratios and interpretation of the results.

Types of Ratios
All the ratios which we will learn under this chapter can broadly be classified into 3 types.
- Balance Sheet Ratios (numerator and denominator comes from Balance Sheet)
- Profit and Loss Ratios (numerator and denominator comes from P & L)
- Mixed Ratios (Numerator from P&L and denominator from Balance Sheet)

(A) BALANCE SHEET RATIOS

Balance Sheet Ratios are also known as Solvency ratios, as they test the solvency
(ability to pay) position of the company. These ratios are calculated in pure numbers
(2, 1.5, 3, etc.). The lenders and the creditors of the company generally use these
ratios.
We need to learn the following set of ratios under the head Balance Sheet Ratios
- Current Ratio
- Quick Ratio
- Super Quick Ratio

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- Stock to Working Capital Ratio

- Debt Equity Ratio
- Capital Gearing Ratio
- Proprietary Ratio

• Current Ratio

This Ratio indicates the ability of the company to pay its current liabilities with the help
of current assets. The standard Ratio is considered to be 2:1, which indicates that against
every 1 rupee of current liability the company is having 2 rupees of current assets to
pay its current liabilities as at the balance sheet date. It is a test of short term solvency
position. A very low ratio indicates unsatisfactory liquidity position & a very high ratio
shows inefficient utilization of funds.

• Quick Ratio

Quick Ratio indicates the ability of the company to pay the quick liabilities or immediate
liabilities with the help of Quick Assets. Quick Assets are those current assets which are
immediately convertible into cash without any loss of time or value. The standard ratio is
1:1, which indicates that against every 1 rupee of current liability the company is having
1 rupee of quick asset to repay its current liability. It is a measure of immediate solvency
position. Quick ratio is also known as Acid test ratio, Liquid Ratio or 1:1 Ratio.
Note: Many times Bank overdraft is deducted from current liabilities to arrive at quick
liabilities.

• Super Quick Ratio

This ratio is also known as Absolute Liquidity Ratio, Cash Ratio, Cash Reservoir Ratio.
This ratio indicates that against 1 rupee of current liability how cash and near cash is
available with the company to pay the current liability.

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• Stock to Working Capital Ratio

This ratio indicates the extent to which the working capital of the company is blocked in
the form of stock. Lower the ratio, higher is the liquidity with the company.

• Debt Equity Ratio

It indicates the proportion of funds belonging to the outsiders to that of the shareholders.
The standard ratio of 2 : 1 which indicates that against 1 rupee of shareholders fund
raised the company has raised 2 rupees from outsiders. Debt Equity ratio is a measure of
financial risk. Higher the Debt Equity ratio higher is the financial risk. Debt equity ratio is
also known as Financial Leverage or Banker’s Ratio.
Debt = Total Long Term Loans.
Equity = Equity Share capital + Preference Share Capital + Reserves and Surplus

• Capital Gearing Ratio

Equity Shareholders funds = Equity share Capital + Reserves and Surplus

This ratio is an extended version of Debt Equity Ratio. It indicates proportion of funds
entitled for fixed commitment (in the form of interest or dividend) to that of funds not
entitled for fixed commitment.
In absence of Preference Share capital, Capital Gearing Ratio = Debt Equity Ratio. The
word gearing indicates risk. High gearing indicate high risk and vice versa.

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• Proprietary Ratio

This ratio indicates the extent to which the total assets of the company are financed
by the shareholders. Higher the ratio better is the long term stability. Total Assets =
Fixed Assets + Long term Investment + Current Assets.

(B) MIXED RATIOS

In mixed ratio numerator comes from P&L and denominator from Balance Sheet.
Since the P&L figures are generally for the whole year and the Balance Sheet as at
a particular date, there exists a timing difference between the numerator and the
denominator and hence, to eliminate the timing difference we take average of the
Balance Sheet figure. Average = (opening balance + closing balance)/2. In absence
of information about the opening balances, closing balance sheet figures are to be
considered.

• Turnover Ratios
• Turnover Ratios are also known as Activity Ratios, Performance Ratios or
Velocity Ratios. These ratios are always computed in times and hence are also
known as Times Ratios (e.g. 4 times, 10 times, etc.)
• We have to learn the following ratios under this head
• Capital Employed Turnover.
• Fixed Asset Turnover.
• Working Capital Turnover.
• Stock Turnover.
• Accounts Receivable (or Debtors) Turnover.
• Accounts Payable (or Creditors) Turnover.

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Capital Employed
Turnover- Sales /
Capital Employed

Fixed Asset Working Capital

Turnover- Sales / Turnover- Sales /
Assets Working Capital

Current Assets Current Liabilities

A/c’s Receivable A/c’s Payable Turnover

Stock Turnover Ratio Turnover =Cr. Cash Bank =Cr. Purchase/Average
=COGS/Average Stock Sales/Average Creditors - Average
Debtor+Average B/R B/P

Capital Employed turnover ratio

This Ratio indicates how efficiently the money invested in the business is used during the
year to generate sales.

Fixed Assets Turnover Ratio

This ratio indicates how efficiently the fixed assets were used during the year for generating
sales.

Working Capital Turnover Ratio

This Ratio indicates how well the money invested in working capital was used during the
year for generating sales.

Stock Turnover Ratio

This ratio indicates how many times the stock was turned over i.e. how many times
the stock that was purchased was sold during the year. Higher the ratio efficient is the
inventory management. This ratio is useful for calculating the average holding period of
stock

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A/c’s Receivable Turnover (or Debtors Turnover)

This ratio indicates how many times the debtors were turned over i.e. how many times
cash was collected from customers for the goods sold during the year. Higher the ratio
efficient is the receivables management. This ratio is useful for calculating the average
collection period.

A/c’s Payable Turnover (or Creditors Turnover)

This ratio indicates how many times the creditors were turned over i.e. how many times
cash was paid to the suppliers for the goods that were purchased. This ratio is useful for
calculating the average payment period.

PROFITABILITY RATIOS IN RELATION TO INVESTMENT

Other set of ratios in mixed ratios is profitability ratios in relation to investment

Return on Capital Employed (ROCE) / Return on Investment (ROI)

This ratio is an indicator of the earning power of the business. It indicates how much
returns has the business earned during the year in % terms on the money employed in
the business.
Capital Employed = Shareholders Funds + Loan Funds

Return on Shareholders’ Funds

This ratio indicates how much returns the company has earned for shareholders during
the year have earned on their funds in % terms

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Return on Equity (Equity share-holders Funds)

This ratio indicates how much returns the company has earned for equity shareholders
during the year on their investments in % terms.

Return on Equity Share Capital

This ratio indicates how much returns the company has earned for equity shareholders
during the year on the share capital in % terms. Equity share capital is also known as
ordinary capital/common stock.

(C) PROFIT AND LOSS RATIOS

These ratios are also known as profitability ratios in relation to sales.
In this segment we have to learn the following ratios
• Gross Profit Ratio
• Operating Profit Ratio
• Operating Ratio
• Administrative Expenses Ratio
• Selling Expenses Ratio
• Net Profit Ratio

Gross Profit Ratio

This ratio indicates the trading profitability. Higher the gross margin the better it is.

Operating Profit Ratio

This ratio indicates the operating profitability. Higher the operating margins better it is.

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Operating Ratio
= 1 – operating profit ratio
OR

Administrative Expenses Ratio

This ratio indicates that to generate sales how much admin expenses have been incurred
in % terms.

Selling Expenses Ratio

This ratio indicates that to generate sales how much selling expenses have been incurred
in % terms.

Net Profit Ratio

SOME OTHER IMPORTANT RATIOS

Earnings per Share (EPS)

Dividend per Share (DPS)

Dividend Payout (DP) Ratio

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Retention Ratio

Book (Balance Sheet) Value per share (BVPS)

Price Earnings Ratio (PE Ratio)

PE Ratio is popularly known as PE multiple. This ratio indicates how many times an
investor is willing to pay to earn 1 rupee of EPS. PE ratio is one factor that determines
the MPS.
MPS = PE x EPS.

Earnings Price Ratio / Earnings Yield Ratio

Yield is defined as the rate of return on the amount invested. The above ratio is a
return on investment ratio. It indicates how much returns an investor has earned on
his investment in percentage terms.

Dividend Price Ratio / Dividend Yield Ratio

It indicates how much returns in the form of Dividend an investor has earned on his
investment in percentage terms.

Interest Coverage Ratio (IC Ratio)

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This ratio is also called the times interest earned ratio and it measures the ability
of the firm to pay the fixed interest liability. It may be noted that EBIT is operating
profits of the firm, therefore, the IC ratio measures as to how many times the interest
liability of the firm is covered with the operating profits of the firm.

Preference Dividend Coverage Ratio

This ratio attempts to measure the ability of the firm to pay fixed preference dividend
and tells us how secure the preference dividend is in relation to the earning power of
the company.

Debt Service Coverage Ratio

This ratio calculates the company’s ability to repay loan instalment + payment of
interest. Higher the ratio better it is.

DU PONT ANALYSIS FOR EVALUATING ROE

= NP Ratio x Asset Turnover Ratio x Equity Multiplier

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XYZ LTD
BALANCE SHEETAS AT 31ST MARCH...
PARTICULARS RS RS
SOURCES OF FUNDS
A) SHAREHOLDERS FUNDS
Share Capital xx
Reserves and Surplus xx
xx

B) BORROWED FUNDS
Secured Loans xx
Unsecured Loans xx xx
TOTAL SOURCES OF FUNDS/CAPITAL EMPLOYED xxxx

APPLICATIONS OF FUNDS
C) FIXED ASSETS
Gross Block xx
Less: Provision for Depreciation (xx)
Net Block/ WDV xx

D) LONG TERM INVESTMENTS xx

E) WORKING CAPITAL xx
Current Assets xx xx
Less: Current Liabilities (xx)
TOTAL APPLICATION OF FUNDS xxxx

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PROFIT AND LOSS STATEMENT FOR THE YEAR END 31ST MARCH...
PARTICULARS RS RS
Sales xx
Less: Cost of Goods Sold (COGS) (xx)
Gross Profit xx

Operating Expenses
Administrative Expenses xx
Selling Expenses xx
Depreciation xx xx
Operating Profits xx
Less: Non Operating Expenses (xx)
Add: Non Operating Incomes xx
Earnings before Interest and Tax (EBIT) xx
Less: Interest (xx)
Earnings before Tax (EBT) xx
Less: Tax (xx)
Earnings after Tax (EAT) xx
Less: Preference Dividend (xx)
Earnings for Equity Shareholders xx
Less: Equity Dividend (xx)
Retained Earnings xx

Important Points to remember

- Shareholder’s funds are also known as Owner’s Funds, Proprietors Funds, Net
Worth or Equity
- Borrowed Funds are also known as Debt or Loan Funds
- Capital Employed is Debt + Equity
- Shareholder’s Funds = Share Capital + Reserves and Surplus – Miscellaneous
Expenditures not w/off
- Fundamental Balance Sheet Equation
Shareholder’s Funds + Borrowed Funds = Fixed Assets + LT Investments +Working
Capital

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CLASSWORK SECTION

Question 1
The following is the Balance Sheet of Z Ltd. on 31st March, 2020 and other information
from which you are required to calculate the following ratios:
(a) Current Ratio.
(b) Liquid Ratio.
(c) Stock Working Capital Ratio.
(d) Capital Gearing Ratio.
(e) Stock Turnover Ratio.
(f) Debtors Turnover Ratio and Collection Period.
Stock on 1.4.2019 was ` 1,20,000. Sales (all credit) were ` 20,00,000. Gross Profit on
sales was 25%. Debtors on 1.4.2019 were ` 40,000.
Balance Sheet on 31.3.2020
Liabilities ` Assets `
12% Preference Capital 3,00,000 Fixed Assets 7,80,000
Equity Share Capital 6,40,000 Short Term Investments 2,00,000
Capital Reserve 60,000 Stock 3,80,000
General Reserve 2,00,000 Debtors 3,60,000
Profit & Loss A/c 20,000 Prepaid Expenses 60,000
14% Debentures 1,60,000
Creditors 3,20,000
Bank Overdraft 80,000
17,80,000 17,80,000

Question 2
The Following information relates to X. Ltd for the year end March 31st 2020.
Net Working Capital ` 12,00,000/-
Fixed Assets to Proprietors Funds 0.75
Working Capital Turnover 5 Times
Return on Equity (ROE) 15%
You are required to calculate:
(a) Proprietors Funds
(b) Fixed Assets
(c) Net Profit Ratio

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Question 3
Following is the abridged Balance Sheet of Alpha Ltd.:
Liabilities ` Assets ` `
Share Capital 1,00,000 Land and Buildings 80,000
Profit and Loss Account 17,000 Plant and Machineries 50,000
Current Liabilities 40,000 Less: Depreciation 15,000 35,000
1,15,000
Stock 21,000
Receivable 20,000
Bank 1,000 42,000
Total 1,57,000 Total 1,57,000
With the help of the additional information furnished below, you are required to prepare
Trading and Profit & Loss Account and a Balance Sheet as at 31st March, 2020:
(i) The company went in for reorganisation of capital structure, with share capital
remaining the same as follows:
Share Capital 50%
Other Shareholder’s funds 15%
5% Debentures 10%
Payables 25%
Debentures were issued on 1st April, interest being paid annually on 31st March.
(ii) Land and Buildings remained unchanged. Additional plant and machinery has been
bought and a further ` 5,000 depreciation written off.
(The total fixed assets then constituted 60% of total fixed and current assets.)
(iii) Working capital ratio was 8: 5.
(iv) Quick assets ratio was 1: 1.
(v) The receivables (four-fifth of the quick assets) to sales ratio revealed a credit period
of 2 months. There were no cash sales.
(vi) Return on net worth was 10%.
(vii) Gross profit was at the rate of 15% of selling price.
Ignore Taxation.

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Question 4
Ganpati Limited has furnished the following ratios and information relating to the year
ended 31st March, 2020.
Sales ` 60,00,000
Return on net worth 25%
Rate of income tax 50%
Share capital to reserves 7:3
Current ratio 2
Net profit to sales 6.25%
Inventory turnover (based on cost of goods sold) 12
Cost of goods sold ` 18,00,000
Interest on debentures ` 60,000
Receivables ` 2,00,000
Payable ` 2,00,000
You are required to:
(a) Calculate the operating expenses for the year ended 31st March, 2020.
(b) Prepare a balance sheet as on 31st March in the following format.

Balance Sheet as on 31st March, 2020

Liabilities ` Assets `
Share Capital Fixed Assets
Reserve and Surplus Current Assets
15% Debentures Stock
Payables Receivables
Cash

Question 5
The capital structure of Beta Limited is as follows:
Equity share capital of ` 10 each 8,00,000
9% preference share capital of ` 10 each 3,00,000
11,00,000
Additional information: Profit (after tax at 35 per cent), ` 2, 70,000; Depreciation,
` 60,000; Equity dividend paid, 20 per cent; Market price of equity shares, ` 40.
You are required to compute the following, showing the necessary workings:
(a) Dividend yield on the equity shares
(b) Cover for the preference and equity dividends
(c) Earnings per shares
(d) Price-earnings ratio.

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Question 6
MN Limited gives you the following information related for the year ending 31st March,
2020:
(1) Current Ratio 2.5: 1
(2) Debt-Equity Ratio 1: 1.5
(3) Return on Total Assets (After Tax) 15%
(4) Total Assets Turnover Ratio 2
(5) Gross Profit Ratio 20%
(6) Stock Turnover Ratio 7
(7) Current Market Price per Equity Share ` 16
(8) Net Working Capital ` 4, 50,000
(9) Fixed Assets ` 10, 00,000
(10) 60,000 Equity Shares of ` 10 each
(11) 20,000, 9% Preference Shares of `10 each
(12) Opening Stock ` 3, 80,000
You are required to calculate:
(i) Quick Ratio
(ii) Fixed Assets Turnover Ratio
(iii) Proprietary Ratio
(iv) Earnings per Share
(v) Price-Earning Ratio.

Question 7
The assets of SONA Ltd. consist of fixed assets and current assets, while its current
liabilities comprise bank credit in the ratio of 2: 1. You are required to prepare the Balance
Sheet of the company as on 31st March 2020 with the help of following information:
Share Capital ` 5, 75,000
Working Capital (CA-CL) ` 1, 50,000
Gross Margin 25%
Inventory Turnover 5 times
Average Collection Period 1.5 months
Current Ratio 1.5:1
Quick Ratio 0.8: 1
Reserves & Surplus to Bank & Cash 4 times
Assume 360 days in a year

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Question 8
The following is the Profit and loss account and Balance sheet of KLM LLP.
Trading and Profit & Loss Account
Particulars Amount (`) Particulars Amount (`)
To Opening stock 12,46,000 By Sales 1,96,56,000
To Purchases 1,56,20,000 By Closing stock 14,28,000
To Gross profit c/d 42,18,000
2,10,84,000 2,10,84,000
By Gross profit b/d 42,18,000
To Administrative By Interest on investment 24,600
expenses 18,40,000 By Dividend received 22,000
To Selling & distribution
expenses 7,56,000
To Interest on loan 2,60,000
To Net profit 14,08,600
42,64,600 42,64,600

Balance Sheet as on......

Capital & Liabilities Amount (`) Assets Amount (`)
Capital 20,00,000 Plant & machinery 24,00,000
Retained earnings 42,00,000 Building 42,00,000
General reserve 12,00,000 Furniture 12,00,000
Term loan from bank 26,00,000 Sundry receivables 13,50,000
Sundry Payables 7,20,000 Inventory 14,28,000
Other liabilities 2,80,000 Cash & Bank balance 4,22,000
1,10,00,000 1,10,00,000
You are required to COMPUTE:
(i) Gross profit ratio
(ii) Net profit ratio
(iii) Operating cost ratio
(iv) Operating profit ratio
(v) Inventory turnover ratio
(vi) Current ratio
(vii) Quick ratio
(viii) Interest coverage ratio
(ix) Return on capital employed

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Question 9
The following figures and ratios are related to a company:
(i) Sales for the year (all credit) ` 90,00,000
(ii) Gross Profit ratio 35 percent
(iii) Fixed assets turnover (based on cost of goods sold) 1.5
(iv) Stock turnover (based on cost of goods sold) 6
(v) Liquid ratio 1.5:1
(vi) Current ratio 2.5:1
(vii) Receivables (Debtors) collection period 1 month
(viii) Reserves and surplus to Share capital 1:1.5
(ix) Capital gearing ratio 0.7875
(x) Fixed assets to net worth 1.3 : 1
You are required to PREPARE:
(a) Balance Sheet of the company on the basis of above details.
(b) The statement showing working capital requirement, if the company wants to make
a provision for contingencies @ 15 percent of net working capital.

Question 10
The following information of ASD Ltd. relate to the year ended 31st March, 2022:
Net profit 8% of sales
Raw materials consumed 20% of Cost of Goods Sold
Direct wages 10% of Cost of Goods Sold
Stock of raw materials 3 months’ usage
Stock of finished goods 6% of Cost of Goods Sold
Gross Profit 15% of Sales
Debt collection period 2 Months (All sales are on credit)
Current ratio 2:1
Fixed assets to Current assets 13 : 11
Fixed assets to sales 1:3
Long-term loans to Current liabilities 2:1
Capital to Reserves and Surplus 1:4

You are required to PREPARE-

(a) Profit & Loss Statement of ASD Limited for the year ended 31st March, 2022 in the
following format.

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Particulars (`) Particulars (`)

Direct Materials consumed ? By Sales ?
Direct Wages ?
Works (Overhead) ?
Gross Profit c/d ?
? ?
Selling and Distribution Expenses ? By Gross Profit b/d ?
Net Profit ?
? ?

(b) Balance Sheet as on 31st March, 2022 in the following format.

Liabilities (`) Assets (`)
Share Capital ? Fixed Assets 1,30,00,000
Reserves and Surplus ? Current Assets:
Long term loans ? Stock of Raw Material ?
Current liabilities ? Stock of Finished Goods ?
Debtors ?
Cash ?
? ?

Question 11
The following figures are related to the trading activities of M Ltd.
Total assets ` 10,00,000
Debt to total assets 50%
Interest cost 10% per year
Direct Cost 10 times of the interest cost
Operating Exp. ` 1,00,000
The goods are sold to customers at a margin of 50% on the direct cost
Tax Rate is 30%
You are required to calculate:
(i) Net profit margin (after tax)
(ii) Net operating profit margin (before tax)
(iii) Return on assets (after tax)
(iv) Return on owner’s equity (after tax)
(v) Asset turnover Ratio

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Question 12
From the following figures and ratios draw out Balance Sheet and Trading and Profit and
Loss Account:
(a) Share Capital ` 1,80,000
(b) Working Capital ` 63,000
(c) Bank O/D ` 10,000
There is no fictitious asset. In Current Assets there are no assets other than stock, Debtors
and Cash. Closing Stock is 20% higher than the Opening Stock.
i. Current Ratio 2.5
ii. Quick Ratio 1.5
iii. Proprietary Ratio
(Fixed Assets : Proprietary Fund) 0.7
iv. Gross Profit Ratio 20% (to sales)
v. Stock Velocity 4
vi. Debtors' Velocity 36.5 days
vii. Net Profit Ratio 10%

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HOMEWORK SECTION

Question 1
X Co. has made plans for the next year. It is estimated that the company will employ
total assets of ` 8,00,000; 50 per cent of the assets being financed by borrowed capital
at an interest cost of 8 per cent per year. The direct costs for the year are estimated at
` 4,80,000 and all other operating expenses are estimated at ` 80,000. The goods will
be sold to customers at 150 per cent of the direct costs. Tax rate is assumed to be 50 per
cent.
You are required to calculate: (i) net profit margin (after tax); (ii) return on assets (after
tax); (iii) asset turnover and (iv) return on owners’ equity (after tax); (v) operating margin
(before tax).

Question 2
The following accounting information and financial ratios of PQR Ltd. relate to the year
ended 31st December, 2020
I Accounting Information:
Gross Profit 15% of Sales
Net Profit 8% of sales
Raw materials consumed 20% of works cost
Direct Wages 10% of works cost
Stock of raw materials 3 months’ usage
Stock of finished goods 6% of works cost
Debt collection period 60 days
All sales are on credit
II Financial Ratios:
Fixed assets to sales 1:3
Fixed assets to Current assets 13:11
Current ratio 2:1
Long – term loans to Current liabilities 2:1
Capital to Reserves and Surplus 1:4

If value of fixed assets as on 31st December, 2020 amounted to ` 26 lakhs, prepare a

summarised Profit and Loss Account of the company for the year ended 31st December,
2020 and also the Balance Sheet as on 31st December, 2020.

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Question 3
From the following information, prepare a summarised Balance Sheet as at 31st March,
2020:
Net Working Capital ` 2, 40,000
Bank overdraft ` 40,000
Fixed Assets to Proprietary ratio 0.75
Reserves and Surplus ` 1, 60,000
Current ratio 2.5
Liquid ratio (Quick Ratio) 1.5

Question 4
With the help of the following information complete the Balance Sheet of MNOP Ltd.:
Equity share capital ` 1, 00,000
The relevant ratios of the company are as follows:
Current debt to total debt 0.40
Total debt to Equity share capital 0.60
Fixed assets to Equity share capital 0.60
Total assets turnover 2 Times
Inventory turnover 8 Times

Question 5
In a meeting held at Solan towards the end of 2019, the Directors of M/s HPCL Ltd. have
taken a decision to diversify. At present HPCL Ltd. sells all finished goods from its own
warehouse. The company issued debentures on 01.01.2020 and purchased fixed assets
on the same day. The purchase prices have remained stable during the concerned period.
Following information is provided to you:
Income Statements
Particulars 2019 (`) 2020 (`)
Cash Sales 30,000 32,000
Credit Sales 2,70,000 3,00,000 3,42,000 3,74,000
Less: Cost of goods sold 2,36,000 2,98,000
Gross profit 64,000 76,000
Less: Operating Expenses
Warehousing 13,000 14,000
Transport 6,000 10,000
Administrative 19,000 19,000
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Selling 11,000 49,000 14,000

Interest 2,000 59,000
Net Profit 15,000 17,000

Balance Sheet
Assets & Liabilities 31-12-2019 31-12-2020
Fixed Assets (Net Block) - 30,000 - 40,000
Receivables 50,000 82,000
Cash at Bank 10,000 7,000
Stock 60,000 94,000
Total Current Assets (CA) 1,20,000 1,83,000
Payables 50,000 76,000
Totals Current Liabilities (CL) 50,000 76,000
Working Capital (CA – CL) 70,000 1,07,000
Total Assets 1,00,000 1,47,000
Represented by:
Share Capital 75,000 75,000
Reserve and Surplus 25,000 42,000
Debentures - 30,000
1,00,000 1,47,000

You are required to calculate the following ratios for the years 2019 - 2020.
(i) Gross Profit Ratio
(ii) Operating Expenses to Sales Ratio.
(iii) Operating Profit Ratio
(iv) Capital Turnover Ratio
(v) Stock Turnover Ratio
(vi) Net Profit to Net Worth Ratio, and
(vii) Receivables Collection Period.

Ratio relating to capital employed should be based on the capital at the end of the year.
Give the reasons for change in the ratios for 2 years. Assume opening stock of ` 40,000
for the year 2019. Ignore Taxation.

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Question 6
JKL Limited has the following Balance Sheets as on March 31, 2019 and March 31, 2020:
Balance Sheet
Assets & Liabilities (`) In Lakhs
March 31, 2020 March 31, 2019
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 1,567 1,404
Current Assets (3,937) (3,794)
Less: Current Liabilities 5,947 4,555

The Income Statement of the JKL Ltd. for the year ended is as follows:
(`) In Lakhs
March 31, 2020 March 31, 2019
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 2019 – 2020:
(a) Inventory turnover ratio
(b) Financial Leverage

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(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.

Question 7
Using the following information, complete the Balance Sheet given below:
(i) Total debt to net worth 1: 2
(ii) Total assets turnover 2
(iii) Gross profit on sales 30%
(iv) Average collection period (Assume 360 days in a year) 40 days
(v) Inventory turnover ratio based on cost of goods sold and year- 3
end inventory
(vi) Acid test ratio 0.75

Balance Sheet as on March 31, 2020

Liabilities ` Assets `
Equity Shares Capital 4,00,000 Plant and Machinery and -
Reserves and Surplus 6,00,000 other Fixed Assets
Total Debt: Current Assets:
Current liabilities - Inventory -
Debtors -
- Cash -
- -

Question 8
Using the following data, complete the Balance Sheet given below:
Gross Profit  ` 54,000
Shareholders’ Funds  ` 6, 00,000
Gross Profit margin  20%
Credit sales to Total sales  80%
Total Assets turnover  0.3 times
Inventory turnover  4 times
Average collection period (a 360 days year)  20 days
Current ratio  1.8
Long-term Debt to Equity  40%

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Balance Sheet
Creditors ………….. Cash …………..
Long-term debt ………….. Debtors …………..
Shareholders’ funds ………….. Inventory …………..
Fixed assets …………..

Question 9
The following accounting information and financial ratios of M Limited relate to the year
ended 31st March, 2020:
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 ` 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.

Question 10
The total sales (all credit) of a firm are ` 6, 40,000. It has a gross profit margin of 15
per cent and a current ratio of 2.5. The firm’s current liabilities are ` 96,000; inventories
` 48,000 and cash ` 16,000. (a) Determine the average inventory to be carried by the firm,
if an inventory turnover of 5 times is expected? (Assume a 360 day year). (b) Determine
the average collection period if the opening balance of debtors is intended to be of
` 80,000? (Assume a 360 day year).

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Question 11
Using the following information, complete this balance sheet:

Long-term debt to net worth 0.5 to 1

Total asset turnover 2.5 x

Average collection period* 18 days

Inventory turnover 9x

Gross profit margin 10%

Acid-test ratio 1 to 1

*Assume a 360-day year and all sales on credit.

` `
Cash - Notes and payables 1,00,000
Account - Long – term debt -
Inventory - Common stock 1,00,000
Plant and equipment - Retained earnings 1,00,000
Total assets - Total liabilities and equity -

Question 12
From the following information, you are required to PREPARE a summarised Balance
Sheet for Rudra Ltd. for the year ended 31st March, 2022
Debt Equity Ratio 1:1
Current Ratio 3:1
Acid Test Ratio 8:3
Fixed Asset Turnover (on the basis of sales) 4
Stock Turnover (on the basis of sales) 6
Cash in hand 5,00,000
Stock to Debtor 1:1
Sales to Net Worth 4
Capital to Reserve 1:2
Gross Profit 20% of cost
COGS to Creditor 10:1
Interest for entire year is yet to be paid on Long Term loan @ 10%

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Question 13
Using the following information, PREPARE and complete the Balance Sheet given below:
(i) Total debt to net worth : 1:2
(ii) Total assets turnover : 2
(iii) Gross profit on sales : 30%
(iv) Average collection period : 40 days
(Assume 360 days in a year)
(v) Inventory turnover ratio based on cost of goods : 3
sold and year - end inventory
(vi) Acid test ratio : 0.75
Balance Sheet
As on March 31, 20X8
Liabilities Rs. Assets Rs.
Equity Shares Capital 4,00,000 Plant & Machinery & Fixed Assets -
Reserves and Surplus 6,00,000
Total Debt: Current Assets:
Current Liabilities - Inventory -
Debtors -
Cash. -

Question 14
SN Ltd. has furnished the following ratios and information relating to the year ended 31st
March 2021:
Share Capital Rs. 6,25,000
Working Capital Rs. 2,00,000
Gross Margin 25%
Inventory Turnover 5 times
Average Collection Period 1.5 months
Current Ratio 1.5:1
Quick Ratio 0.7:1
Reserves & Surplus to Bank & Cash 3 times
Further, the assets of the company consist of fixed assets and current assets, while its
current liabilities comprise bank credit and others in the ratio of 3:--. Assume 360 days
in a year.
You are required to PREPARE the Balance Sheet as on 31st March 2021.

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Question 15
Using the information given below, PREPARE the Balance Sheet of SKY Private Limited:
(i) Current ratio 1.6:1
(ii) Cash and Bank balance 15% of total current assets
(iii) Debtors turnover ratio 12 times
(iv) Stock turnover (cost of goods sold) ratio 16 times
(v) Creditors turnover (cost of goods sold) ratio 10 times
(vi) Gross profit ratio 20%
(vii) Capital gearing ratio 0.6
(viii) Depreciation rate 15% on W.D.V.
(ix) Net fixed Assets 20% of total assets
(Assume all purchase and sales are on credit)
Balance Sheet of SKY Private Limited as at 31.03.2020
Liabilities Amount in ` Assets Amount in `
Share Capital 25,00,000 Fixed assets
Reserve & surplus ? Opening WDV ? ?
12% Long term debt ? Less: Depreciation ? ?
Current liabilities
Creditors ? Current Assets
Provisions & outstanding 68,50,000 Stock ?
expenses ?
Debtors ?
Cash and bank balance ? ?
Total ? Total ?
(Detailed working notes are not required to be shown)

Question 16
The following is the information of XML Ltd. relate to the year ended 31-03-2018:
Gross Profit 20% of Sales
Net Profit 10% of Sales
Inventory Holding period 3 months
Receivable collection period 3 months
Non-Current Assets to Sales 1:4
Non-Current Assets to Current Assets 1:2
Current Ratio 2:1
Non-Current Liabilities to Current Liabilities 1:1
Share Capital to Reserve and Surplus 4:1
Non-current Assets as on 31st March, 2017 ` 50,00,000

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Assume that:
(i) No change in Non-Current Assets during the year 2017-18
(ii) No depreciation charged on Non-Current Assets during the year 2017-18.
(iii) Ignoring Tax
You are required to Calculate cost of goods sold, Net profit, Inventory, Receivables and
Cash for the year ended on 31st March, 2018

Question 17
The accountant of Moon Ltd. has reported the following data:
Gross profit ` 60,000
Gross Profit Margin 20 per cent
Total Assets Turnover 0.30:1
Net Worth to Total Assets 0.90:1
Current Ratio 1.5:1
Liquid Assets to Current Liability 1:1
Credit Sales to Total Sales 0.80:1
Average Collection Period 60 days
Assume 360 days in a year

You are required to complete the following:

Balance Sheet of Moon Ltd.
Liabilities ` Assets `

Net Worth Fixed Assets

Current Liabilities Stock
Debtors
Cash
Total Liabilities Total Assets

Question 18
Masco Limited has furnished the following ratios and information relating to the year
ended 31st March 2021:
Sales ` 75,00,000
Return on net worth 25%
Rate of income tax 50%
Share capital to reserves 6:4
Current ratio 2.5

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Net profit to sales (After Income Tax) 6.50%

Inventory turnover (based on cost of goods sold) 12
Cost of goods sold ` 22,50,000
Interest on debentures ` 75,000
Receivables (includes debtors ` 1,25,000) ` 2,00,000
Payables ` 2,50,000
Bank Overdraft ` 1,50,000

You are required to:

(a) Calculate the operating expenses for the year ended 31st March, 2021.
(b) Prepare a balance sheet as on 31st March in the following format:
Liabilities ` Assets `
Share Capital Fixed Assets
Reserves and Surplus Current Assets
15% Debentures Stock
Payables Receivables
Bank Term Loan Cash

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