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BFA

# BFA

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Published by silverliningmyself

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Published by: silverliningmyself on Oct 20, 2010
Copyright:Attribution Non-commercial

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10/20/2010

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1.If the current ratio of a company is 2:1,
a)When a current liability is paid off the current liability and the cash balance, which is acurrent asset, will both reduce by the same amount. But this would lead to an increase in thecurrent ratio. b)When a motor car is sold the cash balance would increase by the amount the car was sold for.This would increase the current assets and therefore the current ratio would also increase.c)When a company borrows money there is an increase in the current liabilities as a result of anincrease in the value of creditors. Therefore the current ratio will be reduced.d)Both stocks and cash are current assets. When stocks are purchased for cash the cash balancewould reduce but the stock value will also increase. This transaction will not leave any effecton the current ratio.e)By giving an interest bearing promissory note to a creditor the
2.Stock Turnover ratio:
Stock turnover ratio, otherwise called as inventory turn over ratio is calculated as follows:Stock turnover ratio = Cost of sales / Average inventoryWhere,Cost of sales = Sales – Gross profitAverage Inventory = (Opening stock + Closing stock) / 2This ratio indicates how fast inventory is sold. A high ratio is good from the point of view of liquidity. A low ratio would signify that the inventory does not sell fast and stays on the shelf or in the ware-house for a long time.
Fixed Assets Turnover ratio:
Fixed assets turnover ratio is calculated as follows:Fixed assets turnover ratio = Cost of Sales/Net fixed AssetsWhere,Cost of sales = Sales – Gross profitNet fixed assets = Gross fixed assets - Depreciation

The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-assetinvestments - specifically property, plant and equipment net of depreciation. Generally speaking, thehigher the ratio, the better, because a high ratio indicates the business has less money tied up in fixedassets for each rupee of salesrevenue. A declining ratio may indicate that the business is over-investedin plant,equipment, or other fixed assets.
Debt Equity ratio:
The Debt Equity ratio is calculated as below:Debt equity ratio = Debt: EquityIt is ameasureof a company's leverage. It indicates what proportion of equity and debt that thecompany is using to finance its assets. A high debt equity ratio generally means that a company has beenaggressive in financing its growth with debt. This can result in volatile earnings as a result of theadditional interest expense.
Capital Gearing Ratio:
The formula to calculate capital gearing ratio is:Capital Gearing ratio = (Preference shares + Debentures + Long term Loans)/ (Equity share capital +Reserves& Surplus) Leverage of capital structure ratios is calculated to test the long-term financial position of a firm. It isthe proportion between the fixed interest or dividend bearing funds and non fixed interest or dividend bearing funds. Equity share capital includes equity share capital and all reserves and surpluses items that belong to shareholders. Fixed interest bearing funds includes debentures, preference share capital andother long-term loans. The higher a company's degree of leverage, the more the company is consideredrisky.
Net operating profit ratio:
Net operating profit can be calculated as follows: Net operating profit ratio = (Net Profit – Non-operating income + Non-operating expenses)/Sales

This ratio is mainly concerned with the operating profit or the profit obtained from the main line of activity. It indicates the overall operating efficiency in the company. This ratio is a tool in the hands of the management to control the cost of production and other expenses administrative and sellingexpenses. If the amount earned is more it means that there is a low cost operation.
3. (i) Current ratio
Current ratio = Current assets : Current liabilities
31.12.2005
Current Assets = Stock + Debtors + Investments (short term) + Cash & Bank balances= Rs.47, 00,000Current Liabilities = Creditors + Provision for taxation +Proposed dividend= Rs.25, 00,000
Current ratio = 1.88 : 131.12.2006
Current Assets = Stock + Debtors + Cash & Bank balances=Rs.57, 00,000Current Liabilities = Creditors + Provision for taxation +Proposed dividend= 42, 50,000
Current ratio = 1.34 : 1(ii) Debt Equity ratio

31.12.2005
Debt = Long term funds (debentures)=Rs.10, 00,000Equity = Equity share capital + Reserves=Rs.56, 00,000
Debt/Equity ratio = 0.18: 1 31.12.2006
Debt = Long term funds (debentures)=Rs.10, 00,000Debt equity ratio = Debt : Equity

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