Ratio Analysis

Illustration 1
The following is the Balance sheet of a company as on 31-3-06
Liabilities Rs. Assets Rs.
E. Shares 40,00,000 Land & building 40,00,000
Reserves & Surplus 20,00,000 Plant & 40,00,000
machinery
Debentures 30,00,000 Investments 30,00,000
Long term loans 50,00,000 Stock 25,00,000
Creditors 8,00,000 Debtors 15,00,000
Other current 12,00,000 Other current 10,00,000
liabilities assets
1,60,00000 1,60,00000

Calculate
(1) Current ratio
(2) Stock to working capital ratio
(3) Debt-Equity ratio
(4) Net-worth ratio / proprietor/ ratio
(5) Fixed assets to net worth ratio
(6) Current assets to net worth ratio
(7) Solvency ratio
(8) Capital gearing ratio.

Solution:
(1) Current ratio = Current Asset / Current Liabilities
= 50,00,000 / 20,00,000 = 2.5

(2) Stock to working capital ratio = Stock / Inventory / Working capital x 100

Working capital = Current Assets - Current Liabilities

= 50,00,000 - 20,00,000 = 30,00,000
= 25,00,000 / 30,00,000 x 100 = 83.33%

(3) Debt-Equity ratio = Debt / Equity

Debt = Long term loans 30,00,000+50,00,000=80,00,000 Equity = Share capital + Reserves + Surplus
= 40,00,000 + 20,00,000 = 60,00,000
= 80,00,000 / 60,00,000 = 1.33
(4) Net worth or Proprietary ratio = Net worth (Equity) / Total assets
(Net worth = Share capital + Reserves & Surplus)
= 60,00,000 / 1,60,00,000 = 0.375

(5) Fixed Assets to net worth ratio = Net fixed assets

= 80,00,000 / 60,00,000 = 1.33

(6) Current assets to net worth ratio = Current assets / Net worth
= 50,00,000 / 60,00,000 = 0.833

(7) Solvency ratio = Total assets / Total liabilities

Total assets = Total of asset side of balance sheet.

Total liabilities = Both long-term and current liabilities.
= 1,60,00,000 / 1,00,00,000 = 1.6

8. Capital gearing ratio = Fixed dividend bearing lonas debentures + fixed dividend bearing preference shares / Eq

= Debentures 30,00,000 + long term loan 50,00,000 / E.Sahre capital 40,00,000

= 80,00,000 / 40,00,000 = 2
rves + Surplus
ng preference shares / Equity share capital
 Yahoo Ltd. has the following Profit and Loss Account for the year ended 31st March, 2007 and the Balance Sheet as
Profit and Loss Account for the year ended 31st March, 2007
Particulars Rs. Lakhs Particulars Rs. Lakhs

Openings stock 1.75 Sales : Credit 12

Add: Manufacturing cost 10.75 Cash 3
12.5
Less: Closing stock 1.5
Cost of goods sold 11
Gross Profit 4
15 15
Administrative expenses 0.35 Gross profit 4
Selling expenses 0.25 Other income 0.09
Depreciation 0.5
Interest 0.47
Incom-tax 1.26
Net profit 1.26
4.09 4.09
Balance Sheet as on 31st March, 2007
Liabilities Rs. Lakhs Assets Rs. Lakhs

Equity shares of Rs. 10 each 3.5 Plant and machinery 10

10% Preference shares 2 Less : Depreciation 2.5
Reserves and surplus 2 Net plant and machinery 7.5
Long-term loan (12%) 1 Goodwill 1.4
Debentures (14%) 2.5 Stock Debtors 1.5
Creditors 0.6 Pre-paid expenses 1
Bills Payable 0.2 0.25
Accured expenses 0.2 Marketable securities 0.75
Provision for tax 0.65 Cash 0.25
12.65 12.65

The market price of the share of Yahoo Ltd. on 31st March, 2007 is Rs. 45
(Rs. Lakhs)
Reserves at the beginning 1.47
Net profit during the year 1.26
2.73
Preference dividends 0.2
Equity dividends 0.53
Reserves at the close of year 2
Calculate the following ratios – (1) Current ratio (2) Quick ratio (30 Debt-equity ratio (4) Interest coverage
(5) Fixed charge coverage (6) Stock turnover (7) Debtors turnover (8) Average collection period (9) Gross
profit margin (10) Net profit margin (11) Operating ratio (12) Return on capital employed (ROCE) (13)
Earning per share (14) Return on shareholders’ equity (15) P/E ratio and (16) Earning yield
Solutions:
(1) Current Ratio
Current assets 3,75,000 = 2.27:1
-------------------- = ------------
Current liabilities 1.65.000

(2) Quick Ratio

Current assets – Inventories 2,00,000
---------------------------------------- = ----------- = 1.21:1
Current liabilities – Bank overdraft 1,65,000

(3) Debt-Equity Ratio

Long-term debt 3,50,000
------------------------ = ---------- = 0.467:1
Shareholders funds 7,50,000

(4) Interest Coverage

PBIDT 1,26,000 + 47,000 + 1,26,000
-------------- = ------------------------------------
Interest 47,000

(5) Fixed Charge Coverage

PBIDT 2,99,000
----------------------------- = -----------------------
Interest + Preference dividend 47,000 + 20,000

(6) Stock Turnover

Cost of goods sold 11,00,000
---------------------- = ----------------------------
Average inventory (1,75,000 + 1,50,000) / 2

(7) Debtors Turnover

Credit sales 12,00,000
-------------- = ----------------
 Debtors 1,00,000

(8) Average Collection Period

360 days 360
---------------------------- = ----- = 30 days
Debtors turnover 12

(9) G.P Margin

Sales – Cost of goods sold 15,00,000 – 11,00,000
-------------------------------
= X 100 --------------------------- X 100 = 26.67%
Sales 15,00,000

(10) N.P. Margin

PBIT 1,26,000 + 1,26,000 + 47,000
------ X 100 = ----------------------------------- X 100 =
Sales 15,00,000

(11) Operating Ratio

Operating expenses 11,00,000 + 35,000 + 25,000 + 50,000
----------------------- X 100 = ----------------------------------------------- X 100 =
Sales 15,00,000

(12) Return on Capital Employed (ROCE)

(Rs.)
Equity share capital 3,50,000
Preference share capital 2,00,000
Reserves and surplus 2,00,000
Long-term loan (12%) 1,00,000
Debentures 914%) 2,50,000
Capital employed 11,00,000

Net Profit 1,26,000

------------------ X 100 = -------------- X 100 = 11.45%
Capital employed 11,00,000

OR Net profit before interest and tax 2,99,000

--------------------------------------- X 100 = -------------- X 100 = 27.18%
Capital employed 11,00,000
(13) Return on Shareholders’ Equity

Net profit 1,26,000

----------------------=X 100 ------------ X 100 16.80%
Share holders funds 7,50,000

(14) EPS
Net profit – Preference dividend 1,26,000 – 20,000
--------------------------------------- = --------------------- =
No. of equity shares 35,000

(15) Price / Earning Ratio

Market price 45
--------------- = ------- = 14.85 times
EPS 3.03

(16) Earning Yield

EPS 3.03
---------------------
X 100 = ------ X 100
Market price 45
07 and the Balance Sheet as on that date:
) Interest coverage
n period (9) Gross
d (ROCE) (13)
eld

= 6.36 times

= 4,46 times

= 6.8 times

= 12 times
X 100 = 26.67%

------ X 100 = 19.93%

5,000 + 50,000
------------ X 100 = 80.67%
----- = Rs. 3.03

= 14.85 times

6.73%
Following is the balance sheet and income statement of Jaynagara Ltd. for the year ended 31st march, 2007 are as un
Statement for the year ended 31st March, 2007
(Rs. '000)
Sales 1,600
Less: Cost of Goods sold 1,310
Gross margin 290
Less: Selling and administrative expenses 40
EBIT 250
less: interest expenses 45
Earnings before tax 205
Les: Tax 82
Net profit 123
Balance Sheet as on 31st March, 2007
(Rs. '000)
Liabilities
Paid-up capital (40,000 equity shares of Rs. 10 each. Fully paid-up
400
Retained earnings 120
Debentures 700
Creditors 180
Bills payable 20
Other current liabilities 80
1,500

Assets
Net fixed assets 800
inventory 400
Debtors 175
Marketable securities 75
Cash 50
1,500
Price per share : RS. 15 industry’s average ratios are:
Current ratio 2.4 Debt equity ratio2:01
Quick ratio 1.5 Times interest earned
6
Sales to inventory 8.0 times Net profit margin7%
Average collection period 36 days Price to earnings ratio
15
Debt to assets 40% Return to total assets
11%
From the above facts and figures, you are required to – (i) Calculate the relevant ratios and
interpret them to identify the problems areas. (ii) Based on the ratio analysis, as a Company
Secretary, prepare a report for consideration of your Board of Directors clearly bringing out the
reason in respect of identified problem areas and giving suggestions to solve them.
Solutions:
(Rs. '000)

Current
Inventory 400
Debtors 175
Marketable securities 75
Cash 50
700

Current Liabilities
Creditors 180
Bills payable 20
Other Current liabilities 80
280

Current assets 700

(1) Current Ratio = ---------------------- = ------ 2.5
Current liabilities 280

Liquid assets 300

(2) Quick Ratio = ----------------------- = ----- 1.07
Current liabilities 280

Sales
(3) Sales to Inventory = -------------- =
Inventory

Debtors 175
(4) Average collection Period = ---------------------- ----- = 40 days
Average daily sales4.4

Debts 700
(5) Debts to Assets = ------------------- X=100 ------- X 100
Total assets 1500
 Debts 700
(6) Debt-Equity Ratio = ---------------------- = ------ =
Shareholders funds 520

EBIT 250
(7) Times Interest Earned -------------------- = --------------------
=
Interest charges 45

Net Profit 123

(8) Net Profit Margin = ------------------- X 100 = -------- X 100
Sales 1600

Price per share 15

(9) Price to Earnings Ratio = --------------- = --------- 4.88
E.P.S 3.08

Net Profit 123

(10) Return to Total Assets = ---------------- X 100 --------- X 1008.20%
Total Assets 1500
ended 31st march, 2007 are as under: Income
 1600
------ = 4 times
400

46.70%
 1.35

5.56

7.70%
 From the following details prepare Statement of Proprietary funds with as many
details as possible:
(i) Stock velocity: 6
(ii) Capital turnover ratio (on cost of sales) : 2
(iii) Fixed assets turnover ratio (on cost of sales) : 4
(iv) Gross profit turnover ratio: 20 per cent.
(v) Debtors' velocity: 2 months
(vi) Creditors' velocity: 73 days
The gross profit was Rs. 60,000. Reserves and Surplus amount Rs. 20,000. Closing stock was Rs. 5,000 in excess o
Solution :

-1 Sales
Gross profit
Gross profit ratio = -------------------- x 100
Sales
If Gross profit is Rs. 20, Sales = Rs. 100
If Gross profit is Rs. 60,000, Sales = 60,000 x 100/20 = Rs. 3,00,000

-2 Stock:
Cost of goods sold
Stock velocity
= --------------------------- = 6
Average stock
Cost of goods
Err:508
sold
= Rs. 3,00,000 - Rs. 60,000
= Rs. 2,40,000

2,40,000
= ----------------------- = 6
Average stock
6 x Average = stock2,40,000
Average stock = 2,40,000 + 6 = Rs. 40,000
Opening stock + Closing stock
Average stock = ------------------------------------------ = Rs. 40,000
2
Total of stocks
= (40,000 Rs.x80,000
2)
Less: Excess = Rs. 5,000
-----------------
Rs. 75,000
-----------------
###
Opening stock
= ------------ = Rs. 37,500
 2
Closing stock
= 37,500 + 5,000 = Rs.42,500

(3) Debtors

Debtors velocity
Debtors + Bills receivable
----------------------------------- x No. of working days = 2 months
Credit sales
There are no bills receivable. Hence,
Debtors
Debtors velocity ------------ x 12 =2
3,00,000
Adopting cross multiplication,

3,00,000 x 2
Debtors = -------------------- = Rs. 50,000
12

(4) Creditors:

Creditors velocity =
Creditors + Bills payable
---------------------------------- x No.of working days = 73
Credit purchases
Calculation of Purchases:
Purchases = Cost of goods sold + Closing stock - Opening stock
= Rs. 2,40,000 + Rs. 42,500 - Rs. 37,500
= Rs. 2,45,000

There are no bills payable. Hence, Creditors velocity

Creditors
-------------- x 365 = 73
2,45,000
Adopting cross multiplication,
73 x 2,45,000
Creditors =---------------------- = Rs.49,000
365

(5)Fixed assets:
 Fixed assets turnover ratio (based on cost of sales)
Cost of sales
= ---------------------- = 4
Fixed assets
2,40,000
=
------------------------ = 4
Fixed assets
4 x Fixed assets
= Rs. 2,40,000
2,40,000
Fixed assets
= ------------------= Rs.60,OOO
###

(6) Share Capital:

Capital turnover ratio (based on cost of sales)

Cost of sales
= ------------------------------------------- =2
Total capital (or) Proprietary fund
2,40,000
= ------------------------ =2
Proprietary fund
2 x Proprietary fund = Rs. 2,40,000
2,40,000
Proprietary
= ------------------
fund = Rs. 1,20,000
2
Proprietary fund = Rs. 1,20,000
Less: Reserves and Surplus = Rs. 20,000
------------
Share capital
Rs. 1,00,000
-

(7) Cash:
Balance Sheet
----------------------------------------------------------------------------------------
LiabilitiesRs. Assets Rs.
----------------------------------------------------------------------------------------
Share capital1,00,000 Cash (ha1.fig.) 16,500
Reserves & Surplus
20,000 Debtors 50,000
Creditors 49,000 Stock 42,500
60,000 Fixed assets
 --------------- ---------------
1,69,000 1,69,000
----------------------------------------------------------------------------------------
Statement of Proprietory Funds
----------------------------------------------------------------------------------------
Rs.
Fixed assets 60,000
Current assets: Rs.
Cash 16,500
Debtors 50,000
Stock 42,500
--------------
1,09,000
Less: Current liability:
Creditors 49,000
--------------
60,000
---------------
- 1,20,000
----------------
Represented by:
Share capital 1,00,000
Reserves and 20,000
Surplus
------------------------------------------------------------------------------------------
was Rs. 5,000 in excess of opening stock.
Illustration 26: With the help of the following ratios regarding Dr. Raj Films draw the Balance Sheet of the Compan
Current ratio 2.5
Liquidity ratio 1.5
Net workingRs.capital
3,00,000
Stock turnover ratio (cost pf sales/
6 times closing stock)
Gross profit ratio
20%
Debt collection
2 months
period
Fixed assets turnover ratio, (on cost of sales) 2 times
Fixed assets to shareholders'
0.8 net worth
Reserve and Surplus0.5 to Capital
Solutions:

(a) Current assets:

Current assets
Current ratio
= ------------------------ = 2.5 : 1
Current liabilities
Working capital = Current assets - Current liabilities
= 2.5 - 1 = 1.5
If working capital is 1.5, current assets = 2.5
[f working capital is Rs. 3,00,000, current assets
3,00,000 = ---------
1.5

(b) Current Liabilities:

If working capital is 1.5, current liabilities = 1
If working capital is Rs. 3,00,000, current liabilities
3,00,000
=--------------------- =Rs. 2,00,000
15

(3)Stock :
Quick assets
Quick ratio= ----------------------- =1.5
Quick liabilities
As there is no bank overdraft, Quick liabilities = Current liabilities
Quick assets
 Quick ratio= -------------------- = 1.5
2,00,000
Quick assets
= 2,00,000 x 1.5 = Rs. 3,00,000
Stock = Current assets - Quick assets
= Rs. 5,00,000 - Rs. 3,00,000
= Rs. 2,00,000
(4) Cost of goods sold:
Cost of goods sold
Stock turnover
= ratio ---------------------------- = 6
Closing stock
Cost of goods sold
= --------------------------- = 6
2,00,000
Cost of goods
= 2,00,000
sold x 6 = Rs. 12,00,000

(5) Sales:
Gross profit ratio 20% on sales
Sales - Gross profit = Cost of goods sold
Rs. 100 -Rs. 20 = Rs. 80
If cost of goods sold is Rs. 80, sales = Rs. 100
If cost of goods sold is Rs. 12,00,000, sales
12 00 000
= ------------------- x 100 Rs. 15,00,000
80

(6) Debtors:

Debtors + Bills receivable

Debtors turnover ratio = ----------------------------------- x 12 =2
Credit sales

There are no bills receivable. Hence, Debtors turnover ratio:

Debtors
= ---------------------- x 12 =2 months
15,00,000
By cross multiplication,
2 x 15,00,000
Debtors = ----------------------
= Rs. 2,50,000
12
(7) Fixed assets:
Fixed assets turnover ratio (on cost of sales)
Cost of sales
= ------------------------ =2
Fixed assets
12,00,000
= ------------------------ =2
Fixed assets
2 x Fixed assets
= Rs. 12,00,000
12,00,000
Fixed assets
= -------------------- = Rs. 6,00,000
2

(8) Shareholders' Net worth (or Proprietory fund):

Fixed assets to Shareholders' Net worth
Fixed assets
=---------------------------------- = 0.80
Shareholders' Net worth
6,00,000
= ------------------------ = 0.80
Net worth
0.80 x Net=worth
6,00,000
6,00,000
Net worth = ---------------- = Rs. 7,50,000
0.8

Reserves
and
-9 Surplus:
Net Worth = Share Capital + Reserves and Surplus
Reserves and Surplus to Capital = 0.50 : 1
Net worth = 1 + 0.50 = 1.50
If Net worth is 1.5, reserves and surplus = 0.50
If Net worth is Rs. 7,50,000, reserves and surplus
7,50,000
= ------------------ x 0.5
1.5
= Rs. 2,50,000
(10) Share Capital:
Net worth i.e. Share capital +
 Reserves and
= Rs.
Surplus
7,50,000
Less: Reserves
= Rs.and
2,50,000
Surplus
-------------
Share capital
= Rs. 5,00,000
-------------
(11) Bank Balance:
Rs.
Total Current assets 5,00,000
Less: Stock2,00,000
Debtors
2,50,000
4,50,000
-------------
Bank 50,000
-------------

Balance Sheet as on 31-12-2006

-------------------------------------------------------------------------------------------------------
LiabilitiesRs. Assets Rs.
-------------------------------------------------------------------------------------------------------
Share capital5,00,000 Fixed assets 6,00,000
Reserves and 2,50,000
SurplusStock 2,00,000
Long-term loan. Debtors 2,50,000
(balancing
1,50,000
figure)Bank 50,000
Current liabilities
2,00,000
-------------- --------------
11,00,000 11,00,000
nce Sheet of the Company for the year 1999.

= ---------------------------2.5 = Rs. 5,00,000

 Problem 27: From the following information of a textile company complete proform balance sheet, if its sales are R
Sales to Net2.3worth
times
Current debt to Net42%worth
Total debt to Net75%worth
Current ratio
2.9 times
Net sales to4.6
inventory
times
Average collection
90 days period
Fixed assets 53.20%
to Net worth
Proforma Balance Sheet
Net worth ? Fixed assets
?
Long-term?debt Cash ?
Current debt
? Sundry debtors
?
---- ----
---- ----
Solution:

-1 Net worth:
Sales
Sales to Net
= ------------------
worth = 2.3 times
Net worth
23,00,000
= -------------------- = 2.3 times
Net worth
2.3 x Net worth = 23,00,000
23,00,000
Net worth = ---------------
= Rs. 10,00,000
2.3

(2) Current Debt:

Current debt
Current debt to Net worth = ----------------- = 42%
Net worth
i.e. Current debt is 42% of net worth
∴ Current debt = 42% of 10,00,000 = Rs. 4,20,000

(3) Total Debt:

Total debt
Total Debt to Net worth = ----------------- = 75%
Net worth
i.e. Total debt is 75% of net worth
Total debt is = 75% of 10,00,000 = Rs, 7,50,000

(4) Long-term debt:

Long-termErr:508
debt
= 7,50,000 - 4,20,000 =Rs. 3,30,000

(5) Current assets:

Current assets
Current ratio = ----------------------- = 2.9
Current liabilities
Current assets
= ------------------------- = 2.9
4,20,00
Current assets
= 2.9 X 4,20,000 = Rs, 12,18,000

(6) Inventory:
Sales
Net Sales to
= inventory
-------------- = 4.6 times
inventory
23,00,000
= ------------------------- = 4.6 times
Inventory

4.6 x Inventory = 23,00,000

23,00,000
Inventory = ----------------- = Rs. 5,00,000
4.6
(7) Debtors:
Average collection period (or) Debtors velocity
Debtors + Bills receivable
= ----------------------------------- X 360 = 90
Credit sales
Note : Number of working days in a year is assumed to be 360. There are no bills receivable. Hence,
Debtors
Debtors velocity
= -------------- x 360 = 90
23,00,000
90 X 23,00,000
Debtors = ---------------------
= Rs. 5,75,000
 360

(8) Fixed assets:

Fixed assets
Fixed assets to Net worth
= ------------------ = 53.2%
Net worth
i.e. Fixed assets = 53.2% of Net worth
Fixed assets = 53.2% of Rs. 10,00,000 = Rs. 5,32,000

(9) Cash:
Rs.
Total current assets 12,18,000
Less: StockRs. 5,00,000
Debtors Rs. 5,75,000
10,75,000
--------------
Cash
1,43,000
---------------

Balance Sheet
-------------------------------------------------------------------------------------------------------
Rs. Rs.
Net worth 10,00,000 Fixed assets 5,32,000
Long-term3,30,000
debt Cash 1,43,000
Current debt 4,20,000 Stock 5,00,000
Debtors 5,75,000
-------------- ---------------
17,50,000 17,50,000
-------------------------------------------------------------------------------------------------------
e sheet, if its sales are Rs. 23,00,000.
Problem
28: From
the
following
particular
s, prepare
the
balance
sheet of
KSBS
Ltd.,
which
has only
one class
of share
capital:

Sales for
the year -
Rs.
(i) 20,00,000
Gross
profit
ratio -
(ii) 25%
Current
ratio -
(iii) 1.50
 Quick
assets
(cash and
debtors)
ratio -
(iv) 1.25

Stock
turnover
(v) ratio - 15

Debts
collection
period -
1½
(vi) months

Turnover
to fixed
assets -
(vii) 1.5

Ratio of
reserves
to share
capital -
0.33 (i.e.,
(viii) 1/3)

Fixed
assets to
net worth
- 0.83
(ix) (i.e.,5/6)
(The term
"turnover
" refers to
cost of
sales and
the term
"stock" to
closing
stock)
(
Solution :

(1) Gross profit:

Gross profit
Gross profit ratio = ------------------- x 100 = 25%
Sales
i.e, Gross profit is 25% of sales
Gross profit = 25% of Rs. 20,00,000 = Rs. 5,00,000

(2) Cost of goods sold:

Cost of goods
Err:508
sold
= Rs. 20,00,000 - Rs. 5,00,000
= Rs. 15,00,000

(3) Stock:
Stock turnover ratio (based on closing stock)
Cost of goods sold
= --------------------------- = 15
Closing stock
15,00,000
= --------------------------- = 15
Closing stock
15 x Closing
= 15,00,000
stock

15,00,000
Closing stock = ---------------- = Rs. 1,00,000
15
(4) Current assets:
Current assets
Current ratio = ----------------------- = 1.5 : 1
Current liabilities
Quick assets
Quick ratio = ----------------------- = 1.25: 1
Quick liabilities
As there is no bank overdraft, Quick liabilities = Current liabilities
The difference in ratios therefore represents only stock.
Current assets
Err:508
- Quick assets
1.5 - 1.25 0.25
If stock is Rs. 0.25, current assets are 1.5
If stock is Rs. 1,00,000, current assets are
1,00,000
= -------------- x 1.5 = Rs. 6,00,000
0.25

(5) Current liabilities:

Current assets
Current ratio = ----------------------- = 1.5 : 1
Current liabilities
6,00,000
= ---------------------- = 1.5 : 1
Current liabilities
1.5 x Current
= Rs.
liabilities
6,00,000
6,00,000
Current liabilities = --------------- x 1 = Rs. 4,00,000
1.5

(6) Debtors:
Debt Collection Period
Debtors + Bills receivable
= ------------------------------------- x 12 = 1½
Credit sales
There are no bills receivable. Hence,
Debtors
Debtors velocity = ------------------ x 12 = 1.5
20,00,000
20,00,000
Debtors = ------------------ x 1.5 = Rs. 2,50,000
12
(7) Quick assets:
If the stock is 0.25, quick assets are 1.25
If the stock is Rs. 1,00,000, quick assets are
1 00 000
= ------------- x 1.25 = Rs. 5,00,000
0.25

(8) Cash:
Quick assets
= (DebtorsRs.+ Cash)
5,00,000
Less: Debtors
= Rs. 2,50,000
-------------------
Cash
Rs. 2,50,000
-------------------
(9) Fixed assets:
Turnover to fixed assets (based on cost sales)
Cost of goods sold
= -------------------------- = 1.5
Fixed assets
15,00,000
= ------------------------ = .1.5
Fixed assets
1.5 x Fixed assets = Rs. 15,00,000
15,00,000
Fixed assets = ---------------- = Rs. 10,00,000
1.5

(10 ) Net worth:

Fixed assets
Fixed assets
= -----------------------
to net worth = 0.83 (i.e. 5/6)
Net worth
If fixed assets, are Rs. 5, net worth = Rs. 6
If fixed assets are Rs. 10,00,000, net worth
10,00,000
= ------------- x 6 = Rs. 12,00,000
5
(11) Share capital:
Net worth or Proprietary fund = Share capital + Reserves and Surplus
Ratio of Reserves to Share capital = 1 : 3
∴ Net worth = 1 + 3 = 4
If net worth is 4, share capital = 3
 If net worth is Rs. 12,00,000, share capital
12 00 000
= ---------------- x 3 == Rs. 9,00,000
4
(12) Reserves and Surplus:
Share capital
= Rs.
+ Reserves
12,00,000and Surplus
Less: Share capital Err:508 9,00,000
---------------------
Reserves and Surplus Err:508 3,00,000
---------------------
Balance Sheet of KSBS Ltd.
------------------------------------------------------------------------------------------------------
Rs. Rs.
Share capital
9,00,000 Fixed assets 10,00,000
Reserves and3,00,000
SurplusStock 1,60,000
Creditors Debtors 2,50,000
(balancing
4,00,000
figure)Cash 2,50,000
---------------- ----------------
16,00,000 16,00,000
-------------------------------------------------------------------------------------------------------
 The following abridged report related to KSBS. Ltd.

ment for the year ended 31st December, 2006.

Sales (Rs
(all . in
credit) lak
hs)

(-) 600
Cost of
goods
sold

O 2
p 0
e 0
n
i
n
g
st
o
c
k

P 4
u 1
r 0
c
h
a
s
e
s
 C 1 450
l 6
o 0
si
n
g
S
t
o
c
k

Gross 150
Margin

Operati 114
ng
expens
es
Profit 36
before
taxatio
n
Provisi 16
on for
tax
Profit 20
after
tax

Balance Sheet as at 31st December, 2006

Accounts 174 Cash 60
payable

Provision 16 Accounts 120

for tax receivabl
e

Accrued 10 Inventory 160

expenses
Mortgage 50 Land & 130
loan Building
Paid up 160 Plant 30
capital
Reserves 60

Un 30
appropria
ted
profits
500 500

Calculate the ratios which indicate

(i) the rapidity with which accounts receivable are collected
(ii) the ability of the co. to met its current obligations
(iii) what mark-up has been attained.
(iv) the efficiency with which funds represented by inventories are being utilized and managed;
(v) the ability of the co. to meet quickly demands for payment amounts due; and
(vi) the relative importance of proprietorship and liabilities as sources of funds.

Solution:
(i) Accounts receivable turnover
= Sales /Accounts receivable = 660/120 = 5 times

Average collection
Err:508 period
= 365/5 = 73 days

(ii) Ability of meet current obligations

= Current ratio = current assets / Current liabilities = 340/200 = 1.7:1
= Quick ratio = Liquid assets / Current liabilities = 180/200 = 0.9 : 1

(iii) Mark-up
Err:508

(iv) Inventory turnover = Cost of goods sold / Average stock = 450/180 = 2.5 times.

(v) Quick ratio = Liquidity assets / Current liabilities = 180/200 = 0.9

(vi) Equity to the total liabilities
= Shareholders funds / total liabilities = 250/500 = 0.5 or 50%
utilized and managed;