Documents - MX A73e4ratio Analysis

5.
Premier Company's net profit margin is 8 percent, total assets turnover ratio is 2.5
times, debt to total assets ratio is 0.6. What is the return on equity for Premier?
Solution:
Net profit
Return on equity =
Equity
=
Net profit
Net sales
Total assets
x
Net sales
x
Total assets
Equity
1
=
0.08
= 0.6
So
Debt
Note :
= 0.5 or 50 per cent

0.4
Equity
Total assets
Hence Total assets/Equity
6.
2.5
= 1- 0.6 = 0.4
Total assets
= 1/0.4
The following information is given for Alpha Corporation

Sales
Current ratio
Acid test ratio
Current liabilities
3500
1.5
1.2
1000
What is the inventory turnover ratio?

Solution:
Current assets = Current liabilities x 1.5
= 1000 x 1.5 = 1500
Quick assets = Current liabilities x 1.2
= 1000 x 1.2 = 1200
Inventories
= 300
3500
Inventory turnover ratio =
300
7.
= 11.7
The following information is given for Beta Corporation.

Sales
Current ratio
Inventory turnover
ratio
Acid test ratio
5000
1.4
5
1.0
What is the level of current liabilities?

Solution:
Inventory = 5000/5 = 1000
Current assets
Current ratio =
= 1.4
Current liabilities
Current assets Inventories
Acid test ratio =
= 1.0
Current Liabilities
C.A - 1000
= 1.0
CL
CA
1000
-
CL
1.4
= 1.0
CL
1000
= 1.0
CL
1000
0.4 =
CL = 2500
CL
8.
Safari Inc. has profit before tax of Rs.90 million. If the company's times interest
covered ratio is 4, what is the total interest charge?
Solution:
PBT
Rs.90 million
PBIT
Times interest covered =
= 4
Interest
So PBIT = 4 x Interest
PBT = PBIT interest
= 4 x interest - interest = 3 x interest = 90 million
Therefore interest = 90/3 = Rs.30 million
9.
A has profit before tax of Rs.40 million. If its times interest covered ratio is 6, what
is the total interest charge?
Solution:
PBT
Rs. 40 million
PBIT
= 6
Interest
PBIT Interest = PBT = Rs.40 million
6 x Interest Interest = Rs. 40 million
5 x Interest
= Rs.40 million
Hence Interest = Rs.8 million

10.
McGill Inc. has profit before tax of Rs.63 million. If the company's times interest
covered ratio is 8, what is the total interest charge?
Solution:
PBT
Rs.63 million
PBIT
= 8
Interest
PBIT Interest = PBT = Rs.63 million
8 x Interest Interest = 7 x Interest = Rs.63 million
Hence Interest
11.
= Rs.9 million
The following data applies to a firm:

Interest charges
Sales
Tax rate
Net profit margin
Rs.200,000
Rs.6,000,000
40 percent
5 percent
What is the firm's times interest covered ratio?

Solution:
Sales = Rs.6,000,000
Net profit margin = 5 per cent
Net profit = Rs.6,000,000 x 0.05 = 300,000

Tax rate = 40 per cent
300,000
So, Profit before tax =
= Rs.500,000
(1-.4)
Interest charge
= Rs.200,000
So Profit before interest and taxes = Rs.700,000

Hence
Times interest covered ratio =
700,000
= 3.5
200,000
12.

Interest charges
Sales
Tax rate
Net profit margin
Rs.50,000
Rs.300,000
25 percent
3 percent

Solution:
Sales = Rs.300,000
Net profit margin
3 per cent
Net profit = Rs.300,000 x 0.03 = 9,000

Tax rate
25 per cent
9,000
So,
Profit before tax =
= Rs.12,000
(1-.25)
Interest charge
Rs.50,000
So Profit before interest and taxes = Rs.62,000

Hence
13.
62,000
= 1.24
50,000

Interest charges
Sales
Tax rate
Rs.10,000,000
Rs.80,000,000
50 percent
Net profit margin

10 percent
Solution:
Sales = Rs.80,000,000
Net profit margin = 10 per cent
Net profit = Rs.80,000,000 x 0.1 = 8,000,000
Tax rate
= 50 per cent
8,000,000
So,
Profit before tax =
Interest charge
= Rs.16,000,000
(1-.5)
= Rs.10,000,000
So Profit before interest and taxes = Rs.26,000,000

Hence
26,000,000
= 2.6
10,000,000
14.
A firm's current assets and current liabilities are 25,000 and 18,000 respectively.
How much additional funds can it borrow from banks for short term, without
reducing
the current ratio below 1.35?
Solution:
CA = 25,000 CL = 18,000
Let BB stand for bank borrowing
CA+BB
=
1.35
CL+BB
25,000+BB
=
1.35
18,000+BB
1.35x 18,000 + 1.35 BB = 25,000 + BB
0.35BB = 25,000- 24,300 = 700
BB = 700/0.35 = 2,000
15.
LNGs current assets and current liabilities are 200,000 and 140,000 respectively.
How much additional funds can it borrow from banks for short term, without
reducing the current ratio below 1.33?
Solution:
CA = 200,000 CL = 140,000
CA+BB
=
1.33
200,000+BB
=
140,000+BB
1.33
CL+BB
1.33 x 140,000 + 1.33BB = 200,000 + BB

0.33 BB = 200,000- 186,200 = 13,800
BB =13,800/0.33 = 41,818
16.
Navneets current assets and current liabilities are 10,000,000 and 7,000,000
respectively. How much additional funds can it borrow from banks for short term,
without reducing the current ratio below 1.4?
Solution:
CA = 10,000,000
CL = 7,000,,000

CA+BB
=
1.4
CL+BB
10,000,000+BB
=
1.4
7,000,000+BB
1.4 x 7,000,000 + 1.4BB = 10,000,000 + BB
0.4 BB = 10,000,000- 9,800,000 = 200,000
BB = 200,000/0.40 = 500,000
17.
A firm has total annual sales (all credit) of 25,000,000 and accounts receivable of
8,000,000. How rapidly (in how many days) must accounts receivable be collected
if management wants to reduce the accounts receivable to 6,000,000?
Solution:
25,000,000
Average daily credit sales =
= 68,493
365
If the accounts receivable has to be reduced to 6,000,000 the ACP must be:
6,000,000
= 87.6 days
68,493
18.
500,000. How rapidly (in how many days) must accounts receivable be collected if
management wants to reduce the accounts receivable to 300,000?
Solution:
1,200,000
= 3287.67
365
If the accounts receivable has to be reduced to 300,000 the ACP must be:
300,000
= 91.3 days
3287.67
19.
20,000,000. How rapidly (in how many days) must accounts receivable be
collected if management wants to reduce the accounts receivable to 15,000,000?
Solution:
100,000,000
= 273,972.6
365
If the accounts receivable has to be reduced to 15,000,000 the ACP must be:
15,000,000
= 54.8 days
273,972.6
20.
The financial ratios of a firm are as follows.

Current ratio
Acid-test ratio
1.25
=
1.10
Current liabilities
Inventory turnover ratio
=
=
2000
10
What is the sales of the firm?

Solution:
Current assets = Current liabilities x Current ratio
=
2000
x
1.25
=
Current assets - Inventories
21.
2500
= Current liabilities x Acid test ratio

= 2000
x
1.10 = 2200
Inventories
300
Sales
=
=
Inventories
300
x Inventory turnover ratio

x
10
=
3000

Current ratio
Acid-test ratio
Current liabilities
=
=
=
1.33
=
0.80
40,000
6

Solution:
=
40,000
x
1.33
=
22.
Inventories
Sales
=
=
53,200

=
40,000
x
0.80
=
32,000
21,200
Inventories x Inventory turnover ratio
21,200
x
6
= 127,200

Current ratio
Acid-test ratio
Current liabilities
=
=
=
1.6
=
1.2
2,000,000
5
Solution:
= 2,000,000
x
1.6
= 3,200,000
23.

=
2,000,000 x
1.2
=
2,400,000
Inventories
800,000
Sales
Inventories x Inventory turnover ratio
800,000 x 5
4,000,000
Complete the balance sheet and sales data (fill in the blanks) using the following
financial data:
Debt/equity ratio
Acid-test ratio
Total assets turnover ratio
Days' sales outstanding in
Accounts receivable
Gross profit margin
=
=
=
0.80
1.1
2
=
=
=
30 days
30 percent
6
Balance sheet
Equity capital
80,000
Retained earnings
50,000
Short-term bank borrowings . . . .
Sales
Cost of goods sold
Plant and equipment

Inventories
Accounts receivable
Cash
....
....
..
....
....
....
....
....
Solution:
Debt/equity = 0.80
Equity = 80,000 + 50,000 = 130,000
So Debt = Short-term bank borrowings = 0.8 x 130,000
Hence Total assets = 130,000+104,000 = 234,000
Total assets turnover ratio = 2
= 104,000
So Sales = 2 x 234,000 = 468,000

Gross profit margin = 30 per cent
So Cost of goods sold = 0.7 x 468,000 = 327,600
Days sales outstanding in accounts receivable = 30 days
Sales
So Accounts receivable =
30
360
468,000
=
x 30
= 39,000
360
Cost of goods sold
327,600
=
Inventory
= 6
Inventory
So Inventory = 54,600
As short-term bank borrowing is a current liability,
Cash + Accounts receivable
Acid-test ratio =
Current liabilities
Cash + 39,000
=
1.1
104 ,000
So Cash = 75,400
Plant and equipment = Total assets - Inventories Accounts receivable Cash
= 234,000 - 54,600
- 39,000 75,400
= 65,000
Putting together everything we get
Balance Sheet
Equity capital
80,000
Retained earnings
50,000
Short-term bank borrowings 104,000
Plant & equipment

Inventories
Accounts receivable
Cash
65,000
54,600
39,000
75,400
234,000
234,000
Sales
Cost of goods sold
468,000
327,600
24.
financial data:
Debt/equity ratio
Acid-test ratio
Accounts receivable
Gross profit margin
= 0.40
= 0.9
= 2.5
= 25 days
= 25 percent
= 8
Balance sheet
Equity capital
160,000,000
Plant and equipment-------Retained earnings
30,000,000
Inventories
Short-term bank borrowings . . .

Accounts
receivable .. . . .
Cash
....
....
....
Sales
.....
Cost of goods sold
.
Solution:
Debt/equity = 0.40
Equity = 160,000,000 + 30,000,000 = 190,000,000
So Debt = Short-term bank borrowings = 0.4 x 190,000,000
= 76,000,000
Hence Total assets = 190,000,000+ 76,000,000 = 266,000,000

Total assets turnover ratio = 2.5
So Sales = 2.5 x 266,000,000 = 665,000,000
So Cost of goods sold = 0.75 x 665,000,000 = 498,750,000
Sales
25
360
665,000,000
=
x 25
= 46,180,556
360
Cost of goods sold
498,750,000
=
Inventory
= 8
Inventory
So Inventory
62,343,750
As short-term bank borrowings is a current liability,

Acid-test ratio =
Current liability
Cash + 46,180,556
=
0.9
76,000 ,000
So Cash
22,219,444

= 266,000,000 - 62,343,750
- 46,180,556 22,219,444
= 135,256,250
Balance Sheet
Equity capital
Retained earnings
Short-term bank borrowings
Sales
Cost of goods sold
25.
160,000,000
30,000,000
76,000,000
266,000,000
665,000,000
498,750,000
Plant & equipment 135,256,250

Inventories
62,343,750
Accounts receivable 46,180,556
Cash
22,219,444
266,000,000
financial data:
Debt/equity ratio
= 1.5
Acid-test ratio
= 0.3
= 1.9
Accounts receivable
= 25 days
Gross profit margin
= 28 percent
= 7
Balance sheet
Equity capital
600,000
Retained earnings
100,000
Short-term bank borrowings . . .
....
Plant and equipment

Inventories
Accounts receivable
Cash
....
....
....
....
....
Sales
Cost of goods sold
Solution:
. . . ..
Debt/equity = 1.5
Equity = 600,000 + 100,000 = 700,000
So Debt = Short-term bank borrowings =1.5 x 700,000
= 1050,000
Hence Total assets = 700,000+1050,000 = 1,750,000

Total assets turnover ratio = 1.9
So Sales = 1.9 x 1,750,000 = 3,325,000
So Cost of goods sold = 0.72 x 3,325,000 = 2,394,000
Sales
25
360
=
3,325,000
x 25 = 230,903
360
Cost of goods sold
2,394,000
=
= 7
Inventory
Inventory
So Inventory = 342,000
As short-term bank borrowings is a current liability,
Acid-test ratio =
Current liabilities
Cash + 230,903
=
0.3
1050 ,000
So Cash = 84,097
= 1,750,000 342,000 230,903 84,097
= 1,093,000
Balance Sheet
Equity capital
600,000
Retained earnings
100,000
Short-term bank borrowings 1050,000
Plant &equipment 1,093,000

Inventories
342,000
Accounts receivable 230,903
Cash
84,097
1,750,000
Sales
Cost of goods sold
26.
1,750,000
3,325,000
2,394,000
Compute the financial ratios for Acme Ltd.

Evaluate Acme's performance with reference to the standards.
Acme Limited Balance Sheet, March 31, 20X7
Liabilities and Equity
Equity capital
Reserves and surplus
Long-term debt
Short-term bank borrowing
Trade creditors
Provisions
Total
Assets
Fixed assets (net)
Current assets
Cash and bank
Receivables
Inventories
Pre-paid expenses
Others
Rs.60,000,000
45,000,000
72,000,000
40,000,000
30,000,000
15,000,000
262,000,000
Rs.110,000,000
Total
30,000,000
45,000,000
61,000,000
10,000,000
6,000,000
262,000,000
Acme Limited Profit and Loss Account for the Year Ended March 31, 20X7
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Non-operating surplus
Profit before interest and tax
Interest
Rs.320,000,000
204,000,000
116,000,000
50,000,000
66,000,000
4,000,000
70,000,000
12,000,000
Profit before tax

Tax
Profit after tax
Dividends
Retained earnings
58,000,000
20,000,000
38,000,000
4,000,000
34,000,000
Acme
Current ratio
Acid-test ratio
Debt-equity ratio
Times interest covered ratio
Average collection period
Net profit margin ratio
Earning power
Return on equity
Standard
1.3
0.70
2.0
4.5
5.0
45 days
1.5
8%
20 %
18 %
Solution:
a.
For purposes of ratio analysis, we may recast the balance sheet as under.
Let assume that Othersin the balance sheet represents other current assets.
Equity capital
Long-term debt
Assets
.60,000,000
45,000,000
72,000,000
40,000,000
Total
Fixed assets (net)

Current assets
Cash and bank
Receivables
Inventories
Pre-paid expenses
Others
Less:
Current liabilities
Trade creditors
Provisions
Net current assets
217,000,000
110,000,000
30,000,000
45,000,000
61,000,000
10,000,000
6,000,000
30,000,000
15,000,000
Total
Current assets
152,000,000
45,000,000
107,000,000
217,000,000
(i) Current ratio =

Current liabilities
152,000,000
=
= 1.8
85,000,000
(Current liabilities here includes short-term bank borrowing also)
91,000,000
(ii) Acid-test ratio =
=
Current liabilities
85,000,000
= 1.1
Long-term debt + Short-term bank borrowing

(iii) Debt-equity ratio =
Equity capital + Reserves & surplus
72,000,000 + 40,000,000
=
= 1.1
60,000,000 + 45,000,000
(iv) Times interest coverage ratio =

Interest
70,000,000
=
= 5.83
12,000,000
Cost of goods sold
(v) Inventory turnover period
204,000,000
=
Inventory
365
= 3.34
61,000,000
(vi) Average collection period =

Net sales / Accounts receivable
365
=
= 51.3 days
320,000,000/45,000,000
(vii)
Total assets =Equity + Total debt = (60,000,000 + 45,000,000) +(72,000,000+40,000,000)
= 217,000,000
Net sales
320,000,000
Total assets turnover ratio =
=
= 1.5
Total assets
217,000,000
Profit after tax

(ix) Net profit margin
38,000,000
=
Net sales
PBIT
70,000,000
(x) Earning power =
=
Total assets
(xi) Return on equity =
= 11.9%
320,000,000
= 32.3 %
217,000,000
Equity earning
38,000,000
=
= 36.2 %
Net worth
105,000,000
b.
The comparison of the Acmes ratios with the standard is given below
Current ratio
Acid-test ratio
Debt-equity ratio
Earning power
Return on equity
27.
Acme
1.8
1.1
1.1
5.8
3.3
51.3 days
1.5
11.9 %
32.3 %
36.2 %
Standard
1.3
0.7
2.0
4.5
5.0
45 days
1.5
8%
20 %
18 %
Compute the financial ratios for Nainar Ltd.
Evaluate Nainar's performance with reference to the standards.

Nainar Limited Balance Sheet, March 31, 20X7
Equity capital
Long-term debt
Trade creditors
Provisions
Total
Assets
Fixed assets (net)
Current assets
Cash and bank
Rs.100,000,000
65,000,000
140,000,000
70,000,000
24,000,000
19,000,000
418,000,000
Rs. 206,000,000
25,000,000
Receivables
Inventories
Pre-paid expenses
Others
70,000,000
85,000,000
20,000,000
12,000,000
418,000,000
Total
Nainar Limited Profit and Loss Account for the Year Ended March 31, 20X7
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Non-operating surplus
Interest
Profit before tax
Tax
Profit after tax
Dividends
Retained earnings
Rs.740,000,000
520,000,000
220,000,000
102,000,000
118,000,000
12,000,000
130,000,000
22,000,000
108,000,000
46,000,000
62,000,000
20,000,000
42,000,000
Nainar
Current ratio
Acid-test ratio
Debt-equity ratio
Earning power
Return on equity
Standard
1.7
1.0
1.4
5.5
6.0
40 days
2.0
8%
30 %
35 %
Solution:
For purposes of ratio analysis, we may recast the balance sheet as under.
Let assume that Others in the balance sheet represents other current assets.
Equity capital
Long-term debt
100,000,000
65,000,000
140,000,000
70,000,000
Total
Assets
Fixed assets (net)
Current assets
Cash and bank
Receivables
Inventories
Pre-paid expenses
Others
Less:
Current liabilities
Trade creditors
Provisions
Net current assets
375,000,000
206,000,000
25,000,000
70,000,000
85,000,000
20,000,000
12,000,000
212,000,000
24,000,000
19,000,000
43,000,000
169,000,000
375,000,000
Total
Current assets
(i) Current ratio =
Current liabilities
212,000,000
=
1.9
113,000,000
(ii) Acid-test ratio =
127,000,000
=
Current liabilities
113,000,000
Long-term debt + Short-term bank borrowing
(iii) Debt-equity ratio =
Equity capital + Reserves & surplus
= 1.1
140,000,000 + 70,000,000
=
= 1.3
100,000,000 + 65,000,000
(iv) Times interest coverage ratio =
Interest
130,000,000
=
= 5.9
22,000,000
Cost of goods sold
(v) Inventory turnover period
520,000,000
=
Inventory
365
= 6.1
85,000,000
(vi) Average collection period =

Net sales / Accounts receivable
365
=
= 34.5 days
740,000,000/70,000,000
(vii)
Total assets =
Equity + Total debt =(100,000,000 + 65,000,000 )

+(140,000,000+70,000,000)
= 375,000,000
Net sales
740,000,000
=
Total assets
Profit after tax
(ix) Net profit margin
62,000,000
=
Net sales
PBIT
(x) Earning power =
(xi) Return on equity =
= 8.4 %
740,000,000
130,000,000
=
Total assets
= 2.0
375,000,000
= 34.7 %
375,000,000
Equity earning
62,000,000
=
= 37.6 %
Net worth
165,000,000
The comparison of the Nainars ratios with the standard is given below
Nainar
Current ratio
Acid-test ratio
Debt-equity ratio
Earning power
Return on equity
28.
Standard
1.9
1.1
1.3
5.9
6.1
34.5 days
2.0
8.4 %
34.7 %
37.6 %
1.7
1.0
1.4
5.5
6.0
40 days
2.0
8%
30 %
35 %
The comparative balance sheets and comparative Profit and Loss accounts for
Nalvar Limited, are given below:
Comparative Balance Sheets, Nalvar Limited
(Rs. in million)
Share capital
Long-term debt
Current liabilities
Total
Assets
Net fixed assets
Current assets
Cash and bank
Receivables
Inventories
Other Assets
Total
20X3
1.6
1.0
1.4
1.3
1.1
6.4
20X4
1.6
1.6
1.5
1.5
1.3
7.5
20X5
1.8
2.4
1.8
1.7
1.5
9.2
20X6
1.8
2.3
1.6
1.5
1.6
8.8
20X7
2
3
1.4
1.2
1.8
9.4
1.2
1.4
1.7
0.3
1.8
1.8
0.3
2.1
2.2
0.2
2.5
2.8
0.4
2.4
2.4
0.3
2.5
2.8
1.3
6.4
1.5
7.5
1.7
9.2
1.9
8.8
1.8
9.4
Comparative Profit and Loss Accounts, Nalvar Limited

(Rs. in million)
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Non-operating surplus deficit
Interest
Profit before tax
Tax
Profit after tax
20x3
3.8
2.6
1.2
0.3
0.9
0.1
1
0.1
0.9
0.05
0.85
20X4
4.2
3.1
1.1
0.3
0.8
0.2
1
0.1
0.9
0.08
0.82
20X5
5.3
3.9
1.4
0.4
1
0.1
1.1
0.2
0.9
1
-0.1
20X6
6.5
4
2.5
0.6
1.9
0.3
2.2
0.1
2.1
1.2
0.9
20X7
7.8
4.8
3
0.6
2.4
0.3
2.7
0.1
2.6
1.2
1.4
Required: Compute the important ratios for Nalvar Limited for the years 20X3- 20X7.
You may assume that other assets in the balance sheet represent other current
assets.
Current ratio
Debt-equity ratio
Net profit margin
Earning power
Return on equity
Solution
We will rearrange the balance sheets as under for ratio analysis. It is assumed that
Other assets are other current assets
Share capital
Long-term debt
Short-term bank
borrowing
Total
Assets
Net fixed assets
Current assets
Cash and bank
20X3
1.6
1
1.4
20X4
1.6
1.6
1.5
20X5
1.8
2.4
1.8
20X6
1.8
2.3
1.6
20X7
2
3
1.4
1.3
5.3
1.5
6.2
1.7
7.7
1.5
7.2
1.2
7.6
1.7
1.2
0.3
1.4
0.3
0.2
0.4
0.3
Receivables
Inventories
Other current assets
Less: Current liabilities
Other current liabilities
Net current assets
Total
1.8
1.8
1.3
1.1
5.2
1.1
4.1
5.3
2.1
2.2
1.5
1.3
2.5
2.8
1.7
7.2
1.3 1.5
4.8
6.2
1.5
5.7
7.7
6.1
2.4
2.4
1.9
1.6
2.5
2.8
1.8
7.1
1.6
5.5
7.2
1.8
The required ratios are as under:
Current ratio
Debt-equity ratio
Total assets
turnover ratio
Net profit margin(%)
Earning power (%)
Return on equity (%)
29.
20X1
20X2 20X3
20X4
20X5
2.2
2.2
2.3
2.3
2.5
1.0
0.9
0.8
0.8
0.5
0.7
22.4
18.9
32.7
0.7
19.5
16.1
25.6
0.7
-1.9
14.3
-2.4
0.9
13.8
30.6
22.0
1.0
17.9
35.5
28.0
The comparative balance sheets and comparative Profit and Loss accounts for
Somani Limited, a machine tool manufacturer, are given below:
Comparative Balance Sheets, Somani Limited (Rs. in million)
Share capital
Long-term debt
Current liabilities
Total
Assets
Net fixed assets
Current assets
Cash and bank
Receivables
Inventories
Other Assets
Total
20X 20X
20X3
4
5
20X6
20X7
41
50
50
50
55
16
36
72
118
150
28
25
30
29
22
35
30
36
38
38
24
28
30
30
25
144
169
218
265
290
72
80
75
102
103
8
24
35
5
144
9
30
42
8
169
15
59
55
14
218
12
62
75
14
265
11
85
79
12
290
7.4
1.8
5.6
7.6
Comparative Profit & Loss Account of Somani Ltd

(Rs. in million)
20X3
285
164
121
64
57
3
60
8
52
15
37
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Non-operating surplus deficit
Interest
Profit before tax
Tax
Profit after tax
20X
4
320
150
170
66
104
4
108
6
102
26
76
20X
5
360
170
190
68
122
4
126
10
116
30
86
20X6
350
175
175
68
107
3
110
12
98
26
72
20X7
355
174
181
64
117
3
120
12
108
29
79
Compute the following ratios for years 20X3-20X7:

Current ratio
Debt-equity ratio
Net profit margin
Earning power
Return on equity
For ratio analysis purpose, we will rearrange the balance sheet as under. It is
assumed that Other assets are other current assets
Share capital
Long-term debt
Short-term
bank
borrowing
Total
Assets
Net fixed assets
Current assets
Cash and bank
Receivables
Inventories
Other assets
Less : Current liabilities
Net current assets
Total
8
24
35
5
24
20X3
41
16
28
20X4
50
36
25
20X5
50
72
30
20X6
50
118
29
20X7
55
150
22
35
120
30
141
36
188
38
235
38
265
72
80
75
102
103
11
85
79
163 12
30 25
133
235
187
25
162
265
72
24
48
120
9
30
42
8
28
89
28
61
141
15
59
55
14
30
143
30
113
188
12
62
75
14
30
The ratios worked out are as under:
29.
Current ratio
Debt-equity ratio
Net profit margin (%)
Earning power (%)
Return on equity (%)
20X3 20X4 20X5 20X6 20X7

1.2
1.5
2.2
2.4
3.0
1.1
0.6
0.5
0.4
0.3
2.4
2.3
1.9
1.5
1.3
13.0 23.8 23.9 20.6 22.3
50.0 76.6 67.0 46.8 45.3
64.9 88.4 70.5 42.9 38.5
The Balance sheets and Profit and Loss accounts of LKG Corporation are given
below.
Prepare the common size and common base financial statements
Balance Sheets (Rs. in million)
20x6
Shareholders' funds
256
Loan funds
156
Total
412
Fixed assets
322
Investments
15
Net current assets
75
Total
412
Profit & Loss Accounts (Rs. in million)
20x6
Net sales
623
Cost of goods sold
475
Gross profit
148
PBIT
105
Interest
22
PBT
83
Tax
41
PAT
42
20x7
262
212
474
330
15
129
474
20x7
701
552
149
89
21
68
34
34
Solution
Common Size statements:
Profit and Loss Account
Net sales
Cost of goods sold
Gross profit
PBIT
Interest
PBT
Tax
PAT
30.
Regular ( in
Rs. million)
20x6 20x7
623
701
475
552
148
149
105
89
22
21
83
68
41
34
42
34
Common Size(%)
20x6
20x7
100
100
76
79
24
21
17
13
4
3
13
10
7
5
7
5
Balance Sheet
Regular ( in
million)
20x6 20x7
Common Size (%)

20x6
20x7
Shareholders' funds
Loan funds
Total
Fixed assets
Investments
Net current assets
256
156
412
322
15
75
262
212
474
330
15
129
62
38
100
78
4
18
55
45
100
70
3
27
Total
412
474
100
100
The Balance sheets and Profit and Loss accounts of Grand Limited are given below.
Prepare the common size and common base financial statements
Rs. in million
Balance Sheet
20x6
20x7
Shareholders fund
85
85
Loan funds
125
180
Total
210
265
Fixed assets
127
170
Investments
8
10
Net current assets
75
85
Total
210
265
Profit & Loss Account

Net sales
Cost of goods sold
Gross profit
PBIT
Interest
PBT
Tax
PAT
(Rs. in million)
20x6
20x7
450
560
320
410
130
150
85
98
12
17
73
81
22
38
51
43
Solution:
Balance Sheet
Shareholders'
funds
Loan funds
Total
Fixed assets
Investments
Net current assets
Total
Profit & Loss
Account
Net sales
Cost of goods sold
Gross profit
PBIT
Interest
PBT
Tax
PAT
Regular
(Rs. in million)
20x6
20x7
85
125
210
127
8
75
210
85
180
265
170
10
85
265
Regular
(Rs. in million)
20x6
20x7
450
560
320
410
130
150
85
98
12
17
73
81
22
38
51
43
Common Size
(%)
20x6
20x7
40
60
100
60
4
36
100
32
68
100
64
4
32
100
Common Size
(%)
20x6
20x7
100
100
71
73
29
27
19
18
3
3
16
14
5
7
11
8
Common base year statements

Regular
Common base year
Balance Sheet
(Rs. in million)
(%)
20x6
20x7
20x6
20x7
Shareholders' funds
85
85
100
100
Loan funds
125
180
100
144
Total
210
265
100
126
Fixed assets
127
170
100
134
Investments
8
10
100
125
Net current assets
75
85
100
113
Total
210
265
100
126
Profit & Loss Account
Net sales
Cost of goods sold
Gross profit
PBIT
Interest
PBT
Tax
PAT
Regular
(Rs. in million)
20x6
20x7
450
560
320
410
130
150
85
98
12
17
73
81
22
38
51
43
Common base
year (%)
20x6
20x7
100
124
100
128
100
115
100
115
100
142
100
111
100
173
100
84

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5.

= 0.5 or 50 per cent

The following information is given for Alpha Corporation

What is the inventory turnover ratio?

The following information is given for Beta Corporation.

What is the level of current liabilities?

Acid test ratio =

Times interest covered =

Times interest covered =

Hence Interest = Rs.8 million

Times interest covered =

The following data applies to a firm:

What is the firm's times interest covered ratio?

Net profit = Rs.6,000,000 x 0.05 = 300,000

So Profit before interest and taxes = Rs.700,000

The following data applies to a firm:

What is the firm's times interest covered ratio?

Net profit = Rs.300,000 x 0.03 = 9,000

Profit before tax =

So Profit before interest and taxes = Rs.62,000

The following data applies to a firm:

Net profit margin

Profit before tax =

So Profit before interest and taxes = Rs.26,000,000

1.33 x 140,000 + 1.33BB = 200,000 + BB

Let BB stand for bank borrowing

The financial ratios of a firm are as follows.

What is the sales of the firm?

= Current liabilities x Acid test ratio

x Inventory turnover ratio

The financial ratios of a firm are as follows.

What is the sales of the firm?

= Current liabilities x Acid test ratio

The financial ratios of a firm are as follows.

= Current liabilities x Acid test ratio

Inventories x Inventory turnover ratio

Plant and equipment

So Sales = 2 x 234,000 = 468,000

Plant & equipment

Short-term bank borrowings . . .

Hence Total assets = 190,000,000+ 76,000,000 = 266,000,000

As short-term bank borrowings is a current liability,

Plant and equipment = Total assets - Inventories Accounts receivable Cash

Plant & equipment 135,256,250

Plant and equipment

Hence Total assets = 700,000+1050,000 = 1,750,000

Plant &equipment 1,093,000

Compute the financial ratios for Acme Ltd.

Profit before tax

Fixed assets (net)

(i) Current ratio =

(ii) Acid-test ratio =

Long-term debt + Short-term bank borrowing

(iv) Times interest coverage ratio =

(v) Inventory turnover period

(vi) Average collection period =

Profit after tax

(x) Earning power =

(xi) Return on equity =

Compute the financial ratios for Nainar Ltd.

Evaluate Nainar's performance with reference to the standards.

(v) Inventory turnover period

(vi) Average collection period =