12th class RATIO ANALYSIS CA/CMA SANTOSH KUMAR

CHAPTER 15. ACCOUNTING RATIOS

IMPORTANT NOTE:-- According to the Guidelines issued by CBSE, accounting treatment of following
will not be evaluated:

(i) Reserves and Surplus: (Revaluation Reserve, Share Options Outstanding and Other
Reserves are not to be evaluated. However, General Reserve can be evaluated; Mon ey Receiv ed
again st Sh are Warran ts;
( iii) Share Application Mon ey Pending Allotment;
( iv) Deferred Tax Liabilities (Net);
( v) Other Long-term Liabilities;
( vi) Intangible Assets: (Masthead and Publishing Titles, Copyrights and Patents and Other
Intellectual Property Rights, Services and Operating Rights and Licenses and Franchises are
not to be evaluated);
( vii) Capital Work-in-Progress;
Intangible Assets Under Develop ment;

(ix) Deferred Tax Assets (Net);

(x) Other Non-current Assets;
(xi) Cash and Cash Equivalents: (Earmarked Balance with Banks, Balances with Banks held as
Margin Money or Security against borrowings, guarantees, other commitments and Bank
Deposits with more than 12 months maturity are not to be evaluated); and
(xii) Treatment of Unamortized Expenses.
Also note: Accounting Treatment of Other Current Assets is restricted to Prepaid Expenses, Accrued Incomes
and Advance Tax only.

The expression 'Not to be evaluated' used in the guidelines, means that a student will not be
examined for the above items in the examination in the topics of Comparative Statements, Common-size
Statements, Accounting Ratios and Cash Flow Statement. In simple words, questions on Comparative
Statements, Common-size Statements, Accounting Ratios and Cash Flow Statement will not have
entries or items from above heads.

Meaning of ratio analysis :--

Meaning of ratio-- Ratio' is an arithmetical expression of relationship between two interdependent

or related items. Ratios, when calculated on the basis of accounting information, are called Accounting
Ratios. Accounting ratio may be expressed as an arithmetical relationship between two accounting
variables.

EXPRESSION OF RATIOS :- Accounting Ratios can be expressed in any of the following forms:

(a) Pure: It is expressed as a quotient. For example, Current Ratio which expresses the relationship
between Current Assets and Current Liabilities is (say) 2.

Current Ratio = = =2

Alternatively, it may also be expressed as 2 : 1.

(b ) Percentage: It is expressed in percentage. For example, Net Profit Ratio which relates Net Profit to
Revenue from Operations, i.e., Net Sales

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Net Profit Ratio= X100= (say) 25%.

(a) Times: It is expressed in number of times . For example, Trade Payables Turnover Ratio, which
shows relationship between Net Credit Purchases and Average Trade Payables, is (say) 4
Times.
(b) Fraction: It is expressed in fraction. For example, ratio of fixed assets t o share capital is (say)
3/4 (i.e. 0.75).

MEANING OF RATIOS ANALYSIS:- Ratio Analysis is a technique of Financial Statements Analysis. It is

the most widely used tool to interpret quantitative relationship between two variables of the
financial statements. An Analysis of financial statements with the help of 'accounting ratio' is termed as 'Ratio
Analysis'.
Ratio analysis is a process of determining and interpreting relationships between the items of
financial statements to provide a meaningful understanding of the performance and financial position
of an enterprise. Thus, it is a technique of analysing the financial statements by computing ratios.

OBJECTIVE OF RATIO ANALYSIS:-- Ratio analysis serves the purpose of various users who
are interested in the financial statements. It simplifies, summarises and systematises the
figures in the financial statements. The objectives of ratio analysis are:

1. To simplify the accounting informat ion.

2. To determine liquidity (Short-term solvency and Long-term solvency of the business.
3. To assess the operating efficiency of the business.
4. To analyse the profitability of the business.
5. To help in comparative analysis, i.e., inter-firm and intra-firm comparisons.
ADVANTAGES OF RATIO ANALYSIS:- The advantages of ratio analysis are as follows:

1. Useful Tool for Analysis of Financial Statements: Accounting ratios are useful for
understanding the financial position of an enterprise. Bankers, investors, creditors, etc.,
all analyse Balance Sheet and Statement of Profit and Loss using ratios.
2. Simplifies Accounting Data: Accounting ratio simplifies, summarises and systematises
accounting data to make it understandable. Its main contribution lies in communicating
precisely the interrelationships which exist between various elements of financial
statements.
3. Useful in Assessing the Operating Efficiency of Business: Accounting ratios are useful for
assessing the financial health and performance of an enterprise. It is assessed by
evaluating liquidity, solvency, profitability, etc.
4. Useful for Forecasting: Ratios are helpful in business planning and forecasting. The trend
of ratios is analysed and used as a guide for future planning. What should be the course of
action in the future is decided, many a times on the basis of ratio analysis.
5. Useful in Locating the Weak Areas: Accounting ratios assist in locating the weak areas of
the business even though the overall performance may be good. The management can
then pay attention to the weaknesses and take remedial action.
6. Useful in Inter-firm and Intra-firm Comparison: A firm may compare its performance with
that of other firms or with the industry standards in general. The comparison is called
Inter-firm Comparison or Cross-sectional Analysis. If the performance of different units
belonging to the same firm is to be compared, it is called Intra-firm Comparison or Time-
series Analysis. Accounting ratios make the comparison simple.

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LIMITATIONS OF RATIO ANALYSIS:--Ratio analysis is a powerful tool in assessing the strengths

and weaknesses of an enterprise. It also has certain limitations which are discussed below:

1. False Result: Ratios are calculated from the financial statements, so the reliability of ratio and its
analysis is dependent upon the correctness of the financial statements. If the financial statements
are not true and fair, the analysis will give a false picture of the affairs.
2. Qualitative Factors are Ignored: Ratio analysis is a technique of quantitative analysis and thus,
ignores qualitative factors, which may be important in decision -making.
3. Lack of Standard Ratio: There is no single standard ratio against which the ratio can be
compared.
4. May not be Comparable: Ratios may not be comparable if different firms follow different accounting
policies and procedures. For example, one firm may follow Straight Line Method of
Depreciation while another may follow Diminishing Balance Method.
5. Price Level Changes are not considered: Change in price level affects the comparability of the
ratios. But price level changes are not considered in accounting variables from which ratios
are computed. This handicaps the utility of accounting ratios.
6. Window Dressing: Ratios may be affected by window dressing. Manipulation of accounts is a
way to conceal vital facts and present the financial position better than what it actually is.
On account of such a situation, presence of particular ratio may not be a definite indicator of
good or bad management.
7. Personal Bias: Personal judgments play an important role in preparing financial statements and,
therefore, the accounting ratios are also not free from this limitation. The ratios have to be
interpreted but different people may interpret the same ratio in different ways.
Classification of types of ratio: - Ratios may be classified into following four categories:

1. Liquidity Ratios: These ratios show the ability of the enterprise to meet its short -
term financial obligations. Important Liquidity Ratios are: (i) Current Ratio, and (ii)
Quick Ratio.
2. Solvency Ratios: These ratios are calculated to assess the long-term financial
position of the enterprise. Solvency means ability of the enterprise to meet its long -
term financial obligations. Important Solvency Ratios are: (i) Debt to Equity
Ratio, (ii) Total Assets to Debt Ratio, (iii) Proprietary Ratio, and (iv) Interest
Coverage Ratio.
3. Activity Ratios or Turnover Ratios: These ratios show how efficiently a company is
using its resources. Important Activity Ratios are: (i) Inventory Turnover Ratio, (ii) Trade Receivables
Turnover Ratio, (iii) Trade Payables Turnover Ratio, and (iv) Working Capital Turnover Ratio.
4. Profitability Ratios: Profitability of a firm can be measured by its profitability ratios.
Important Profitability Ratios are: (i) Gross Profit Ratio, (ii) Operating Ratio, (iii) Operating Profit
Ratio, (iv) Net Profit Ratio, and (v) Return on Investment (ROI).

1. LIQUIDITY RATIOS (SHORT-TERM SOLVENCY):-- 'Liquidity of Business' refers to the firm's ability to meet its current
obligations, i.e., short-term liabilities. Liquidity ratios are those ratios which are computed to evaluate the
capability of the entity to meet its short-term liabilities. Commonly used liquidity ratios are:
(i) Current Ratio; and (ii) Liquid Ratio or Quick Ratio.

1. Current Ratio :-- Current Ratio is a liquidity ratio that measures ability of the enterprise to pay its
short-term financial obligations, i.e., current liabilities. It is a relationship of current assets and current liabilities.
Current Ratio indicates whether the enterprise will be able to meet its short -term financial
obligations when they become due for payment. Thu s, Current Ratio is a measurement of
financial health of the enterprise in a short -term.
The formula for calculating the Current Ratio is:

Current Ratio =

It is expressed as a 'Pure Ratio' say, 2 : 1.

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Current Assets :-- Current Assets' are the assets that are either in the form of Cash and Cash
Equivalents or can be converted into Cash and Cash Equivalents within 12 months from the date of
Balance Sheet or within the period of operating cycle, whichever is more. They are shown under the head
'Current Assets' in the Balance Sheet. They include:

 Current Investments,
 Inventories (Excluding Loose Tools and Stores and Spares),
 Trade Receivables (bills receivable and sundry
debtors less provision for doubtful debts),
 Cash and Cash Equivalents (cash in hand, cash at bank, cheques /drafts in hand, etc.),
 Short-term Loans and Advances, and
 *Other Current Assets (prepaid expenses, interest receivable, etc.).

Current Liabilities :-- 'Current Liabilities' are the liabilities repayable within 12 months from the date of
Balance Sheet or within the period of operating cycle, whichever is higher. They are shown under
the head 'Current Liabilities' in the Balance [Link] include:
 Short-term Borrowings,
 Trade Payables (bills payable and sundry creditors),
 Other Current Liabilities (current maturities of long-term debts, interest accrued but not due on
borrowings, interest accrued and due on borrowings, outstanding expenses, unclaimed
dividend, calls-in-advance, etc.), and
 Short-term Provisions.
nd
NOTE:--As per CBSE Guidelines (Circular No. Acad -43/2013 dated 2 July, 2013), ‘ Other
Current Assets’ except prepaid expensed, accrued incomes and advance tax, are not to be
evaluated. Therefore, the illustrations and questions do not include ‘Other Current Assets’
other than prepaid expenses, accrued incomes and advance tax.

Ideal Ratio: The acceptable Current Ratio differs from industry to industry depending on the risk
involved. However, generally accepted standard of Current Ratio is 2 : 1, i.e., current assets should
be twice the current liabilities.

If the Current Ratio is 2 or more, it means the firm is adequately liquid and shall be able to meet its
current obligations but if the Current Ratio is less than 2, it means the firm may face difficulty in
meeting its current obligations.

High Current Ratio means better liquidity position. But a very high Current Ratio means poor
operational efficiency. It may be b ecause of following reasons:

(a) stock may be increasing due to poor sales;

(b) large amount is invested in trade receivables due to poor collection or extended credit period; and
(c) cash and bank balances are lying idle because of poor cash management.
Low Current Ratio may be due to inadequate investment in current assets which may result in low
liquidity and may threaten the solvency of the enterprise. Current Ratio should be reasonable. It should
neither be too high nor too low. Both the situations are disadvantageous

Objective and Significance: The objective of calculating Current Ratio is to assess the ability c: the enterprise to
meet its short-term financial obligations, i.e., current liabilities. It is a ratio compute,: to assess short-term

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solvency of the enterprise as on the date when Current Ratio computed. It shows the number
of times current assets are of current liabilities.

Question 1. From the following information, compute Current Ratio:

Trade Receivables (Sundry

1,00,000 Bills Payable 20,000
Debtors)
Prepaid Expenses 10,000 Sundry Creditors 40,000
Cash and Cash Equivalents 30,000 Debentures 2,00,000
Short-term Investments 20,000 Inventories 40,000
Machinery 7,000 Expenses Payable 40,000

Solution: Current Ratio = = =2:1

Question 2. From the following Balance Sheet of COC Ltd. as at 31st March, 2019, calculate Current
Ratio:

Particulars

 EQUITY AND LIABILITIES

1. Shareholders' Funds

(a)
Share Capital 7,50,000
(b) Reserves and Surplus 2,50,000
2. Non-Current Liabilities

Long-term Borrowings 6,00,000

3. Current Liabilities

(a) Short-term Borrowing 3,50,000

(b) Trade Payables 50,000
(c) Short-term Provisions 50,000
Total 20,50,000

 . ASSETS
1. Non-Current Assets
Fixed Assets:
Tangible Assets 10,00,000

2. Current Assets
(a) Inventories 4,00,000
(b) Trade Receivables 3,00,000
(c) Cash and Cash Equivalents 2,75,000
(d) Other Current Assets 75,000
Total 20,50,000

Additional Information:
1. Inventories include Loose Tools of Rs 1,50,000.

2. Other Current Assets: Prepaid Expenses 25,000; and Advance Tax 50,000.

Solution: Current Ratio = = =2:1

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Question3. Current Ratio is 2.5; Working Capital is Rs. 60,000. Calculate the amount of Current Assets
and Current Liabilities.

Solution: Current Ratio = =2.5

Current Assets = 2.5 x Current Liabilities

Working Capital = Rs 60,000 (Given)

Let Current Liabilities be x; Current Assets = 2.5x

Working Capital = Current Assets - Current Liabilities

2.5x - x = Rs 60,000

x = Rs 60,000/1.5 = 40,000 [Current Liabilities].

Current Assets = Rs. 40,000 x 2.5 = 1,00,000.

Question 4. Working Capital is Rs. 7,20,000; Trade Payables Rs. 40,000; Other Current
Liabilities Rs. 2,00,000; calculate Current Ratio.

Solution: Current Ratio = = =4:1

Current Liabilities = Trade Payables + Other Current Liabilities

=Rs 40,000+Rs2,00,000 = Rs 2,40,000.
Working Capital = Current Assets = Working Capital + Current Liabilities
= 7,20,000+2,40,000 = Rs. 9,60,000

Question 5. Current Assets are Rs 4,00,000: Inventories Rs 2,00,000; Working Capital Rs 2,40,000,
Calculate Current Ratio.
Solution:
Current Ration = = =2.5:1
Working Capital = Current Assets – Current Liabilities
Current Liabilities = Currents Assets – Working Capital
= Rs 4,00,000 – Rs 2,40,000 =Rs 1,60,000
Note: Inventories are already included in Current Assets. Hence will not be added to Current Assets.

Question 6. Current Assets are Rs 5,25,000; Inventories Rs 2,00,000 (includes Loose Tools Rs
75,000); Working Capital Rs 2,25,000, Calculate Current Ratio.
Solution:
Current Ratio = = =1.5:1.
Working Capital = Current Assets – Current Liabilities
Current Liabilities = Current Assets – Working Capital
=Rs. 5,25,000- Rs 2,25,000 = Rs 3,00,000
* Current Assets = Current Assets – Loose Tools
= Rs 5,25,000- Rs 75,000 = Rs 4,50,000.
Note: Loose Tools are excluded from Current Assets to compute current Ratio.

Question 7. A company had current Assets of Rs 3,00,000 and Current Liabilities of Rs 1,40,000.
After wards it purchased goods for Rs 20,000 on credit. Calculate current Ratio after the purchase.
Solution:
Current Ratio= = =2:1.
Purchased of goods of Rs 20,000 on credit results into increase in stock (i.e., Current Assets) and
creditors (i.e., Current Liabilities) by Rs 20,000.

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Question 8. Current Liabilities of a company were Rs 1,00,000 and its current ratio was 2.5 :1. It paid
Rs 25,000 to a creditor. Calculate Current ratio after the payment.
Solution:
Current Ratio = = = 3:1
Working Note:
As, Current Liabilities are Rs 1,00,000 and Current Ratio is 2.5:1;
Current Assets= Rs 1,00,000 x 2.5 = Rs 2,50,000

After payment of Rs 25,000 to a creditor, Cash (i.e., Current Asset) and Creditors (i.e., Current
Liability ) both will reduce by Rs 25,000 each. Thus,
Current Assets = Rs 2,50,000 - Rs 25,000 =Rs 2,25,000.
Current Liabilities= Rs 1,00,000 - Rs 25,000 = Rs 75,000.

Question 9. Ratio of Current Assets (Rs 6,00,000) to Current Liabilities ( Rs 4,00,000) is 1.5:1. The
accountant of the firm is interested in maintaining a Current Ratio of 2:1, by paying Part of the
Current liabilities. Compute amount of Cu rrent Liabilities that should be paid, so that Current Ratio
at the level of 2:1 may be maintained. (Delhi 2004)

Current Ratio = = =
Let the amount paid towards Current Liabilities be x
After the payment of a part of Current Liabilities, Cash (i.e., Current Asset) and Current Liabilities
both will reduce by x. Thus,

Rs 8,00,000 - 2x = Rs 6,00,000 – x
Rs 8,00,000 – Rs 6,00,000 = 2x - x
Rs 2,00,000 = x
Current Liabilities that should be paid Rs 2,00,000.

Question 10. Ratio of Current Assets (Rs 10,00,000) to Current Liabilities (Rs 4,00,00) is 2.5:1. The
accountant of the firm is interested in maintaining a Current Ratio of 2:1, by acquiring some current
assets on credit. You are required to suggest him the amount a of current assets that should be
acquired.
Solution: Let the amount of Current Assets acquired on credit be x.
After the acquisition of Currents Assets on credit, both Current Assets and Current Liabilities will
increase by x. Thus,
Current Ratio = = =2
Rs 8,00,000+2x=Rs 10,00,000+x
2x-x=Rs 10,00,000 – Rs 8,00,000
X= Rs 2,00,000
Current Assets that should be acquired = Rs 2,00,000.

Question 11. A firm had Current assets of Rs 3,00,000. It paid Current Liabilities of Rs 60,000. After
the payment, Current Ratio was 2:1. Determine current Liabilities a nd working Capital after and
before the payment was made.
Solution:
Let the Current Liabilities after payment of Rs 60,000 be X, which reduces cash (i.e., Current Assets)
by the same amount. Thus,
Current Ratio =

2x = Rs 2,40,000
Current Liabilities after payment = Rs 2,40,000/2 =Rs 1,20,000

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Current Liabilities before payment= Rs 1,20,000+ Rs 60,000= Rs 1,80,000

Working capital after payment = Rs 2,40,000(CA) – Rs 1,20,000(CL) = Rs 1,20,000.
Working Capital before payment = Current Assets – Current Liabilities before payment
= Rs. 3,00,000 – Rs 1,80,000 = Rs 1,20,000.
Question 12. Current Ratio of a company is 2:1. State giving reasons, which of the following
would improve, reduce or not change in the ratio:

(I) Repayment of a current liability.

(II) Purchase of goods for cash.
(III) Sale of office equipment for Rs 4,000 ( book value Rs 5,000).
(IV) Purchase of Stock-in-trade on credit.
(V) Sale of goods Rs 11,000 (Cost Rs 10,000).
(VI) Payment of dividend.

Solution: In such questions it is better to assume accounts of current assets (CA) and current liabilities (CL). It
then becomes easy to determine effect of the transaction on the ratio.
Current Ratio (Given) is 2:1, let us assume CA = Rs 20,000 and CL = Rs 10,000.

(i) Repayment of current liability will improve Current ratio because fall in current
asset will be less than twice the fall in current liability.
(Suppose Rs 5,000 are paid for current liability, balance would be CA=Rs 15,000 and
CL = Rs 5,000 ; Ratio will improve to 3:1.)
(ii) Purchase of goods on cash will not change the Current Ratio, neither the total
current assets nor the total current liabilities are affected since there is only a
conversion of one current asset (Cash) into other current asset (Goods).
(iii) Sale of office equipment will improve the Current Ratio because current asset (
Cash ) will increase without any change in current liability.
(iv) Both the Total Current Assets and Total Current Liabilities are increased by the
same amount Therefore, the current ratio will reduce.
(v) Sale of goods for Rs 11,000; cost being Rs 10,000 will improve the Curr ent Ratio
because current asset (Cash or Trade Receivables) will increase by Rs 1,000.
(vi) Payment of dividend will reduce the total of current assets and total of current
liabilities by the same amount. Therefore, the Current Ratio will improve.

Question 13. Current Ratio of a company is 2:1. State giving reasons, which of the following
will improve, reduce or not change the ratio:

(i) Redemption of Debentures.

(ii) Purchase of goods against cheque.
(iii) Purchase of Loose Tools against cash.
(iv) Sale of fixed asset against che que.
(v) Receipt of cheque from debtor.

Solution:
(i) Redemption of Debentures will improve the current ratio as both Current
Assets and Current Liabilities have decreased by the same amount, if
redemption of debentures takes place in the current year where outs tanding
debentures are considered as Current Liability .
(ii) Purchase of goods against cheque will not change the Current Ratio as one
current asset (Goods) replaces another current asset (Bank).
(iii) Purchase of Loose Tools against cash will reduce the Current Ratio as current
asset (Cash) declines while Loose Tools are not included in current asset at the
time of calculating Current Ratio.
(iv) Sale of fixed asset against cash will improve the Current Rat io since current
asset (Bank) increases while in current liabilities there is no change.

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(v) Cheque received from a debtor will not change the Current Ratio since on
current asset (Debtor) is replaced by another current asset (Bank).

Question 15. The Current Ratio of a company is 2.1 : 1.2. State with reasons, which of the
following transactions will increase, decrease or not change the ratio:

(i) Redeemed 9% Debentures of Rs 1,00,000 at a premium of 10%.

(ii) Received from debtors Rs 17,000.
(iii) Issued Rs 2,00,000 Equity shares to the vendors of machinery.
(iv) Accepted bills of exchange drawn be the creditors Rs 7,000.

Solutions :
S. No. Transactions Effects on Current Reasons
Ratio

(i) Redeemed 9% Debentures Increase If redemption of debentures takes

of Rs 1,00,000 at a place in the current year where
premium of 10% outstanding debentures are
considered as Current Liability,
in such a case current ratio will
increase because both Current
Assets and Current Liabilities
have decreased by the same
amount

(ii) Received from debtors Rs No Change It will increase cash and decrease
17,000 debtors with the same amount.
Hence, both Current Assets and
Current Liabilities remain
unchanged.

(iii) Issued Rs 2,00,000 Equity No Change Both Current Assets and Current
shares to the vendors of Liabilities are no affected.
Machinery

(iv) Accepted Bills of No Change No change in Current Assets and

Exchange drawn by the Current Liabilities. Because
creditors Rs 7,000 increase in one current Liability
results in decrease in a nother
Current Liability with the same
amount.

Question 16. Current Ratio of X Ltd. Is 2;1. State with reason, which of the following transactions would (i)
increase (ii) decrease; (iii) not change the ratio:

(i) Included in the Trade Payables was a bill payable of Rs 9,000 which was met on maturity.
(ii) Company issued 1,00,000 Equity Shares of Rs 10 each to the Vendors of Machinery purchased.
Solution :

Change Reason
(i) Increase Including a Bill payable met on maturity would decrease both Current
Assets (cash) and Current Liabilities ( Bills payable) by the same

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amount.
(iii) No Change Payment to Vendors of machinery by way of issuing Equity Shares
would neither change Current Assets nor Current Liabilities .

Question 17. The Current Ratio of X Ltd. Is 1:1. State with reason, which of the following transactions would
(i) increase or (ii) decrease or (iii) not change the ratio :
Included in the Trade Payables was a bill payable of Rs 20,000 which was met on maturity.
Company issued 50,000 Equity Shares of Rs 10 each to the vendors of Machinery purchased.

Solution:
Transactions Effect on Current Reason
Ratio
(i) No Change Current Assets and also Current Liabilities have decreased by
equal amount. Therefore, the ratio will not change.
(ii) No Change Neither Current Assets nor Current Liabilities are affected.

Question 18. The Current Ratio Y Ltd. Is 2:1. State with reason, which of the following transactions would (i)
increase, (ii) decreases or (iii) not change the ratio:
(i) Trade Receivables include Debtors or Rs 40,000 which were received.
(ii) Company purchased furniture of Rs 45,000. The vendor was paid by issue of equity shares of Rs
10 each at par.
(Delhi 2014)
Solution:
Transactions Effect on Current Reasons
Ratio
(i) No Change One Current Asset (Bill Receivable) is replaced by another Current
Asser (cash OR Bank).
(ii) No Change Current Liability and also Current Assets do not change.

Question 19. State giving reason, whether the Current Ratio of a company will improve or decline or not
change in each of the following transactions if Current Ratio is (i) 1:1, and (ii) 0.[Link]

(a) Cash paid to creditors.

(b) Bills Payable discharged.
(c) Bills Receivable endorsed to a creditor.
(d) Goods purchased on credit.
(e) Purchased goods for cash.
(f) Bills receivable endorsed to a creditor dishonoured.
(g) Payment of dividend payable.
(h) Sale of goods for Rs 15,000 (Cost Rs 10,000).
(i) Sale of old furniture for Rs 12,000 (Book value Rs 15,000).

Solution:
(1) Statement showing the Effect of Various Transactions on Current Ratio of 1:1

Transactions Effect on Current Ratio Reason

(a) No Change Both the Total Current assets and Total Current Liabilities will
decrease by the same amount
(b) No Change Both the Total Current Assets and Total Current Liabilities will
decrease by the same amount.
(c) No Change Both the Total Current Assets and Total Current Liabilities will
decrease by the same amount.
(d) No Change Both the Total Current Assets and Total Current Liabilities will
increase by the same amount

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(e) No Change Neither the Total Current Assets nor the Total Current Liabilities
are affected since it is a conversion of one Current Asset (cash)
into another Current Asset (Goods).
(f) No Change Both the Total Current Assets and Total Current Liabilities will
increase by the same amount.
(g) No Change Both the Total Current Assets and Total Current Liabilities will
decrease by the same amount .
(h) Improve Total Current Assets will increase by Rs 5,000 (profit) but Total
Current Liabilities will remain unchanged.
(i) Improve Total Current Assets will increase by Rs 12,000 (Cash or Bank)
but Total Current Liabilities will remain unchanged .

(2) Statement Showing the Effect of Various Transactions on Current Ratio of 0.8:1
Transactions Effect on Current Ratio Reason
(a) Decrease Both Total Current Assets and Total Current Liabilities will
decrease by the same amount.
(b) Decrease Both Total Current Assets and Total Current Liabilities will
decrease by the same amount.
(c) Decrease Both Total Current Assets and Total Current Liabilities will
decrease by the same amount.
(d) Improve Both Total Current Assets and Total Current Liabilities will
increase by the same amount.
(e) No Change Neither Total Current Assets nor Total Current Liabilities are
affected since there is only a conversion of one Current Asset
into another Current Asset.
(f) Improve Both Total Current Assets and Total Current Liabilities are
increased by the same amount.
(g) Decrease Both Total Current Assets and Total Current Liabilities are
decreased by the same amount
(h) Improve Total Current Assets are increased by Rs 5,000 (profit) but Total
Current Liabilities remain unchanged.
(i) Improve Total Current Assets are increased by Rs 12,000 (Cash or Bank)
but Total Current liabilities remain unchanged.

(II) Liquid Ratio or Quick Ratio or Acid Test Ratio:- Liquid Ratio or Quick Ratio or Acid Test Ratio is a liquidity
ratio which measures the ability of the enterprise to meet its short-term financial obligations, i.e., Current
Liabilities. It is a relationship of liquid assets with current liabilities.

The liquid/Quick Ratio is calculated as follows: Liquid/Quick Ratio =

It is expressed as a ‘Pure Ratio’ say, 1:1.
Liquid/Quick Assets Current Liabilities
‘Liquid Assets’ are the assets that are either in the ‘Current Liabilities’ are the liabilities repayable within
form of Cash and Cash Equivalents or can be 12 months from the date of Balance Sheet or within
converted into Cash and Cash Equivalents in a very the period of operating cycle, whichever is higher.
short time i.e., are the most liquid assets. They are They are shown under the head ‘Current Liabilities’ in
shown under the head ‘Current Assets” in the Balance the Balance Sheet.
Sheet and include: They include:
 Current Investments,  Short-term Borrowings,
 Trade Receivables ( Bills Receivable,  Trade Payables (bills Payable and sundry
Debtors – Provision for Doubtful Debts), creditors),
 Other Current Liabilities (current Maturities
 Cash and Cash Equivalents, of long-term debts, interest accrued and due
 Short-term Loans and Advances, and on borrowings, outstanding expenses
unclaimed dividend, calls-in-advance, etc.),
 *Other Current Assets except Prepaid and
Expenses.  Short term Provisions

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nd
*As per CBSE Guidelines (Circular No. Acad-43/2013 dated 2 July, 2013), accounting treatment of ‘Other
Current Assets’ is restricted to Prepaid Expenses, Accrued Incomes and Advance Tax only.
Liquid or quick assets are the assets which are either in the form of Cash and Cash Equivalents or can be
converted into cash within a very short period, i.e., are the most liquid assets.
Thus, they exclude inventories and prepaid expenses. Inventories and Prepaid expenses are excluded from it
because these are expenses paid in advance hence cannot be converted into Cash and Cash Equivalents.
Ideal ratio :--Quick Ratio of 1:1 is an accepted standard, since for every rupee of current liabilities, there is a
rupee of quick assets.
In case, Liquid Ratio is less than 1, it means that current liabilities are more than its liquid or quick assets. As a
result, the enterprise may not be able to meet its short-term financial obligations, i.e., current liabilities, if they
fall due for payment on that date.

Objective and Significance: The objective of computing Liquid Ratio/Quick Ratio is to assess whether the
enterprise would be able to met its short-term financial obligations, i.e., Current Liabilities, if they arise on the
date when liquid ratio is computed. A part of the current assets is not readily realizable or convertible into
cash. Therefore the Current Ratio does not indicate adequately the ability of the enterprise to meet its current
liabilities as and when they fall due.

Liquid Ratio is an indicator of short-term debt paying capacity of an enterprise and thus, it is a better indicator
of liquidity. This ratio is very important for banks and financial institutions. The comparison of Current Ratio
with Liquid Ratio would indicate the degree of inventory held. A high Liquid Ratio compared to current Ratio
may indicate under stocking while a low Liquid Ratio indicates overstocking.

Difference between Current Ratio and Liquid/Quick Ratio

Basis Current Ratio Liquid/Quick Ratio

1. Relationship It establishes between Current It establishes relationship between
Assets and Current Liabilities . Liquid Assets and Current
Liabilities.
2. Assessment It assesses the ability to meet It assesses the ability to meet
current liabilities within 12 current liabilities immediately.
months from the date of Balance
sheet or with in the period of
operating Cycle
3. Ideal Ratio 2:1 is considered to be an ideal 1:1 is considered to be an ideal
ratio ratio
4. Measure It is not considered to be better It is considered to be better than
than Liquid/Quick Ratio to Current Ratio to measure short-
measure short-team financial term financial position.
position

Question 20. Wye Ltd. Has furnished following information regarding its Current Assets and Current
Liabilities:
Current Assets: Rs. Current Liabilities: Rs.
Cash and Cash Equivalents 5,000 Sundry Creditors 25,000
Debtors 29,000 Bills Payable 16,000
Bills Receivable 5,000 Outstanding Expenses 8,000
Marketable Securities 15,000 Provision for Expenses
5,000
Inventories 54,000 54,000
1,08,000
Solution:-

(1) Current Ratio = = 2:1.

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(2) Liquid Ratio = = 1:1.

Liquid Assets = Total Current Assets – Inventories

= Rs. 1,08,000 + Rs. 54,000 = Rs. 54,000.

Question 21. Calculate Liquid Ratio from the following information :

Current Liabilities 50,000 Prepaid Expenses 5,000

Current Assets 80,000 Trade Receivables 30,000
Inventories 25,000

Solution:
Liquid Ratio = = = 1:1

Liquid Assets = Current Assets – Inventories – Prepaid Expenses

= Rs 80,000 – Rs. 25,000 – Rs. 5,000 = Rs. 50,000

Question 22: Inventories are Rs. 80,000; Working Capital Rs. 2,40,000; Current Assets Rs. 4,00,000;
Calculate Liquid/Quick Ratio.
Solution :
Liquid/Quick Ratio = = = 2:1

Working Capital = Current Assets – Current Liabilities

Current Liabilities = Current Assets – Working Capital

= Rs. 4,00,000 – Rs. 2,40,000 = Rs. 1,60,000.

Liquid/Quick Assets = Current Assets – Inventories

= Rs. 40,00,000 – Rs. 80,000 = Rs. 3,20,000.

Question 23: Calculate Liquid Ratio/Quick Ratio/Acid Test Ratio from the following: Working Capital Rs.
1,80,000; Total Debts, i.e., Outside Liabilities Rs. 3,90,000; Long-term Debts Rs. 3,00,000; Inventories Rs.
90,000.

Solution :
Liquid /Quick Ratio = = = 2:1.
Current liabilities = Total Debts, i.e., Outside Liabilities – Long-term Debts
= Rs. 3,90,000 – Rs. 3,00,000 = Rs. 90,000.
Current Assets = Working Capital + Current Liabilities
= Rs. 1,80,000 + Rs. 90,000 = Rs. 2,70,000
Liquid/Quick Assets = Current Assets – Inventories
= Rs. 2,70,000 – Rs. 90,000 = Rs. 1,80,000.

Question 24: Current Liabilities of a company are Rs. 3,00,000. Its Current Ratio is 3 and Liquid Ratio is 1.
Calculate value of Inventories.
Solution:
Current Liabilities = Rs. 3,00,000
Liquid Ratio = ;

1=
Liquid Assets= Current Raito x Current Liabilities
= 3 x Rs. 3,00,000 = Rs. 9,00,000

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Inventories = Current Assets – Liquid Assets

= Rs. 9,00,000 – Rs. 3,00,000 = Rs. 6,00,000

Question 25: Current Ratio of A Ltd. Is 4.5 : 1 and Liquid Ratio is 3:1. If its Inventories are Rs. 3,00,000, find
out its Current Liabilities; Current Assets and Quick Assets.

Solution: Let Current Liabilities be X

Current Ratio is 4.5 :1; Current Assets – Inventories
Liquid Assets = Current Assets – Inventories
Or 3x = 4.5x – Rs. 3,00,000
1.5x = Rs. 3,00,000
X=
Current Liabilities = Rs. 2,00,000.
Current Assets = Rs. 2,00,000 x 4.5 = Rs. 9,00,000.
Quick Assets = Current Assets – Inventories
= 9,00,000 – Rs. 3,00,000 = Rs. 6,00,000
Or
= Rs. 2,00,000 (Current Liabilities) x 3 = Rs. 6,00,000

Question 26. Quick Ratio 1.5; Current Assets Rs. 1,00,000; Current Liabilities Rs. 40,000. Calculate value of
Inventories (Stock).

Solution :
Quick Ratio = =
Quick Assets= Rs. 40,000 x 1.5 = Rs. 60,000.
Calculation of Inventories ( Stock):
Inventories = Current Assets – Quick Assets
= Rs. 1,00,000 – Rs. 60,000 = Rs. 40,000

Question 27: A firm has Current Ratio of 4:1 and Quick Ratio of 2.5:1. Assuming Inventories are Rs. 22,500;
find out total Current Assets and total Current Liabilities.
Solution:
Calculation of Current Assets and Current Liabilities:
Let Current Liabilities ( CL ) be x
Current Ratio is 4:1, hence Liquid Assets or Quick Assets = 2.5x
Quick Assets + Inventories = Current Assets
Or 2.5 x + Rs. 22,500 = 4x
Or 1.5 x= Rs. 22,500
X=
Thus, Current Liabilities = Rs. 15,000.
Current Assets = Rs. 15,000 x 4 = Rs. 60,000.

Question 28. Working Capital of a company is Rs. 6,00,000. Its Current Ratio is 2.5:1. Calculate value of (i)
Current Liabilities (ii) Current Assets, and (iii) Liquid Ratio/ Quick Ratio/Acid Test Ratio, assuming Inventories of
Rs. 4,00,000.
Solution :
Current Raito = 2.5:1 ( Given)
Let current Liabilities = x
then Current Assets= 2.5x
Working Capital = Current Assets – Current Liabilities
Rs. 6,00,000= 2.5 – x
Rs. 6,00,000= 1.5x
Therefore,
(1) Current Liabilities (x) =

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(2) Current Assets = Rs. 4,00,000 x 2.5 = Rs. 10,00,000.

(3) Liquid Ratio/Acid Test Ratio =
Quick Assets= Current Assets – Inventories
= Rs. 10,00,000 – Rs. 4,00,000 = Rs. 6,00,000.

Question 29. Current Assets of a company are Rs. 17,00,000. Its Current Ratio is 2.50 and Liquid Ratio is
0.95. Calculate Current Liabilities, Liquid Assets and inventory.
Solution:
Current Ratio =
Current Liabilities =
Liquid Ratio =
Liquid Assets = Rs. 6,80,000 x 0.95 = Rs. 6,46,000.
Inventory = Current Assets – Liquid Assets
= Rs. 17,00,000 – Rs 6,46,000 = Rs. 10,54,000.

Question 30. From the following, calculate Quick Ratio and Current Ratio:
Total Debt 12,00,000 Long-term Borrowings 4,00,000
Total Assets 16,00,000 Long-term Provisions 4,00,000
Fixed Assets 6,00,000 Inventories 1,90,000
Non-current Investment 1,00,000 Prepaid Expenses 10,000
Long-term Loans and Advances (Debt) 1,00,000

Solution: Current Assets = Total Assets – Non-current Assets

= Rs 16,00,000 –[ Rs. 6,00,000 ( Fixed Assets ) + 1,00,000 (Non-current Investments) + Rs. 1,00,000(Long-term Loans
and Advances) = Rs. 8,00,000.

Quick Assets = Current Assets – Non-current Inventories – Prepaid Expenses

= Rs 8,00,000 – Rs . 1,90,000 – Rs. 10,000 = Rs. 6,00,000.

Current Liabilities= Total Debt – Non-current Liabilities

= Rs. 12,00,000 – [ Rs. 4,00,000 (Long-term Borrowings) + Rs. 4,00,000 (Long-term Provisions)]

= Rs. 12,00,000 – Rs. 8,00,000 = Rs. 4,00,000.

Quick Ratio =

Current Ratio = = 2:1.

Question 31. Quick Ratio of a company is 1.7:1. State, giving reasons, which of the following would improve, reduce
or not change the ratio :

(1) Purchase of Inventory for cash; (2) Cash collected from debtors; (3) Sale of goods (costing Rs 10,000) for Rs.
60,000; (4) Sale of an office furniture (Book value Rs 10,000) for Rs. 7,500; and
(5) Payment of Dividend.
Solution :

(I) Goods purchased for cash will reduce the total of quick assets. Therefore, the Quick Ratio will
reduce.
(II) Cash collected from debtors will not change the total of quick assets because one quick asset will
be replaced by another. Therefore, the Quick Ratio will not change.

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(III) Sale of goods for cash will increase the total of the quick assets. Therefore, the Quick Ratio will
improve.
(IV) Sale of Furniture Rs. 7,500 will increase the total of quick assets. Therefore, the Quick Ratio will
improve.
(V) Payment of Dividend will reduce the quick assets as well as current liabilities by the same amount.
Therefore, the Quick Ratio will improve.
Question 32. The Quick Ratio of Z Ltd. is 1:1. State with reason which of the following transactions would (i) increase,
(ii) decrease or (iii) not change the ratio :

(i) Included in the trade payables was bills payable of Rs. 3,000 which was met on maturity.
(ii) Debentures of Rs. 50,000 were converted into equity shares (Delhi 2014)

Solution:

Transactions Effect on Quick Ratio Reason

(i) No Change Quick Assets and Current Liabilities have reduced by Rs. 3,000 and
also the ratio is 1:1. Therefore, there will be no change.
(ii) No Change Neither Quick Assets not Current Liabilities are affected.

Question 33. The Quick Ratio of the company is 1.5:1. State with reason which of the following transactions would
(i) Increase, (ii) decrease or (iii) not change the ratio:

(I) Paid rent Rs. 3,000 in advance.

(II) Trade Receivables included a debtor Shri Ashok who paid his entire amount due Rs. 9,700.
Solution:

Transactions Effect on Quick Ratio Reason

(i) Decrease Quick Assets have decreased by Rs. 3,000 but Current Liabilities
have not changed. Therefore, Quick Ratio will decrease.
(ii) No Change One Current Asset (Debtors) is replaced by another Current Asset
(cash or bank)

st
Question 34. From the following Balance Sheet of XYZ Limited as at 31 March,2019:

Particulars Rs.
I. EQUITY AND LIABILITIES
(1) Share holders’ Funds
(a) Share Capital 2,40,000
(b) Reserves and Surplus 60,000
(2) Non-Current Liabilities
Long-term Borrowings: 10% Debentures 1,50,000
(3) Current Liabilities
(a) Trade Payables
2,34,000
(b) Short-term Provisions
6,000

Total 6,90,000
II. ASSETS
(1) Non-Current Assets
Fixed Assets:
Tangible Assets 4,50,000
(2) Current Assets
(a) Inventories 1,20,000
(b) Trade Receivables 90,000

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(c) Cash and Cash Equivalents 22,800

(d) Other Current Assets :
Prepaid Expenses 7,200
Total 6,90,000

Calculate :

(I.) Current Ratio, and (II.) Liquid Ratio

What conclusions do you draw about the company on the basis of these ratios?

Solution:

(I). Current Ratio =

CONCLUSIONS:-- Normally, current assets should be twice the current liabilities. In this case, current assets are equal to
the current liabilities. Hence short-term financial position of the company is not satisfactory. It may not be able to meet
its current liabilities promptly.

(II). Liquid Ratio =

= 0.47:1

CONCLUSIONS:- If, Liquid Ratio is 1:1, only then the position can be said to be satisfactory. In this case, it is less than half
hence liquidity position of the company is not satisfactory.

Note: Analysis and comments are not in syllabus. These have been given for understanding and being helpful in
preparation of projects.

Question 36. From the following data, calculate Current Ratio:

Liquid Assets Rs. 37,500; Inventories Rs. 10,000; Prepaid Expenses Rs. 2500; Working Capital Rs. 30,000.

Solution

Current Ratio =

Question 37. Current Liabilities of A Ltd. are Rs. 5,00,000 and Acid Test Ratio (Quick / Liquid Ratio ) is 3:1.
Inventories are Rs. 2,50,000. Find Current Assets and Current Ratio.

Solution

Current Ratio =

Current Liabilities= Rs. 5,00,000

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Quick /Liquid Assets are 3 times the Current Liabilities = 3 x Rs 5,00,000 = Rs. 15,00,000.

Current Assets = Quick Assets + Inventories

= Rs 15,00,000 + 2,50,000 = Rs 17,50,000.

Question 38. X Ltd. has Liquid (Acid Test) Ratio 2:1. If its Inventories (Stock) are Rs. 20,000 and its total Current Liabilities
are Rs. 50,000, find its Current Ratio. ( Foreign 2002

Solution

Current Ratio =

Liquid Ratio = Liquid Assets : Current Liabilities

= 2;1 (Given)
If Current Liabilities are Rs. 50,000, then Liquid Assets would be Rs. 1,00,000.
And Current Assets = Liquid Assets + Inventories
Current Assets = Rs 1,00,000 + Rs. 20, 000 = Rs. 1,20,000.

SOLVENCY RATIOS (LONG-TERM SOLVENCY RATIOS):-- Solvency of a business means that the business is in a position to
meet its long-term financial obligations as and when they become due.
‘Solvency Ratios’ are the ratios which show whether the enterprise will be able to meet its long-term financial obligations,
i.e., long-term liabilities. Important solvency ratios are :

(A) Debt to Equity Ratio;

(B) Total Assets to Debt Ratio;
(C) Proprietary Ratio ; and
(D) Interest Coverage Ratio.
(A) Debt to Equity Ratio :
Debt Equity Ratio is computed to assess long-term financial soundness of the enterprise. The ratio expresses the
relationship between long-term debts and equities (i.e., Shareholders’ Funds) of the enterprise.

Long term debts are the liabilities of the enterprises payable to outsiders. They include long-term borrowings and long-
term provisions. They are shown as non-current liabilities in the Equity and Liabilities part of the Balance Sheet.
nd
Note :--As per CBSE Guidelines (Circular No. Acad-43/2013 dated 2 July, 2013), accounting treatment of Other Long-
term Liabilities is not to be evaluated. Therefore, it is not discussed and also not included in the questions.

Provision is made to meet a liability amount of which is not determined but is provided by making best estimate. Since,
long-term provisions are in the nature of long-term liability. They are included in external equities, i.e., external debts in
spite of the fact that the amount may be different at the time of settlement of liability.

The Debt to Equity Ratio is computed as follow:

Debt to Equity Ratio =

Debt to Equity Ratio is expressed as ‘Pure Ratio’ say 2:1.

Debt=Long-term Borrowings + Long-term Provisions

Or
= Total Debt – Current Liabilities
Or
= Capital Employed – share holder’fund

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Note: Capital Employed = Debt + Equity

Or
= Non-Current Assets + Working Capital – Fictitious Assets
Equity/Shareholders’ Funds= Share Capital + Reserves and Surplus- fictitious assets
Or
= Non-current Assets ( Tangible Assets+ Intangible Assets + Non-current Trade Investments + Long-term Loans
and Advances) + Working Capital - Non-current Liabilities ( Long-term Borrowings + Long-term Provisions)

Or
= Total Assets – Total Debt

*Working Capital = Current Assets – Current Liabilities

Note: If Surplus, i.e., Balance in Statement of Profit and Loss has debit balance, it is deducted to compute
Equity/Shareholders’ Funds.
nd
As per CBSE Guidelines (Circular No. Acad.-43/2013 dated 2 July, 2013), accounting treatment of Other
Non-Current Assets is not to be evaluated. Hence, other Non-current Assets have not been included in
questions.

A high Debt to Equity Ratio means that the enterprise is depending more on borrowings or debts as compared
to shareholders’ funds. In effect, lenders are at higher risks and have lower safety. On the other hand, low
Debt to Equity Ratio means that the enterprise is depending more on shareholders’ funds than external
equities. In effect, lenders are at a lower risk and have higher safety. Normally, Debt to Equity Ratio of 2:1 is
considered as an appropriate ratio.

Objective and Significance: The objective of Debt to Equity Ratio is to measure the proportions of external
funds and shareholders’ funds invested in the company. This ratio assesses long-term financial position and
soundness of long-term financial policies of the enterprise. It also indicates the extent to which the enterprise
depends on borrowed funds for its business.

Question 39. From the following information, calculate Debt to Equity Ratio

Share Capital: 10,000 Equity Shares of Debentures 75,000

Rs. 10 each 1,00,000
General Reserve 45,000 Long-term Provisions 25,000

Surplus 30,000 Outstanding Expenses 10,000

Solution: Debt to Equity Ratio =

Question 40. Calculate Debt to Equity Ratio from the following information:
(1) Total Assets 1,25,000
(2) Total Debts, i.e., external debts 1,00,000
(3) Current Liabilities 50,000.

Solution: Debt to Equity Ratio =

Question 41. From the following information, compute Debt to Equity Ratio:

Shareholders’ Funds: Long-term Borrowings:

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Equity Share Capital 2,00,000 10% Debentures 3,50,000

Reserves and Surplus 1,50,000 Current Liabilities 1,00,000
Solution:
Debt to Equity Ratio =

Question 42. From the following information, compute Debt to Equity Ratio:

Long-term Borrowings 5,00,000 Equity Share Capital 2,00,000

Long-term Provision 1,00,000 General Reserve 2,00,000
Current Liabilities 50,000 surplus (debit balance) 1,00,000

Solution:
Debt to Equity Ratio=

Question 43. From the following information, compute Debt to Equity Ratio:
Rs. Rs.
Long-term Borrowings 2,00,000 non current assets 3,60,000
Long-term Provisions 1,00,000 current assets 90,000
Current Liabilities 50,000 (Delhi 2014)
Solution:
Debt to Equity Ratio=

Question 44. Assuming that Debt to Equity Ratio is 2:1. State giving reasons, whether this ratio will increase or
decrease or will have no change in each one of the following cases:
(1). Purchase of a Fixed Asset by taking long-term loan.
(2). Sale of Fixed Asset (Book value Rs. 40,000) at a loss of Rs. 5,000.
(3). Sale of Fixed Asset (Book value Rs. 40,000) for Rs. 50,000.
(4). Issue of New Shares for Cash.
(5). Issue of Bonus Shares.
(6). Redemption of Debentures for Cash.
(7). Conversion of Debentures into Equity Shares.
(8). Declaration of Final Dividend.

Transactions Effect on Debt to Reason

Equity Ratio
(1) Increase Total Long-term Debts are increased but total Shareholders’ Funds
remain unchanged. Therefore, Debt to Equity Ratio will increase
(2) Increase Total Shareholders’ Funds are decreased by the amount of loss but
total Long-term Debts remain unchanged. Therefore, Debt to Equity
Ratio will increase.
(3) Decrease Total Shareholders’ Funds are increased by the amount of profit but
total Long-term Debts remain unchanged. Therefore, Debt to Equity
Ratio will decrease
(4) Decrease Total Shareholders’ Funds are increased by the amount of cash
received but total Long-term Debts remain unchanged. Therefore,
Debt to Equity Ratio will decrease
(5) No Change Neither the total Long-term Debts nor the total Shareholders’ Funds
are affected since it is a conversion of accumulated profit into share
capital.
(6) Decrease Total Long-term Debts have decreased but total Shareholders’ Funds
have increased by the same amount. Therefore, Debt to Equity Ratio
will decrease.
(7) Decrease Total Long-term Debts have decreased and total Shareholders’ Funds
have increased by the same amount. Therefore, Debt to Equity Ratio
will decrease.

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(8) Increase Total shareholders’ Funds have decreased by the amount of profits
appropriated for dividend but Long-term Debts remain unchanged.
Note: Upon the deceleration of dividend by the company the profits to
the extent of dividend declared become a current debt and hence
Shareholders’ Funds are decreased and Current Liabilities are
increased by the amount of dividend declared.
Question 45. Calculate Debt to Equity Ratio from the following information:
Rs. Rs.
Fixed Assets (Gross) 6,00,000 Current Assets 2,50,000
Accumulated Depreciation 1,00,000 Current Liabilities 2,00,000
Non-Current Investments 30,000 Long-term Borrowings 3,00,000
Long-term Loans and Advances 20,000 Long-term Provisions 1,00,000
Solution
Date to Equity Ratio
Notes:
[Link] = Long-term Borrowings + Long-term provision
= Rs. 3,00,000 + Rs. 1,00,000 = Rs. 4,00,000
2. Equity= Non-Current Assets + Current Assets – Current Liabilities – Non-current Liabilities
= Rs. 5,50,000 + Rs. 2,50,000-Rs.2,00,0000- Rs. 4,00,000 = Rs. 2,00,000.

Question 46. From the following Balance Sheet of Defence Brokers Ltd. , compute Debt to Equity Ratio:
ST
BALANCE SHEET AS AT 31 MARCH, 2019
Particulars Note No. Rs.
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 15,00,000
(b) Reserves and surplus (Surplus, i.e., Balance in
Statement of Profit and Loss) (2,30,000)
2. Non-Current Liabilities
(a) Long-term Borrowings 15,00,000
(b) Long-term Provisions 2,85,000
3. Current liabilities
(a) Short-term Borrowings 55,000
(b) Trade Payables 1,15,000
(c) Other Current Liabilities 25,000

Total 32,50,000

II. ASSETS
1. Non-Current Assets
(a) Fixed Assets:
(i) Tangible Assets 11,00,000
(ii) Intangible Assets 1,30,000
(b) Non-Current Investments 1 2,60,000
2. Current Assets
(a) Current Investments 2 1,90,000
(b) Inventories 7,50,000
(c) Trade Receivables 3,00,000
(d) Cash and Cash Equivalent 5,20,000
Total 32,50,000

Notes to Accounts
Particulars Rs.
1. Non-Current Investments
Trade Investments 2,60,000
2. Current Investments
Government Securities 50,000

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Other Investments (Trade) 1,40,000

1,90,000

Solution:
Debt to Equity Ratio =
Debt = Long-term Borrowings + Long-term Provisions
= 15,00,000 + Rs. 2,85,000 = Rs. 17,85,000.
Equity or Shareholders’ Funds = Share Capital + Reserves and Surplus
= 15,00,000 – Rs. 2,30,000 = 12,70,000.
*RS. 2,30,000, being negative amount of surplus, i.e., Balance in Statement of Profit and Loss shown under
Reserves and Surplus is deducted.

(ii.) Total Assets to Debt Ratio

Total Assets to Debt Ratio shows relationship between total assets and long-term debts of the enterprise.

Total Assets to Debt Ratio is computed as follows:

Total Assets to Debt Ratio .It is expressed as ‘Pure Ratio’ say 1:1.

The two components of this ratio, i.e., total assets and debt are computed as follow:
Total Assets Debt
Total Assets include: Debt means Long-term Debts and includes:
 Non-current Assets* [ Fixed Assets (Tangible  Long-term Borrowings* and
and Intangible Assets) + Non-Current
Investments + Long-term Loans and  Long term Provisions.
Advances)
 Current Assets [Current Investments +
Inventories (Including Spare Parts and Loose
Tools) + Trade Receivables + Cash and Cash
Equivalents + Short-term Loans and
Advances + Other Assets
nd
*As per CBSE Guidelines (Circular No. Acad-43/2013 dated 2 July, 2013), accounting treatment of Deferred
Tax Assets (Net), Other Non-Current Assets and other Long-term Liabilities is not to evaluated.
Objective and Significance: The objective of computing this ratio is to establish relationship between total
assets and long-term debts of the enterprise. It measures the ‘Safety Margin’ available to the lenders of long-
term debts. In other words, it measures the extent to which debt (Long-term) is covered by the assets.
A high ratio means higher safety for leaders to the business. On the other hand, a low ratio means lower safety
for lenders as the business depends largely on outside loans for its existence. In other words, investment by
the proprietor is low.

Question 47. Calculate Total Assets to Debt Ratio from the following information:
Long-term Debts Rs. 16,00,000; Total Assets Rs. 24,00,000.

Solution: Total Assets to Debt Ratio

Question 48. Shareholders’ Funds Rs. 14,00,000; Total Debts (Liabilities) Rs 18,00,000; Current Liabilities Rs
2,00,000. Calculate Total Assets to Debt Ratio.
Solution: Total Assets to Debt Ratio =
Long-term Debts = Total Debts ( Liabilities) – Current Liabilities
= Rs. 18,00,000 – Rs. 2,00,000 = Rs. 16,00,000.
Total Assets = Shareholders’ Funds + Total Debts (Liabilities)
= Rs. 14,00,000 = Rs. 18,00,000 = Rs. 32,00,000.

Question 49. From the following information, calculate Total Assets to Debt Ratio:
Capital Employed 22,20,000 Equity Share Capital 10,50,000

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Current Liabilities 1,80,000 8% Debentures 3,00,000

Fixed Assets (Gross) 15,00,000 Capital Reserves 2,40,000
Accumulated Depreciation 2,00,000 Surplus,[Link] in Statement
Noon-current Investment 7,00,000 of Profit and Loss (Dr.) 30,000
Trade Receivables 2,50,000 Cash and Cash Equivalent 1,50,000

Solution: Total Assets to Debt Ratio =

Working Notes:
1. Total Assets = Non-Current Assets* + Current Assets**
= Rs. 20,00,000+ Rs. 4,00,000+ Rs. 24,00,000.
*Non-current Assets=Fixed Assets (Gross)- Accumulated Depreciation + Non-current Investment
= Rs. 15,00,000 – Rs. 2,00,000 + Rs. 7,00,000 = Rs. 20,00,000.
*Current Assets= Trade Receivables + Cash and Cash Equivalents
= Rs. 2,50,000 + Rs. 1,50,000= Rs. 4,00,000..
2. Capital Employed = Shareholders’ Funds* + Long-term Debts**
Rs. 22,20,000 = Rs. 12,60,000 + Long-term Debts
Long-term Debts = Rs. 22,20,000 – Rs. 12,60,000 = Rs. 9,60,000.
*Shareholders’ Funds= Equity share Capital + Capital Reserve + Surplus, i.e., Balance in Statement of
Profit and Loss
= 10,50,000 + Rs. 2,40,000- Rs. 30,000 = Rs. 12,60,000.
**Debt or Long-term Debts = Long-term Borrowings + Long-term Provisions

Question 50. Compute Total Assets to Debt Ratio from the following information:

Total Assets 7,50,000 Bills Payable 30,000

Total Debts 8,00,000 Bank Overdraft 37,500
Creditors 75,000 Outstanding Expenses 17,500

Solution:
Total Assets to Debt Ratio
Debt = Total Debts – Creditors- Bills Payable- Bank Overdraft- Outstanding Expenses
= Rs. 8,00,000- Rs. 75,000 – Rs. 30,000 – Rs, 17,500 = Rs. 6,40,000.

Note : Creditors, Bills Payable, Bank Overdraft and Outstanding Expenses are Current Liabilities . Hence, these
are deducted.

Question 51. Compute Total Assets to Debt Ratio from the following information:
Share Capital Rs. 12,00,000: Reserves and Surplus Rs. 8,00,000; Long-term Borrowings Rs. 25,00,000: Long
term Provisions Rs. 5,00,000; Current Liabilities Rs. 10,00,000.

Solution Total Assets to Debt Ratio

Total Assets = Share Capital + Reserves and Surplus + Long-term Borrowing + Long-term Provisions + Current
Liabilities
= Rs. 12,00,000+ Rs. 8,00,000 + Rs. 25,00,000 + Rs. 5,00,000 + Rs. 10,00,000 = Rs. 60,00,000.

Debt = Long-term Borrowings + Long-term Provisions.

= Rs. 25,00,000 + Rs. 5,00,000 = Rs. 30,00,000.

Question 52. From the following information, calculate Total Assets to Debt Ratio:
Rs. Rs.
Capital Employed 25,00,000 Equity Share Capital 14,30,000
Investment 2,10,000 8% Debentures 4,00,000
Land 8,50,000 Capital Reserve 2,75,000
Trade Receivables 2,70,000 Surplus i.e., Balance
Cash and Equivalents 1,50,000 in SPL 1,50,000

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(OD 2015C)
Solution:
Total Assets to Debt Ratio =

Working Note:
Total Assets = Investment + Land + Trade Receivables + Cash and Cash Equivalents
= Rs. 2,10,000 +Rs. 8,50,000+ Rs. 1,50,000 = Rs. 14,85,000.
Debt = Capital Employed – Equity*
= Rs. 25,00,000 – Rs. 18,55,000 = Rs. 6,45,000.
*Equity=Equity Share Capital + Capital Reserve + Surplus
= Rs. 14,30,000 + Rs. 2,75,000 + Rs. 1,50,000 = Rs. 18,55,000.

Question 53. Calculate Total Assets to Debt Ratio from the following information : Total Debt Rs. 48,00,000;
Shareholders’ Funds Rs. 8,00,000: Reserves and Surplus Rs. 2,00,000; Current Assets Rs. 20,00,000; Working
Capital Rs. 4,00,000.
Solution :
Total Assets to Debt Ratio
Notes:
1. Current Liabilities = Current Assets – Working Capital
= Rs. 20,00,000 – Rs. 4,00,000 = Rs. 16,00,000
Debt = Total Debt-Current Liabilities = Rs. 48,00,000 – Rs. 16,00,000 = Rs. 32,00,000.
2. Total Assets = Shareholders’ Funds + Total Debt
= Rs. 8,00,000 + Rs. 48,00,000 = Rs. 56,00,000.
3. Reserves and Surplus are already included in Share holders’ Funds.

Question 54. Shareholders’ Funds Rs. 8,00,000: Total Borrowings Rs. 18,00,000: Short-term Borrowing Rs.
2,00,000; Other Current Liabilities Rs. 6,00,000. Calculate Total Assets to Debt Ratio.
Solution: Total Assets to Debt Ratio =
Notes: 1. Long-term Borrowings or Debt = Total Borrowings – Short-term Borrowings
= Rs. 18,00,000 – Rs. 2,00,000 = Rs. 16,00,000.
[Link] Assets =Shareholders’Funds +Long term Borrowings +Short-term Borrowings +Other Current Liabilities
= Rs. 8,00,000 + Rs. 16,00,000 + Rs. 2,00,000+ Rs 6,00,000
= Rs. 32,00,000.

Question 55. Fixed Assets (Gross) Rs. 10,00,000; Accumulated Depreciation Rs. 5,00,000; Non-Current
Investments Rs. 50,000; Long-term Loans and Advances Rs. 2,00,000; Current Assets Rs. 2,50,000; Current
Liabilities Rs. 10,00,000; Long-term Borrowings Rs. 3,25,000; Long-term Provisions Rs. 2,75,000. Calculate Total
Assets to Debt Ratio.
Solution
Total Assets to Debt Ratio =
Notes:
1. Debt = Long-term Borrowing + Long-term Provisions
= Rs. 3,25,000 + Rs. 2,75,000 = Rs. 6,00,000.
2. Total Assets = Non-Current Assets + Current Assets
= [Fixed Assets (Net)+ Non-Current Investments +Long-term Loans and Advances]+Current Assets
= (Rs. 10,00,000-Rs. 5,00,000)+ Rs. 50,000+ Rs. 2,00,000+2,50,000=Rs. 10,00,000.

Question 56. From the following information, calculate Total Assets to Debt Ratio:

Total Debt 4,50,000 Short-term Bank Loan 50,000

Sundry Creditors 75,000 Total Assets 5,50,000
Expense Payable 25,000 Surplus i.e., Balance i.e.,
Bills Payable 25,000 Balance in SPL (Debit) 20,000

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Solution:-
Total Assets to Debt Ratio=
Note: Debt = Total Debt- Short-term Bank Loan-Trade Payables (Sundry Creditors + Bills Payable)
– Other Current Liabilities (Expenses Payable).
= Rs. 4,50,000 – Rs. 50,000 –(Rs. 75,000 + Rs. 25,000) – Rs. 25,000=Rs. 2,75,000
st
Question 57. From the following Balance Sheet of Y Ltd. for the year ended 31 March, 2019, calculate Total
Assets to Debt Ratio:

Particulars Rs.
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
Share Capital 20,00,000
2. Non-Current Liabilities
Long-term Borrowings 10,00,000
3. Current Liabilities
Trade Payables 5,00,000
Total 35,00,000
II. Assets
1. Non-Current Assets
Fixed Assets: Tangible Assets 22,00,000
2. Current Assets
(a) Inventories 8,00,000
(b) Trade Receivables 3,00,000
(c) Cash and Cash Equivalents 1,50,000
(d) Short-term Loans and Advances 50,000
Total 35,00,000

Solution:- Total Assets to Debt Ratio = =

(iii) Proprietary Ratio: Proprietary Ratio establishes the relationship between proprietors’ funds and total
assets.
Computation: Proprietary Ratio is computed as follow:

Expression of Proprietary Ratio:- Proprietary Ratio may be expressed either as ‘Pure Ratio’ or as
‘Percentage’ . Suppose Proprietors’ Funds of a company Rs.12,00,000 against total assets of Rs.
16,00,000, then Proprietary Ratio may be expressed as :
Proprietary Ratio (Pure Ratio) =
Or
Proprietary Ratio (Percentage) = .

Proprietors’ Funds can be computed by following either Liabilities Approach or Assets Approach:
(a) Liabilities Approach: Share Capital (Equity + Preference) + Reserves and Surplus- Fictitious
assets( e.g discount on issue of debentures).
(b) Assets Approach: Non-current Assets + Working Capital (i.e., Current Assets – Current Liabilities)
– Non-Current Liabilities.
(c) It should be kept in mind that the result under both the approaches will be same.

Non-Current Assets= Tangible Fixed Assets + Intangible Fixed Assets + Non-current Investments
+ Long-term Loans and Advances
Current Assets = Current Investments + Inventories + Trade Receivables + Cash and Cash
Equivalents + Short-term Loans and Advances + Other Current Assets

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(e.g., Prepaid expenses, accrued income).

Current Liabilities= Short-term Borrowings + Trade Payables + Other Current Liabilities +
Short term Provisions.
Non-current Liabilities = Long-term Borrowings + Long-term Provisions.

Total Assets = Non-current Assets (Tangible Fixed Assets + Intangible Fixed Assets + Non-current Investments +
Long-term Loans and Advances) + Current Assets [ Current Investments + Inventories (including Spare parts
and Loose Tools) + Trade Receivables + Cash and Cash Equivalents + Short-term Loans and Advances + Others
Current Assets]

NOTE
In the question sometimes, information is given and not the Balance Sheet and student asked to compute
Proprietors Funds. Students should not that in such questions, Proprietors’ Funds computed by the two methods
may not be same. In such situations, students will have to use one of the two methods to compute Proprietors’
Funds.

Objective and Significance: The objective of computing this ratio is to measure the proportion of total assets
financed by Proprietors’ Funds. The ratio is important for creditors as they can ascertain the portion of
shareholders’ funds in the total assets employed in the firm and thus safety margin available to them.
Besides, it shows financial strength of the enterprise.
A high ratio means adequate safety for lenders and creditors.
A low ratio , on the other hand, means lower or inadequate safety for the creditors. It may lead to
unwillingness of creditors to extend credit to the enterprise. It is so because in case of liquidation creditors
being unsecured are likely to lose their money.

Question 58. From the following information, calculate Proprietary Ratio:

Rs. Rs.
Share Capital 5,00,000 Reserves and Surplus 3,00,000
Non- Current Assets 22,00,000 Current Assets 10,00,000

Solution:

Notes:
1. Shareholders’ Funds = Share Capital + Reserves and Surplus
= Rs. 5,00,000 + Rs. 3,00,000 = Rs. 8,00,000.
2. Total Assets= Non-current Assets + Current Assets
= 22,00,000 + Rs. 10,00,000 = Rs. 32,00,000.

Question 59. From the following Balance Sheet, calculate Proprietary Ratio:
Shareholders’ Funds Rs. Non-Current Assets Rs.
Equity Share Capital 1,00,000 Fixed Assets ( Tangible) 1,25,000
Preference Share Capital 50,000 Current Assets
Reserves and Surplus 25,000 Current Investments 75,000
Non-Current Liabilities Cash and Cash Equivalents 40,000
Debentures 60,000 Other Current Assets 10,000
Current Liabilities (Prepaid Expenses)
Trade Payables 15,000
2,50,000
2,50,000

Solution:- Proprietary Ratio =

Note: Calculation of Shareholders’ Funds or Equity or Proprietors’ Funds:
Liabilities Approach Rs Assets Approach Rs.
Equity Share Capital 1,00,000 Fixed Assets 1,25,000

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Add: Reserves and Surplus 25,000 Add: Working Capital* 1,10,000

Equity Shareholders’ Funds 1,25,000 2,35,000
Add: Preference Share Capital 50,000 Less: Long-term Borrowings (Debentures) 60,000
Shareholders’ Funds 1,75,000 Shareholders’ Funds 1,75,000

*Working Capital = Current Assets (Current Investments + Cash and Cash Equivalents + Other Current Assets)
– Current Liabilities (Trade Payables)
= Rs. 75,000 + Rs. 40,000 + Rs. 10,000 – Rs 15,000 = Rs, 1,10,000.

Question 60. From the Following information, Calculate Debt to Equity Ratio, Proprietary Ratio and Total
Assets to Debt Ratio :
Rs. Rs.
Equity Share Capital 2,00,000 12% Debentures 16,00,000
10% Preference Share Capital 3,00,000 Current Liabilities 6,80,000
Reserves: Fixed Assets (Tangible) 21,00,000
General Reserve 2,25,000 Long-termTrade Investments 2,00,000
Surplus, i.e., Balance in statement
Of Profit and Loss 1,50,000 Current Assets 8,80,000
Solution:
Debt to Equity Ratio =

Proprietary Ratio =

Total Assets to Debt Ratio =

Working Notes:
1. Calculation of Shareholders’ Funds or Equity:
Liabilities Approach Rs Assets Approach Rs.
Equity Share Capital 2,00,000 Fixed Assets (Tangible) 21,00,000
Add: Reserves and Surplus 25,000 Long-term Trade Investments 2,00,000
(Rs. 2,50,000 + Rs. 1,50,000) Add: Working Capital (WN)2 2,00, 000
Equity Shareholders’ Funds 6,00,000 25,00,000
Add: Preference Share Capital 3,00,000 Less: Long-term Borrowings (12%Debentures) 16,00,000
Shareholders’ Funds 9,00,000 Shareholders’ Funds 9,00,000

2. Working Capital = Capital Assets – Current Liabilities = Rs. 8,80,000 – Rs. 6,00,000 = Rs. 2,00,000.
3. Total Assets = Fixed Assets (Tangible) + Long-term Trade Investments + Current Assets
= Rs. 21,00,000 + Rs. 2,00,000 + Rs. 8,80,000 = Rs. 31,80,000.
4. Debt = 12% Debentures = Rs. 16,00,000.

Question 61. The Proprietary Ratio of M. Ltd. is 0.80 : 1. State with reasons whether the following transactions
will increase, decrease or not change the Proprietary Ratio:
(i). Obtained a loan from rank Rs. 2,00,000 payable after five years.
(ii). Purchased machinery for cash Rs. 75,000.
(iii). Redeemed 5% redeemable preference shares Rs. 1,00,000.
(iv). Issued equity shares to the vendors of machinery purchased for Rs. 4,00,000.
(AI2017).
Solution:

Transactions Effect on Reason

Proprietary Ratio
(i). Decrease No change in Shareholders’ Funds but Total Assets will increase by Rs.
2,00,000.
(ii). No Change No change in Total Assets and Shareholders’ Funds.
(iii). Decrease Both Shareholders’ Funds and Total Assets are decreased by the same

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amount.
(iv). Increase Shareholders’ Funds and Total Assets are increased by the Same amount

(iv). Interest Coverage Ratio :-- The ratio establishes the relationship between Net Profit before Interest and
Tax and Interest on long-term debts. Interest is a charge on profit therefore, net profit before interest and tax
is taken to calculate the ratio. It is calculated as follows:

Objective and Significance: The ratio is very meaningful to debentureholders and lenders of long-term funds.
The objective of calculating this ratio is to ascertain the amount of profit available to cover interest on long-
term debt. A high ratio is considered better for the lenders as it means higher margin to meet interest cost.

Question 62: Prakash Ltd. has a term-loan of Rs. 10,00,000. Interest on the loan for the years is Rs. 1,25,000
and its Profit before Interest and Tax is Rs. 5,00,000. Calculate Interest Coverage Ratio.

Solution: Interest Coverage Ratio=

Question 63. From the following details obtained from the financial statements of Jeev Ltd., Calculate Interest
Coverage Ratio:

Net Profit after Tax Rs. 1,20,000

12% Long-term Debt Rs 20,00,000
Tax Rate 40%.
(Delhi 2016)

Solution :
Interest Coverage Ratio= =
Interest on Long-term Debts= 12% of Rs. 20,00,000 =Rs. 2,40,000.

Calculation of Net Profit before Interest and Tax:

Net Profit after Tax = Rs. 1,20,000
Let, Net Profit before Tax = Rs. 100; Tax = Rs. 40; Net Profit after Tax = Rs. 60
Net Profit before Tax= Rs. 1,20,000x Rs. 2,00,000.
Net Profit before Interest and Tax = Net Profit before Tax + Interest on Long-term Debts
= Rs. 2,00,000+ Rs. 2,40,000 = Rs. 4,40,000.

(3) ACTIVITY RATIOS: Activity Ratios, also termed as Performance or Turnover Ratios, measure how well the
resources have been used by the enterprise. In other words, these ratios measure the effectiveness with which
the enterprise uses its available resources. The result is expressed in number of times. These ratios are
calculated on the basis of Cost of Revenue from Operations, i.e., Cost of Goods Sold or Revenue from
Operations, i.e., Net Sales. Higher turnover ratio means, better use of capital or resources, which in turn,
means better profitability ratio. The activity ratios are:
(i.) Inventory Turnover Ratio;
(ii.) Trade Receivables Turnover Ratio;
(iii.) Trade Payables Turnover Ratio; and
(iv.) Working Capital Turnover Ratio.
Let us discuss them in detail.

(I) Inventory Turnover Ratio

Inventory Turnover Ratio establishes relationship between Cost of Revenue from Operations, i.e., Cost of
Goods Sold and average inventory carried during that period.
Inventory Turnover Ratio is an activity as well as efficiency ratio and it measures the number of times and
enterprise sells and replaces its inventory, i.e., the number of times inventory was converted into sales during
this period.

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Inventory Turnover Ratio is computed as follows:

Inventory Turnover Ratio = .

Cost of Revenue from Operations ( Cost of Goods Sold) = Revenue from Operations – Gross Profit
Or
= Revenue from Operations + Gross loss
Or
= Opening Inventory + Net Purchases+Direct
Expenses - Closing Inventory

Average Inventory =
NOTE :- In case, amount of Cost of Revenue from Operations is not given but instead amount of Revenue from
Operations is given, amount of Revenue from Operations is used for calculating the Ratio.

Objective and Significance: The objective of computing Inventory Turnover Ratio is to ascertain whether
investment in stock has been judicious or not, i.e., only the required amount is invested in stock. It measures
the efficiency of inventory management.
A High Ratio shows that more Sales are being produced by a rupee of investment in inventories. A very high
Inventory Turnover Ratio shows overtrading and it may result in working capital shortage.
A low Inventory Turnover Ratio means inefficient use of investment in inventory, Turnover Ratio ensures
adequate working capital and also enables the enterprise to earn reasonable margin of profits.

Question 64. From the following information, calculate Inventory Turnover Ratio:

Cost of Revenues from Operations (Cost of Goods Sold) 4,50,000.

Inventories in the beginning of the year 1,00,000.
Inventories at the end of the year 1,25,000.

Solution: Inventory Turnover Ratio

Question 65. From the following information, calculate Inventory Turnover Ratio:
Revenue from Operations 5,00,000
Inventory; Opening 75,000
Closing 1,25,000
hints: Inventory Turnover Ratio =

Question 66. From the following data, calculate Inventory Turnover Ratio:
Cost of Revenue from Operations ( Cost of Goods Sold) Rs. 3,00.000; Purchases Rs. 3,30,000; Opening
Inventory Rs. 60,000.
Solution
Inventory Turnover Ratio =
Cost of Revenue from Operations (Cost of Goods Sold)
= Opening Inventory + Purchases + Direct Expenses – Closing Inventory
Closing Inventory = Opening Inventory + Purchases – Cost of Revenue from Operations
(Cost of Goods Sold)
= Rs. 60,000 + Rs. 3,30,000 – Rs. 3,00,000 = Rs. 90,000.
Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2
( Rs. 60,000 + Rs. 90,000) ÷ 2 = Rs. 75,000.

Question 67. Opening Inventory is Rs. 29.000; Purchases Rs. 2,42,000 ; Revenue from Operations i.e., Net
Sales Rs. 3,20,000; Gross Profit 25% on Sales. Calculate Inventory Turnover Ratio.
Solution:
Inventory Turnover Ratio = .
Cost of Revenue from Operations (Cost of Goods sold)

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= Revenue from Operations – Gross Profit

= Rs. 3,20,000 + Rs. 2,42,000 - Rs. 2,40,000 = Rs. 31,000. Average
Inventory=

Question 68. Opening Inventory Rs. 29,000: Closing Inventory Rs. 31,000; Revenue from Operations (Net Sales)
Rs. 3,00,000; Gross Profit 25% on Cost. Calculate Inventory Turnover Ratio.
hints:
Inventory Turnover Ratio =

Question 69. From the following information, Calculate Inventory Turnover Ratio:
Net Sales Rs. 4,00,000: Average Inventory Rs. 55,000; Gross Loss on Sales is 10%.
hints:
Inventory Turnover Ratio =
Working Note:
Net Sales = Rs. 4,00,000
Gross Loss= 10% of Rs. 4,00,000 = Rs. 40,000.
Cost of Revenue from Operations = Net Sales + Gross Loss
= Rs. 4,00,000 + Rs. 4,40,000.

Question 70. From the following information, calculate Inventory Turnover Ratio: Total Sales Rs. 2,20,000;
Sales Return Rs. 20,000; Gross Profit Rs. 50,000; Closing Inventory Rs. 60,000; Excess of Closing Inventory over
Opening Inventory Rs. 20,000.
hints:
Inventory Turnover Ratio =
Working Notes:
1. Calculation of Average Inventory :
Opening Inventory = Closing Inventory – Excess of Closing Inventory over Opening
Inventory
= Rs. 60,000 – Rs. 20,000 = Rs. 40,000.
Average Inventory = (Opening Inventory + Closing Inventory ) ÷2
= (Rs. 40,000 + Rs. 60,000)÷2 = Rs. 50,000.
2. Cost of Revenue from Operations = Net Sales – Gross Profit
= Rs. 2,00,000 – Rs.50,000 = Rs. 1,50,000.

IMPORTANT NOTE:-- Be Careful abut the languages:

There is difference between the statement ‘ Closing Inventory was 2 times that of the Opening Inventory’ and
‘Closing Inventory was 2 times more than that of in the beginning’. The former means that if Opening
Inventory is x, then Closing Inventory will be 2x, and the latter means that if Opening Inventory is x, then
Closing Inventor will be 3x (i.e., x+2x).

Question 71. Rs. 2,00,000 is Cost of Revenue from Operations ( Cost of Goods Sold); Inventory Turnover Ratio
8 times; Inventory in the beginning is 1.5 times more than the Inventory at the end. Calculate values of
Opening and Closing Inventory. (Delhi 2004, Modified)

Solution: Inventory Turnover Ratio =

8 =
Average Inventory = Rs. 25,000
Average Inventory = (Opening Inventory + Closing Inventory)/2
Let the Closing Inventory be x; So, Opening Inventory = x+ 1.5x
Hence,
3.5x= Rs. 50,000
X=
Thus, Opening Inventory = Rs. 14,286 + 1.5 Times of Rs. 14,286

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= Rs 35,715 (i.e., Rs. 14,286 x 2.5).

Question 72. Cash Revenue from Operations Rs. 50,000, Credit Revenue from Operations Rs. 1,50,000. Gross
Profit 25% on cost. Closing Inventory was 3 times the Opening Inventory. Opening Inventory was 10% of Cost
of Revenue from Operations. Calculate Inventory Turnover Ratio.
Solution:
Inventory Turnover Ratio =
Working Notes:
1. Calculation of Cost of Revenue from Operations:
Let Cost of Revenue from Operations be Rs. 100; = Rs. 25 = Rs. 125
If Revenue from Operations is Rs. 125, then cost is Rs. 100
If Revenue from Operations is Rs. 125, then cost is = Rs. 100.
If Revenue from Operations is Rs. 2,00,000, then cost = Rs. 2,00,000 x Rs. 100/Rs. 125 = Rs. 1,60,000.
2. Opening Inventory = 10% of Cost of Revenue from Operations = Rs. 1,60,000 x 10/100 = Rs. 16,000.
3. Closing Inventory=3 (Opening Inventory)=Rs. 16,000x3=Rs. 48,000.
4. Average Inventory

Question 73. Calculate Inventory Turnover Ratio from the following information;
Opening Inventory Rs. 20,000; Purchases Rs. 1,60,000 and Closing Inventory Rs. 60,000.
State giving reason, which of the following transactions would (i) increase, (ii) decrease, (iii) no change.
(a) Sale of goods for Rs. 30,000 (Cost Rs. 16,000).
(b) Increase in the value of Closing Inventory by Rs. 20,000.
(c) Gods purchased from Rs. 40,000.
(d) Purchases return Rs. 10,000.
(e) Goods costing Rs. 5,000 withdrawn for personal use.
(f) Goods costing Rs. 10,000 distributed as free samples.

Solution: Inventory Turnover Ratio =

Notes:
1. Cost of Revenue from Operations = Opening Inventory + Purchases-Closing Inventory
= Rs. 20,000 + Rs.1,6,000 – Rs. 60,000=Rs. 1,20,000.
2. Average Inventory =

Statement Showing the Effect of Different Transactions on Inventory Turnover Ratio

Transactions Effect Reason
(a) Increase Cost of Revenue from Operations (Cost of Goods Sold) will increase
because of decrease in Closing Inventory by Rs. 16,000. Hence, Cost of
Revenue form Operations will be: Opening Inventory Rs. 20,000 +
Purchases Rs. 1,60,000 – Closing Inventory Rs. 44,000 = Rs. 1,30,000.
Average Inventory will decrease due to decrease in Closing Inventory.
Average Inventory will be
Hence, Inventory Turnover Ratio will be:
(b) Decrease Cost of Revenue from Operations ( Cost of Goods Sold ) will decrease
because of increase in Closing Inventory. Hence, Cost of Revenue from
Operations (Cost of Goods Sold) will be: Opening Inventory Rs. 20,000 +
Purchase Rs. 1,60,000 – Closing Inventory Rs. 80,000 = Rs. 1,00,000.
Average Inventory will be
Hence , Inventory Ratio will be
(c) Decrease Cost of Revenue from Operations (Cost of Goods Sold) will remain
unchanged because of increase in Purchases and increase in Closing
Inventory by the same amount. Hence, Cost of Revenue from Operations
(Cost of Goods Sold) will be: Opening Inventory Rs. 20,000 + Purchases
Rs. 2,00,000 – Closing Inventory Rs. 1,00,000 = Rs. 1,20,000.
Average Inventory will increase due to increase in Closing inventory.

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Average Inventory will be:

Hence, Inventory Turnover Ratio will be
(d) Increase Cost of Revenue from Operations ( Cost of Goods Sold) will not change
because of decrease in purchases and decrease in Closing Inventory by the
same amount i.e., Rs. 10,000.
Average Inventory will decrease due to decrease in Closing Inventory.
Average Inventory will be:
Hence, Inventory Turnover Ration will be:
(e) Increase The reason being the same as given in (d).
(f) Increase The reason being the same as given in (d).

Question 74. Cash Revenue from Operations Rs. 1,00,000: Credit Revenue from Operations Rs. 3,00,000; Gross
Profit 30% on Revenue from Operations; Inventory Turnover Ratio = 2 Times.
Calculate Opening inventory and Closing Inventory in each of the following cases:
rd
Case 1: If Opening Inventory is 1/3 of the inventory at the end.
Case 2: If Closing Inventory is 25% less than the inventory at the end.
Case3: If Opening Inventory is 75% of Closing Inventory and Closing Inventory is 30% of Revenue from
Operations.
Solution:
Revenue from Operations = Cash Revenue from Operations +Credit Revenue from Operations
= Rs. 1,00,000 + Rs. 3,00,00 = Rs. 4,00,000.
Cost of Revenue from Operations = Revenue from Operations – Gross Profit
= (Rs. 4,00,000 - )
= Rs. 4,00,000 – Rs. 1,20,000 = Rs. 2,80,000.

Inventory Turnover Ratio=

2 =
Average Inventory =
rd
Case 1. If Opening Inventory is 1/3 of the Inventory at the end.
Let Closing Inventory be x
Opening Inventory =
Average Inventory =

Rs. 1,40,000 =
Rs. 1,40,000 x 2 =
Rs. 2,80,000 =
4x= Rs. 2,80,000 x 3 = Rs. 8,40,000
X=
Opening Inventory=

Case 2. If closing Inventory is 25% less than the Inventory in the beginning.
Let Opening Inventory be x
Closing Inventory = x – 0.25 = 0.75+x
Average Inventory=
Rs. 1,40,000=
Rs. 2,80,000= 1.75x
X=
Closing Inventory = 0.75 x Rs. 1,60,000 = Rs. 1,20,000.

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Case3: If Opening Inventory is 75% of Closing Inventory and Closing Inventory is 30% of Revenue from
Operations.
Closing Inventory = 30% of Revenue from Operations
= 30% of Rs. 4,00,000 = Rs. 1,20,000.
Opening Inventory= 75% of Rs. 1,20,000 = Rs. 90,000.

Question 75. Following is the Statement of Profit and Loss of Exe Ltd., calculate Inventory Turnover Ratios:
st
STATEMENT OF PROFIT AND LOSS for the year ended 31 March,2019
Particulars Note No. Rs.
I. Revenue from Operations 2,00,000
II. Expenses:
Purchases of Stock-in-Trade 1,20,000
Change in Inventory of Stock-in-Trade 12 20,000
Other Expenses 30,000
Total Expenses
III. Profit before Tax (I-II) 1,70,000
IV. TAX 30,000
V. Profit after Tax (III-IV) 5,000
25,000

Notes to Accounts
Particulars Rs.
I. Change in Inventory of Stock-in-Trade
Opening Inventory 40,000
Less: Closing Inventory 20,000

II. Other Expenses 20,000

Carriage Inwards
Carriage Outwards 10,000
Miscellaneous Expenses 12,500
7,500
30,000

Solution:
Inventory Turnover Ratio =
Cost of Revenue from Operations (Cost of Goods Sold) = Purchases of Stock-in-Trade + Change in Inventory of
Stock-in-Trade + Direct Expenses
= Rs, 1,20,000 + Rs. 20,000 + Rs. 10,000*=Rs.1,50,000.
*Direct Expenses are Carriage Inwards taken from Note to Accounts on Other Expenses.
Average Inventory =
=

Question 76. From the following Statement of Profit and Loss Reynold Ltd., calculate Inventory Turnover Ratio:
st
Statement of Profit and Loss for the years ended 31 March, 2019
Particulars Rs.

I. Revenue from Operations 15,00,000

II. Other Income 15,000
III. Total Revenue (I+II) 15,15000

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IV. Expenses: 5,25,000

Cost of Materials Consumed 1 (25,000)
Changes in Inventories of Finished Goods and Work-in-Progress 2 2,50,000
Employees Benefit Expenses 15,000
Depreciation and Amortisation 2,10,000
Other Expenses
9,75,000
Total Expenses
5,40,000
V. Profit before Tax(III – IV)

Notes to Accounts
Particulars Rs.
1. Cost of Materials Consumed
Opening Inventory of Materials 2,00,000
Add: Purchases of Materials 4,25,000

6,25,000
Less: Closing Inventory 1,00,000
5,25,000
2. Changes in Inventories of Finished Goods and WIP,:
Opening Inventory 50,000
Less: Closing Inventory 75,000
(25,000)

Solution :
Inventory Turnover Ratio

Cost of Revenue form Operations (Cost of Goods Sold ) = Cost of Materials Consumed + Changes in
Inventories of Finished Goods and WIP
= Rs. 5,25,000 – Rs. 25,000 = Rs. 5,00,000.
Average Inventory = Opening Inventory ( Materials, Finished Goods and WIP)
+
=
Notes:
1. Direct Expenses are not given. Hence, they are assumed to nil.
2. Inventories are included in Cost of Materials Consumed and Changes in Inventories of Finished Goods
and WIP.

(Ii) Trade Receivables Turnover Ratio: Trade Receivables is the amount receivable against goods sold or
services rendered in the normal course of business by the enterprise. In other words, amount remaining
outstanding against sale of goods and/or services rendered are trade receivables. Trade Receivables include
Debtors and Bills Receivable.
Trade Receivables Turnover Ratio establishes the relationship between Credit Revenue from Operations, i.e.,
Net Credit Sales and Average Trade Receivables of the year.

Trade receivables Turnover Ratio is computed as follows:

Trade Receivables Turnover Ratio = .

NOTE:- When Trade Receivables Turnover Ratio is computed, it should be kept in mind that provision for
doubtful debts is not deducted from trade receivables since the purpose is to calculate the number of days for
which sales are tied up in trade receivables and not to ascertain realizable value of the debtors.

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Objective and Significance: This ratio indicates the number of times trade receivables are turned over in a year
in relation to credit sales. It shows how quickly trade receivables are converted into Cash and Cash Equivalents.
It shows the efficiency in collection of amounts due against trade receivables. A high ratio is better since it
shows that debts are collected more promptly.
A lower ratio shows inefficiency in collection or increased credit period and more investment in debtors than
required.

Debt collection Period or Average Collection Period: It provides and approximation of the average time that it
takes to collect debtors. It is computed by dividing 365(Days) or 12 (Months) by the Trade Receivables
Turnover Ratio. It is calculated as follows:
Debt collection Period =
Or
=

Question 77. Calculate Trade Receivables Turnover Ratio and Average Collection period.
Credit Revenue from the Operations (Net Credit Sales) for the year is Rs. 6,00,000 and Debtors and Bills
Receivable at the year end were R. 60,000 and Rs. 40,000 respectively.
Solution :
Trade Receivables Turnover Ratio =
=

Average Collection Period (Months)= .

Average Collection Period (Days) =

Note: Opening balances of debtors and bills receivable are not given. Hence, they are presumed to be nil.

Question 78. Calculate Trade Receivables Turnover Ratios from the following :

Total Net Sales for 2018-19 2,00,000

Net Cash Sales for 2018-19 40,000
st
Debtors as at 1 April, 2018 35,000
st
Debtors as at 31 March, 2019 55,000
Solution:

Trade Receivables Turnover Ratio=

Question 79. Calculate Trade Receivables turnover Ratio from the following;

Closing Debtors Rs. 40,000; Net Credit Sales being 25% of Net Cash Sales; Excess of Closing Debtors over
Opening Debtors over Opening Debtors R. 20,000; Total Net Sales Rs. 1,50,000.

Solution: Trade Receivables Turnover Ratio =

Working Note:

Credit Revenue from Operations = Total Net Sales – Net Cash Sales
= Rs. 1,50,000 – Rs. 1,20,000 = Rs. 30,000.
Opening Debtors= Closing Debtors – Excess of Closing Debtors over Opening Debtors

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= Rs. 40,000 – Rs. 20,000 = Rs. 20,000.

Average Debtors = =

*Let Net Cash Sales be x, Net Credit Sales = 25% of x or Total Net Sales = x+

X (Net Cash Sales) = Rs. 1,50,000 x 4/5 = Rs. 1,20,000.

Net Cash Sales = Rs. 1,20,000 x 25/100 = Rs. 30,000.

Question 80. From the following details, calculate Trade Receivables Turnover Ratio :

Total Sales for the year (Net) 1,75,000

Cash Sales (Net) 20 % of Total Net Sales
Sales Return-Out of Credit Sales 10,000
Sundry Debtors:
Opening balance 8,000
Closing balance 12,000

Solution:

Trade Receivables Turnover Ratio =

Question 81. Calculate Opening and Closing Trade Receivables from the following information;
rd
Cash Revenue from Operations = 1/3 of Credit Revenue from Operations

Cash of Revenue from Operations = Rs. 3,60,000

Gross Profit = 25% of Revenue from Operations

Trade Receivables at the end were 3 times that of in the beginning

Trade Receivables Turnover Ratio 3 Times.

Solution: Total Revenue from Operations = Cost of Revenue from Operations + Gross Profit

= 3,60,000 + (Rs. 3,60,000 x 1/3) = Rs. 4,80,000.

Credit Revenue from Operations = Rs. 3,60,000

Trade Receivables Turn over Ratio =

3 =

Average Trade Receivables =

Calculation of Opening and Closing Trade Receivables:

Let Opening Trade Receivables = x

Closing Trade Receivables = 3x

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Average Trade Receivables =

Rs. 1,20,000=

Rs. 2,40,000=4x

X=

Closing Trade Receivables = 3x = Rs. 60,000 x 3 = R.s 1,80,000.

Notes:

1. Let Sales (Revenue from Operations) =Rs. 100

Less: Gross Profit (25% of Rs. 100) =Rs.25

Therefore, Cost of Revenue from Operations = Rs. 75

Gross Profit on Cost of Revenue from Operations =

2. Calculation of Credit Revenue from Operations:

Let Credit Revenue from Operations = x

It means Cash Revenue from Operations =

Total Revenue from Operations = Credit Revenue from Operations + Cash Revenue from Operations

X+
3x+x = Rs. 14,40,000; 4x = Rs.14,40,000
X = .

IMPORATNT NOTE:- Be careful about the language:

There is difference between the statements ‘ Trade Receivables at the end were 3 times that of in the
beginning ‘ and ‘Trade receivables at the end were 3 times more than that of in the beginning’. The former
means that if Opening Trade Receivables are X, then Closing Trade Receivables will be 2x, and the latter means
that if Opening Trade Receivables are x, then Closing Trade Receivables will be x + 3x, i.e., 4x.

Question 83. Calculate Opening and Closing Trade Receivables from the following information if Trade
Receivables Turnover Ratios is 3 Times;
rd
(I.) Cash Revenue from Operations is 1/3 of Credit Revenue from Operations.
(II.) Cost of Revenue from operations Rs. 2,40,000.
(III.) Gross Profit 25% on Cost of Revenue from Operations.
(IV.) Trade Receivables at the end were 3 times more than that of in the beginning.
Solution:

Total Revenue from Operations = Cost of Revenue from Operations + Gross Profit

+ Rs. 2,40,000 + 25% of Rs. 2,40,000 = Rs. 3,00,000.

Calculation of Credit Revenue from Operations:

Let Credit Revenue from Operations = x

Cash Revenue from Operations =

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x+

3x + x = Rs. 9,00,000.

X= ).

Trade Receivables Turnover Ratio =

3=

` Average Trade Receivables =

Calculation of Opening and Closing Trade Receivables :

Average Trade Receivables =

Let Opening Trade Receivables = x, Closing Trade Receivables = x+3x = 4x

Rs. 75,000 =

X+4x = Rs. 1,50,000; x= Rs. 30,000 x 4 = Rs. 1,20,000.

Question 84. Calculate amount of Opening Trade Receivables and Closing Trade Receivables from the
following figures:

Trade Receivables Turnover Ratio 4 times

Cost of Revenue from Operations (Cost of Goods Sold) Rs. 6,40,000
Gross Profit Ratio 20%
Closing Trade Receivables were Rs. 20,000 more than in the beginning.
Cash Sales being 33 of Credit Sales.
Solution:
Sales = Cost of Revenue from Operations (Cost of Goods Sold) + Profit
Let Sales = Rs. 100; Gross Profit Rs. 20

Cost of Revenue from Operations (Cost of Goods Sold ) Rs. 80, then Sales = Rs. 100.

If the Cost of Revenue from Operations from Operations is Rs. 80, then Sales = Rs. 100.

If the Cost of Revenue from Operations (Cost of Goods Sold) is Rs. 6,40,000, then

Sales =

Total Sales = Cash Sales + Credit Sales

Let the Credit Sales be x; Cash Sales =

Rs. 8,00,000=

Trade Receivables Turnover Ratio =

Average trade Receivables= (Opening Trade Receivables + Closing Trade)/2

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Let Opening Trade Receivables be y, Closing Trade Receivables = y = Rs. 20,000

4(Given) =

4y+4y + Rs. 80,000 = Rs. 12,00,000

8y= Rs. 11,20,000

Y= Rs. 1,40,000( Opening Trade Receivables).

Closing Trade Receivables = Opening Trade Receivable + Rs. 20,000

= Rs. 1,40,000 + Rs. 20,000 = Rs. 1,60,000.

Question 85. From the following information, calculate Trade Receivables Turnover Ratio:

Cost of Revenue from operations (Cost of Goods Sold)- Rs. 3,00,000

Opening Debtors – Rs. 50,000
Gross Profit on Cost-25%
Closing Debtors Rs. 1,00,000
Cash Sales – 205 of Total Sales
Solutions: Trade Receivables Turnover Ratio =

Notes: 1 Revenue from Operations = Cost of Revenue from Operation + Gross Profit
= Rs. 3,00,000 + 25 % of Rs. 3,00,000.

= Rs. 3,00,000 + Rs. 75,000 = Rs. 3,75,000.

st
Question 86. From the following Balance Sheet of AMC Ltd. as at 31 March,2019 and additional information,
calculate Trade Receivables Turnover Ratio and Debt Collection Period (in Months)
st
Balance Sheet as at 31 March, 2019.
Particulars Rs.
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 5,00,000
(b) Reserves and Surplus 2,00,000
2. Non-Current Liabilities
Long-term Borrowings 2,50,000
3. Current Liabilities
2,00,000
(a) Trade Payables
10,000
(b) Short-term Provisions
Total
II. ASSETS 11,60,000
1. Non-Current Assets
Fixed Assets (Tangible Assets)
7,00,000
2. Current Assets
(a) Inventories
1,00,000
(b) Trade Receivables 3,50,000
(c) Cash and Cash Equivalents 10,000
Total 11,60,000

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Additional Information:

1. Revenue from Operations being Credit Sales Rs. 15,00,000 and Cash Sales Rs. 2,50,000.
2. Trade Receivables in the beginning of the year were Rs. 4,50,000.
HINTS:
Trade Receivables Turnover Ratio =

Average Collection Period =

(III) TRADE PAYABLES TURNOVER Ratio :- Trade Payables means amount payable for purchase of goods or
services taken by the enterprise in the ordinary course of business. It includes creditors and bills payable.

Trade Payables Turnover Ratio shows the relationship between net credit purchases and total payables or
average payables, whereas average payment period or creditors velocity show the credit period enjoyed
by the enterprise in paying creditors.

Computation: Trade Payables Turnover Ratio is calculated as follows:

Trade payables Turnover Ratio =

Average Trade Payables =

or

Average Payment Period or Average Age of Payables

Objective and Significance: The objective of calculating Trade Payables Turnover Ratio is to establish the
number of times the creditors are tuned over in relation to credit purchased.

High turn over not shorter payment period shows the availability of less credit period or early payments.
This boosts up the credit worthiness of the enterprise. A low ratio or longer payment period indicates that
creditors are not paid in time or increased credit period.

Question 87. Opening Sundry Creditors Rs. 80,000; Opening Bills Payables Rs. 3,000; Closing Sundry Creditors
Rs. 1,00,000; Closing Bills Payable Rs. 17,000; Purchases Rs. 14,00,000; Cash Purchases Rs. 5,00,000; Purchases
Return Rs. 1,00,000. Calculate Trade Payables Turnover Ratio.

HINTS: Trade payables Turnover Ratio =

(iv) Working Capital Turnover Ratios :- Working Capital Turnover Ratio shows the relationship between
working capital and Revenue from Operations. It shows the number of times a unit of Rupee invested
in working capital produces sales.
Revenue from Operations means Revenue earned by the company from its Operating Activities, i.e.,
revenue producing activities. It includes net sales and commission, etc., for non-finance company and
interest earned, dividend , profit on sale of securities, etc. in the case of finance companies.

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If the amount of Revenue from Operations is not given, It may be calculated on the basis of Cost of
Revenue from Operations ( Cost of Goods Sold).

Computation: Working Capital Turnover Ratio is computed as follows:

Working Capital Turnover Ratio =

Working Capital = Current Assets – Current Liabilities.

Objective and Significance: the objective of computing the ratio is to ascertain whether or not working
capital has been effectively used in generating revenue. Assessment of effective utilization can be made
by comparing with the past data or with comparable enterprise or with the industry standards. Higher the
ratio, better it is. But , a very high ratio indicates overtrading – the working capital being inadequate for
the scale of operations.

Working Capital Turnover Ratio is considered to be a better measure than the Inventory Turnover Ratio,
since it shows the efficiency or inefficiency in the use of the working capital and not merely a part of it,
viz., the capital invested in inventory. it is the total working capital that leads to sales.

Question 90. Current Assets Rs. 12,00,000; Current Liabilities Rs. 2,40,000; Sales: Credit Rs. 24,00,000 and
Cash Rs. 5,20,000; Sales Return Rs. 40,000: calculate Working Capital Turnover Ratio from the above
information.

Hints:Working Capital Turnover Ratio =

Question 91. Calculate Working Capital Turnover Ratio from the following :
Cost of Revenues From Operations 1,50,000
Current Assets 1,00,000
Current Liabilities 75,000
Hints: Working Capital Turnover Ratio = =

Note: If amount of sales is not given, ratio can be calculated on the basis of Cost of Revenue from Operations
(Cost of Goods Sold).

Question 92. Working Capital Rs. 2,50,000; Cost of Revenue from Operations (Cost of Goods Sold) Rs.
10,00,000: Gross Profit on Sales 20%. Calculate Working Capital Turnover Ratio from the above information.

Hints: Profit 1/5 on Sales = ¼ on cost

Working Capital Turnover Ratio =

Question 93. Calculate working Capital Turnover Ratio from the following information: Revenue from
Operations Rs. 12,00,000; Current Assets Rs. 5,00,000; Total Assets Rs. 8,00,000; Non-current Liabilities s.
4,00,000; and Shareholders’ funds Rs. 2,00,000.

Solution: Working Capital Turnover Ratio =

Note : Working Capital = Current Assets – Current Liabilities = Rs. 5,00,000 – Rs. 2,00,000* = Rs. 3,00,000.

*Current Liabilities = Total Asserts – Non-Current Liabilities – Shareholders’ Funds

= Rs. 8,00,000 – Rs. 4,00,000 – Rs. 2,00,000 = Rs. 2,00,000.

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(4). PROFITABLITY RATIOS:- Efficiency in business is measured by profitability. “Profitability’ refers to financial
performance of the business. Accounting Ratios measuring the profitability are known as Profitability Ratios.
Important Ratios are:

(I) Gross Profit Ratio;

(II) Operating Ratio;
(III) Operating Profit Ratio;
(IV) Net Profit Ratio; and
(V) Return on Investment (ROI) or Return on Capital Employed Ratio.
Let us discuss them in details.

(I) Gross Profit Ratio

Gross Profit Ratio establishes the relationship of Gross Profit and Revenue from Operations, i.e., Net Sales of
an enterprise. The ratio is calculated and shown in percentage.

Computation: Gross Profit Ratio is computed as follows:

Gross Profit Ratio

Revenue from Operations means revenue earned by the enterprise from its operating activities. It includes net
sales (i.e., sales – sales return) and commission, etc. , in the case of non-finance companies and interest
earned, dividend, profit on sale of securities , etc., in the case of finance companies.

Reasons for increase in Gross Profit Ratio:-- Gross Profit Ratio may increase due to the following reasons:

(I.) Higher selling price with constant Cost of Revenue from Operations (Cost of Goods Sold).
(II.) Lower Cost of Revenue from Operations (Cost of Goods Sold) with constant selling price.
(III.) A combinations of Aforesaid two reasons.

Objective and Significance: The main objective of computing Gross Profit ratio is to determine the efficiency
with which productions and or/purchase operations and selling operations are carried on.

Gross Profit Ratio is a reliable guide for fixing selling prices and efficiency of trading activities. The ratio may be
compared with ratio of earlier years of with that of other firms to compare and assess the efficiency of the
business of other firms. Higher Gross Profit ratio is better as it leaves higher margin to meet operating
expenses and creations of reserves.

Question 94. Compute Gross Profit Ratio from the following information:

Revenue from Operations Rs. 6,00,000; Gross Profit 25% on Cost. (AI 2004, Modified)

Hints: Gross Profit Ratio =

Question 95. Calculate Gross Profit Ratio from the following information:

Cash Sales are 25% of Total Sales; Purchases Rs. 6,90,000; Credit Sales Rs. 6,00,000; Excess of Closing Inventory
Rs. 50,000.

Solution:. Gross Profit Ratio

Working Note: Calculation of Revenue from Operations, i.e., Net Sales = Credit Sales + Cash Sales

Let Revenue from Operations, i.e., Net Sales be x.

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Credit Sales (Given) = Rs. 6,00,000

Cash Sales = 25% of x or

X=

4x= x + Rs. 24,00,000

X= Rs. 8,00,000 ( Revenue from Operations, i.e., Net Sales)

Cash Sales = Revenue from Operations, i.e., Net Sales – Cost of Goods Sold

= Rs. 8,00,000 – Rs. 6,40,000 = Rs. 1,60,000.

*Change in Inventories = Opening Inventories – Closing Inventories. Excess of Closing Inventory over Opening
Inventory means negative change. Hence, it is deducted.
st
Question 96. Following information is available for the year ended 31 March, 2019, calculate Gross Profit
Ratio:

Cash Sales Rs. 25,000 Decrease in Inventory Rs. 10,000

Purchase: Cash Rs. 15,000 Returns Outward Rs. 2,000

Credit Rs. 60,000 Wages Rs. 5,000

Carriage Inwards Rs. 2,000 Ratio of Cash Sales and Credit Sales 1:3

Solution: Gross Profit Ratios = = =10%.

Revenue from Operations, i.e., Net Sales = Cash Sales + Credit Sales
= Rs.25,000 + Rs.25,000 x 3/1 =Rs.25,000 + Rs.75,000 = Rs. 1,00,000
Net Purchases = Cash Purchases + Credit Purchases – Returns Outwards
= Rs 15,000 + Rs. 60,000 – Rs. 2,000 = Rs. 73,000.
Cost of Revenue from Operations (Cost of Goods Sold) = Purchases + Opening Inventory + Direct Expenses
(Carriage Inwards + Wages)
= Rs. 73,000 Rs. 10,000 + Rs. 7,000 (i.e., Rs. 2,000 + Rs. 5,000) = Rs. 90,000.
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
= Rs. 1,00,000 – Rs. 10,000.
Note Decrease in Inventory means Opening Inventory is more than the Closing Inventory.

Question 97. Calculate Gross Profit Ratio from the following data:
Average Inventory Rs. 1,60,00; Inventory Turnover Ratios 8 Times; Average Trade Receivables Rs. 2,00,000;
Trade Receivables Turnover Ratio 6 Times ; Cash sales 25% of Net Sales.
Solution:
Gross Profit Ratio =
Cost of Revenue from Operation = Average Inventory x Inventory Turnover Ratio
= 1,60,000 x 8 = Rs.12,80,000.
Credit Sales = Average Trade Receivables x Trade Receivables Turnover Ratio
= Rs. 2,00,000 x 6 = Rs. 12,00,000 (being 75% of net Sales).

Revenue from Operation (Net Sales) = Credit sales x 100/75

= Rs. 12,00,000 x 100/75 = Rs. 16,00,000.
Gross Profit = revenue from Operation (Net Sales)
- Cost of Revenue from Operation (Cost of Goods Sold)

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= Rs. 16,00,000 – Rs. 12,80,000 =Rs. 3,20,000.

Question 98. The Gross Profit Ratio of a company is 25%. State giving reason, which of the following
transactions will (a) increase; (b) decrease (c) not change the Gross Profit Ratio:
(I.) Purchases of Stock-in-trade Rs. 50,000.
(II.) Purchases Return Rs. 15,00.
(III.) Revenue from Operations on sale of Stock-in-Trade Rs. 85,000.
(IV.) Stock in-Trade Costing Rs. 20,000 withdrawn from personal use.
(V.) Stock-in-Trade costing Rs. 10,000 distributed as free samples.

Solution :
Statement Showing Effect of the Transactions on Gross Profit Ratio
Transactions Effect on Gross Reasons
Profit Ratio
(I) No Change Both Purchases and Closing Inventory will increase by the same
amount, therefore, Cost of Revenue from operations will remain
unchanged.
(II) No Change Both Purchases and Closing Inventory will decrease by the same
amount, therefore Cost of Revenue from Operations will remain
unchanged.
(III) No Change Revenue from Operations will increase but Closing Inventory will
decrease the same percentage (Not by same amount). As a result, Cost
of Revenue from Operations will increase by the same percentage as
the Revenue from Operations increase.
(IV) No Change Both Purchases and Closing Inventory will decrease by the same
amount, therefore, Cost of Revenue from Operations will not change.
(V) No Change Cost of Revenue from Operations increases as well as decreases by
the same amount.

(II) Operating Ratio

Operating Ratio establishes the relationship between Operating Costs (i.e., Cost of Revenue from
Operations + Operating Expenses) and Revenue from Operations. Ir shows the proportions of Cost of
Revenue from Operations and Operating Expenses to Revenue from Operations.
Operating costs are those costs which are incurred for operating activities of the business.

Computation: Operating Ratio is computed as follow:

Operating Ratio =
Or
= = …%.

Cost of Revenue from Operations = Opening Inventory (Excluding Spare Pars and Loose Tools)+ Net Purchases
+ Direct Expenses – Closing Inventory (Excluding Spare Parts and Loose Tools)

Objective and Significance: The objective of computing Operating Ratio is to assess the operational efficiency
of the business. It show the percentage of Revenue from Operations that is absorbed by the Cost of Revenue
from Operations (Cost of Goods Sold) and Operating Expenses. Lower Operating Ratio is better because it
leaves higher profit margin to meet no-operating expenses, to pay dividend, etc. A rise in the Operating Ratio
indicates decline in efficiency.

Question 99. From the following information, calculate Operating Ratio:

Revenue from Operations Rs. 6,80,000; Rate of Gross Profit on Cost 25%; Selling Expenses Rs. 1,44,000;
Administrative Expenses Rs. 73,000. (Delhi 2016)

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Solution: Operating Ratio =

Question 100. Revenue from Operations Rs. 9,00,000, Gross Profit 25% on Cost, Operating Expenses Rs.
90,000. Calculate Operating Ratio.
Hints :
Operating Ratio

= =

Question 101. Operating Cost Rs. 6,80,000; Operating Expenses Rs. 80,000; Gross Profit Ratio 25%. Calculate
Operating Ratio.
Hints: Operating Ratio

= = 85%.

st
Question 102. Following is the Statement of Profit and Loss of Uniball Ltd. For the year ended 31 March,
2019, calculate Operating Ratio.
st
STATEMENT OF PROFIT AND LOSS for the years ended 31 March, 2019
Particulars Note No. Rs.
I. Revenue from Operations (Net Sales) 40,00,000
II. Other Income 10,000
III. Total Revenue (I+II) 4,10,000
IV. Expenses:
Purchase of Stock-in-Trade 2,25,000
Change in Inventories of Stock-in-Trade (15,000)
Employees Benefit Expenses 6,000
Other Expenses 1 34,000
Total Expenses. 2,50,000
V. Profit (III-IV) 1,60,000

Note to Accounts.
Particulars Rs.
(I) Other Expenses 10,000
Administrative Expenses 14,000
Selling and Distribution Expenses 10,000
Loss on Sales of Fixed Assets 30,000

Solution: Operating Ratio = x 100

Notes

(I.) Cost of Revenue from Operations

= Purchases of Stock-in-Trade + Change in Inventories + Employees Benefit Expenses
= Rs. 2,25,000 - Rs. 15,000 + Rs. 6,000 = Rs. 2,16,000.
(II.) Operating Expenses = Administrative Expenses + Selling and Distribution Expenses
= Rs. 10,000 + Rs/ 14,000 = Rs. 24,000.
(II) Loss on Sale of Fixed asset is not an operating Expense.

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Question 102. Following is the Statement of Profit and Loss of SKJ Ltd. For the years ended 31 March, 2019;

Particulars Rs.
I. Revenue from Operations (Net Sales) 20,00,000
II. Expenses
Cost of Materials Consumed 11,25,000.
Changes in Inventories of Finished Goods
and WIP 50,000
Employees Benefit Expenses 30,000
Finance Costs 25,0000
Other Expenses 1,70,000
Total Expense 1,40,000
III. Profit from Operations 6,00,000

You are required to compute Operating Ratio.

Solution:
Operating Ratio=
=
Cost of revenue from Operations = Cost of Materials Consumed + Changes in Inventories of finished Goods
and WIP
= 11,25,000 + Rs, 50,000 = Rs, 11,75,000.
Operating Expenses = Employees Benefit Expenses + Other Expenses
= Rs. 11,25,000 + Rs. 50,000 = Rs. 11,75,000.
Operating Expenses = Employees Benefit Expenses + Other Expenses
= Rs. 30,000 + Rs. 1,70,000 = Rs. 2,00,000.
Note: Since information of non-operating expenses is not given, all expenses (other than finance costs) are
taken as operating expenses.

(III) Operating Profit Raito:- Operating Profit Ratio measures the relationship between Operating
Profit and Revenue from Operations. i.e., Net Sales.
Operating Profit Ratio is computed by dividing operating Profit by Revenue from operations (Net Sales) and is
expressed as percentage. In the form of a formula, Operating Profit Ratios is expressed as follow:
Operating Profit Ratio = = .. %
Operating Profit=Gross Profit + Other Operating Income – Other Operating Expenses
Or
= Net Profit (Before Tax) + Non-Operating Expenses/Losses – Non-operating Incomes
Or
=Revenue from Operations – Operating Cost

Question 103. Calculate Operating Profit Ratio in the following cases:

Case 1: Revenue from Operations (Net Sales) Rs. 5,00,000, Operating Profit Rs. 75,000.
Case 2: Revenue from Operations (Net Sales) Rs. 6,00,000, Operating Cost Rs. 5,20,000.
Case 3: Revenue from Operations (Net Sales) Rs. 7,20,000, Gross Profit 20% on Sales, Operating Expenses Rs.
36,000.

Solution : Operating Profit Ratio =

Case 1. Operating Profit Ratio = = 15%.
Case 2. Operating Profit Ratio =
Note: Operating Profit = Revenue from Operations – Operating Cost = Rs. 6,00,000 – Rs. 5,20,000 =Rs. 80,000.
Case 3. Operating Profit Ratio =
Note: Operating Profit = Gross Profit – Operating Expense = 20% of Rs. 7,20,000 – Rs. 36,000 =Rs. 1,08,0000.

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Question 104. Calculate Operating Profit Ratio from the following information:
Rs.
Opening Inventory 50,000 Selling Expenses 60,000
Purchases 5,00,000 Dividend on Shares 15,000
Sales (Gross) 7,50,000 Loss by Theft 10,000
Closing Inventory 75,000 Sales Return 15,000
Administrative Expenses 25,000

hints: Operating Profit Ratio =

Question 105. Revenue from Operations Rs. 4,50,000. Gross Profit 25% on Cost, Operating Expenses Rs.
22,500. Calculate Operating Profit Ratio.
Solution:
Operating Profit Ratio= =
Notes:
(I) Calculation of Cost of Revenue from Operations:
Let Cost of Revenue from Operations = Rs. 100; Gross Profit = Rs. 25
Revenue from Operations= Rs. 100 +Rs. 25 = Rs. 125.
When Revenue from Operations is Rs. 4,50,000,
(II) Operating profit = Revenue from operations – Operating Cost*
= *Rs. 4,50,000 – Rs. 3,60,000 – Rs. 22,500 = Rs. 67,500.
*Operating Cost = Cost of Revenue from Operations + Operating Expenses.

(IV) Net Profit Ratio :-- Net Profit Ratio establishes the relationship between Net Profit and Revenue from
Operations, i.e., Net Sales. It shows the percentage of Net Profit earned on Revenue from Operations.

Computation: Net Profit ratio is computed as follows:

Net Profit Ratio =

Net Profit = Revenue from Operations – Cost of Revenue from Operations

– Operating Expenses – Non-operating Expenses + Non-operating Income-Tax.

Objective and Significance: Net Profit Ratio is an indicator of overall efficiency of the business. Higher the Net
Profit Ratio, better the business. This ratio helps in determining the operational efficiency of the business. An
increase in the ratio over the previous period shows improvement in the operational efficiency and decline
means otherwise. A comparison with the industry standard is also an indicator of the efficiency of the
business.

Question 106. Gross Profit Ratio of a company was 25%. Its Cash sales were Rs. 2,00,000 and credit sales were
Rs. 2,00,000 and credit sales were 90% of the total sales. If the indirect expenses of the company were Rs.
20,000, calculate Net Profit Ratio.
Solution:
Net Profit Ratio =
Total Revenue from Operations = Cash Sales + Credit Sales
= Rs. 2,00,000 + Rs. 18,00,000 = Rs. 20,00,000

Question 107. From the following information, calculate Net Profit Ratio:
Revenue from Operations Rs. 5,00,000 Advertisement Expenses Rs. 10,000
Gross Profit Rs. 2,00,000 Interest Rs. 5,000
Salaries and Wages Rs. 45,000 Rent (Income) Rs. 60,000

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Solution:
Net Profit Ratio =
= = 40%.
Working Notes:
Net Profit = Gross Profit – Indirect Expenses and Losses + Other Income
Income Expenses = Salaries and Wages + Advertisement Expenses + Interest
= Rs. 45,000 + Rs. 10,000 + Rs. 5,000 = Rs. 60,000.
Other Income (Rent) = Rs. 60,000.

Question 108. Revenue from Operations Rs. 8,00,000; Gross Profit Ratio 25%; Operating Ratio 90%; Non-
Operating Expenses Rs. 4,000; Non-operating Income Rs. 44,000. Calculate Net Profit Ratio.
Solution:
Net Profit Ratio = 15%.
Working Notes:
(I.) Operating Profit Ratio = 100 – Operating Ratio = 100 – 90 = 10%.
(II.) Operating Profit = Rs. 8,00,000 x 10/1000 = Rs. 80,000.
(III.) Net Profit = Operating Profit + Non-operating Incomes – Non-operating Expenses
= Rs. 80,000 + Rs. 44,000 – Rs. 4,000 = Rs. 1,20,000.

Question 109. Calculate Net Profit Ratio from the following Statement of Profit and Loss of New Delhi Sales
st
Ltd. For the year ended 31 March, 2019:
Particulars Note No. Rs.
I. Revenue from Operations (Net Sales) 12,50,00
II. Expenses:.
Purchases of Stock-in-Trade 8,70,000
Change in Inventories of Stock-in-Trade 27,000
Employees Benefit Expenses 1,20,000
Finance Costs 5,000
Depreciation and Amortisation Expenses 1 8,000
Other Expenses. 44,000

Total Expenses
10,20,000
III. Net Profit (I-II) 2,30,000

Note to Accounts
Particulars Rs.
I. Other Expenses 5,000
Carriage 10,000
Administrative and General Expenses 29,000
Provision for Tax 44,000

Solution: Net Profit Ratio =

(V) Return on Investment (ROI) or Return on Capital Employed

Return on Investment or Return on Capital Employed shows the relationship of profit (profit before
interest and tax) with Capital Employed. The net result of operations of a business is either profit of loss. The
sources, i.e., funds used in the business to earn this (profit or loss) are Proprietors (Shareholders) funds and
loans.
Computation: This ratio is computed by dividing Net Profit before Interest, Tax and Dividend by Capital
Employed. In the form of formula, this ratio may be expressed as:

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ROI =
The ratio is expressed as a percentage.

Question 109: With the help of the following information, calculate Return on Investment: Net profit after
Interest and Tax Rs. 6,00,000; 10% Debentures Rs. 10,00,000; Tax @ 40%; Capital Employed Rs. 80,00,000.

Solution:
Return on Investment=
X100=13.75%.
Working Notes: calculation of Net before interest an Tax = Rs. 40.
Let Net Profit after Interest and Tax = Rs. 100 – Rs 40 = Rs 60.
Net Profit before Tax = Rs. 6,00,000 X
Net Profit before interest and Tax = Rs. 10,00,000 + ( )

Question 110. From the following information, calculate Return on Capital Employed (or investment):

Net Profit after Interest and Tax 1,20,000 Equity Share Capital 50,000
Tax 1,20,000 10% Preference Share Capital 50,000
Net Fixed Assets 5,00,000 Reserves and Surplus 1,00,000
Long Term Trade Investments (Trade) 50,000 Current Liabilities 1,70,000
Current Assets 2,20,000 12% Debentures 4,00,000

Hints :
Return on Capital Employed(or Investment)=
=

Question 111. From the following information, calculate Return on Investment:

Net Profit (before Tax) Ratio 24% Non-Current Trade Investment 45,000

Tax Rate 50% Current Assets 90,000

Revenue from Operations 9,00,000 Total Debts 4,05,000

Net Fixed Assets 4,50,000 15% Long-term Borrowings 3,60,000

Accumulate Depreciation 1,12,500

Solution: Return on Investment =

Net Profit before Tax = Rs.9,00,000 X

Net Profit before Interest and Tax= Net Profit before Tax + Interest on Long-term Borrowings

= Rs. 2,16,000 + Rs. 54,000 = Rs. 2,70,000.

Current Liabilities = Total Debt – Non-current Liabilities

= Rs. 4,05,000 – Rs. 3,60,000 = Rs. 45,000.

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Capital Employed=Fixed Assets + Trade Investments + Working Capital (i.e., C.A – C.L)

= Rs. 4,50,000 + Rs. 45,000 + Rs. 45,000 (i.e., Rs. 90,000 – Rs. 45,000) = Rs. 5,40,000.

Note: Accumulated Depreciation is already adjusted in Net Fixed Assets.

st
Question 112. From the following Balance Sheet of Times Ltd. as at 31 March, 2019, compute Return on
Capital Employed or Return on Investment:

Particulars Note No. Rs.

I. EQUITY AND LIABILITIES
(I*) Shareholders’ Funds
(a) Share Capital 13,00,000
(b) Reserves and Surplus (2,50,000)
(II*) Non-Current Liabilities
Long-term Borrowings 5,00,000
(III*) Current Liabilities
(a) Trade Payables 1,00,000
(b) Other Current Liabilities 70,000
30,000
(c) Short-term Provisions
17,50,000
Total
II. Assets
(I*) Non-Current Assets 11,20,000
(a) Fixed Assets 2,00,000
(b) Non-current Investments (Trade)
(II*) Current Assets
(a) Inventories 1,70,000
(b) Trade Receivables 140,000
(c) Cash and Cash Equivalents 1,20,000
Total 17,50,000
Note: Net Profit for the year before interest and tax is Rs. 4,65,000.

Solution: Return on Capital Employed = =

Capital Employed:

1. Liabilities Approach = Share Capital + Reserves and Surplus + Long-term Borrowings.

= Rs. 13,00,000 – Rs. 2,50,000 + Rs. 5,00,000 = Rs. 15,50,000.

2. Assets Approach = Fixed Assets + Non-current Investments (Trade) + Working Capital

(i.e., Current Assets – Current Liabilities)

= Rs. 11,20,000 + Rs. 2,00,000 + (Rs. 1,70,000 + Rs. 1,40,000 + Rs. 1,20,000 – Rs.1,00,000 – Rs. 70,000 – Rs.
30,000 ) = Rs. 15,50,000.

Question 113. State with reason whether the following transactions will increase, decrease or not change the
‘Return on Investment’ Ratio:

(i.) Purchases of machinery of Rs. 5,00,000 by issue of equity shares.

(ii.) Charging depreciation of Rs. 12,500 on machinery.
(iii.) Redemption of debentures by cheque Rs. 2,00,000.
(iv.) Converting Rs. 1,00,000, 9% Debentures into equity shares.

Solution: Return on Investment

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(i.) Purchases of machinery of Rs. 5,00,000 by issue of equity shares results in increases in capital
employed without any change in profit. Hence, Return on Investment will decreases.
(ii.) Charging Depreciation of Rs. 12,500 on machinery results in decrease in both profit and capital
employed. Hence, Return on Investment will decrease.
(iii.) Redemption of debentures by cheque Rs. 2,00,000 results in decrease in capital employed
without any change in profit. Hence, Return on Investment will increases.
(iv.) Converting Rs. 1,00,000, 9% Debentures into equity shares does not have any effect on either of
two components of the ‘Return on Investment’. Since there is no change in net profit and capital
employed , there will be no change in Return on Investmen.
Question 114. Calculate Current Assets of a company from the following information:

(i.) Inventory Turnover Ratio: 4 Times.

(ii.) Inventory at the end is Rs. 20,000 more than inventory in the beginning .
(iii.) Revenue from Operations, i.e., Net Sales Rs. 3,00,000.
(iv.) Gross Profit Ratio 25%.
(v.) Current Liabilities Rs. 40,000.
(vi.) Quick ratio 0.75.

Question 115. From the following information, calculate:

(i.) Gross Profit Ratio :

(ii.) Inventory Turnover Ratio;
(iii.) Current Ratio;
(iv.) Liquid Ratio;
(v.) Net Profit Ratio, and
(vi.) Working Capital Turnover Ratio.

Revenue from Operations 25,20,000 Average Inventory 8,00,000

Net Profit 3,60,000 Current Assets (Other than inventory) 7,60,000

Cost of Revenue from Operation 19,20,000 Fixed Assets 14,40,000

Long-term Debts 9,00,000 Current Liabilities 6,00,000

Trade Payables 2,00,000 Net Profit before Interest and Tax 8,00,000

(NCERT, Modified)

Solution:

(I.) Gross Profit Ratio =

(II.) Inventory Turnover Ratio = =
(III.) Current Ratio =

(IV.) Net Profit ratio = =

(V.) Working Capital Turnover Ratio=Current Assets – Current Liabilities.
= Rs. 15,60,000 – Rs. 6,00,000 = Rs. 9,60,000.

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Question 116. Calculate ‘Return on Investment’ and Debt to Equity Ratio’ from the following information:

Net Profit after Interest and Tax Rs. 3,00,000

10% Debentures Rs. 5,00,000

Tax Rate 40%

Capital Employed Rs. 40,00,000 (Delhi 2012 C)

Solution: (i) Return on Investment = =

(II.) Debt to Equity Ratio =

Question 117. On the basis of information given below, calculate:

(I). Gross Profit Ratio , (II) Inventory Turnover Ratio, (iii) Debt to Equity Ratio and

(iv) Working Capital Turnover Ratio.

Information: Revenue from Operations Rs. 7,87,500; Cost of Revenue from Operations (Cost of Goods Sold) Rs.
3,95,600; Current Liabilities Rs. 2,37,000; Long-term Loan Rs. 87,000;Current Assets Rs. 3,99,000; Equity Share
Capital Rs. 3,75,000: 8% Debentures Rs. 1,25,000 and Average Inventory Rs. 1,97,800.

Solution:

(i.) Gross profit Ratio = =49.76%.

Note: Gross Profit = Revenue from Operations – Cost of Revenue from Operations
= Rs. 7,87,500 – Rs. 3,95,000 = Rs. 3,91,000.
(ii.) Inventory Turnover Ratio =
(iii.) Debt to Equity Ratio =
(iv.) Working Capital Turnover Ratio =
=

Working Capital = Current Assets – Current Liabilities.

Question 118. From the following information, calculate:

(i.) Operating Ratio, (ii). Quick Ratio and (iii) Working Capital Turnover Ratio.
Information: Equity Share Capital Rs. 1,00,000; 12% Preference Share Capital Rs. 80,000; 12% Debentures
Rs. 60,000; General Reserve Rs. 40,000; Revenue from Operations Rs. 3,00,000; Opening Inventory Rs.
10,000; Purchases Rs. 1,20,000; Wages Rs. 30,000; Closing Inventory Rs. 30,000; Selling and Distribution
Expenses Rs. 10,000; Quick Assets Rs. 2,00,000 and Current Liabilities Rs. 1,20,000.

Solution:

(i.) Operating Ratio =

=
=

Cost of Revenue from Operations (Cost of Goods Sold)

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= Opening Inventory + Purchases +Wages – Closing Inventory

= Rs. 10,000 + Rs. 1,20,000 + Rs. 30,000 – Rs. 30,000 = Rs. 1,30,000.
Operating Expenses = Selling and Distribution Expenses = Rs. 10,000.

(ii.) Quick Ratio =

(iii.) Working Capital Turnover Ratio =

Question 119. From the information given below, calculate (i) Current Ratio and (ii) Debt to Equity Ratio:

Information: Net profit of the year Rs. 80,000; Fixed Assets Rs. 2,00,000; Closing Inventory Rs. 10,000; Other
Current Assets Rs. 1,00,000; Current Liabilities Rs. 30,000; Equity Share Capital Rs. 1,00,000; 10% Preference
Share Capital Rs. 70,000; 12% Debentures Rs. 60,000 and Revenue from Operations, i.e., Net Sales during the
year Rs. 5,00,000.

Solution:
(i.) Current Ratio =
Current Assets = Closing Inventory + Other Current Assets
= Rs. 10,000 + Rs. 1,00,000 = Rs. 1,10,000.
(ii.) Debt to Equity Ratio =
Note Equity = Equity Share Capital + Preference Share Capital + Reserves and Surplus.

Question 120. Operating Ratio of a company is 80%. State Giving reason, which of the following transactions will
increase, decrease or not alter the Operating Ratio:

1. Purchases of Stock-in-Trade Rs. 7,000; (2.) Purchases Return Rs. 200; (3) Goods costing Rs. 2,000
drawn for personal use; (4) Office Expenses paid Rs. 5,000 and Goods Costing Rs. 2,000 distributed as
free samples (5.) Payment to Creditors Rs. 100; (6) Building sold for Rs. 5,00,000 and (7) Income Tax
Paid Rs. 7,000.
Solution : Statement Showing the Effect on Operating Ratio

Transactions Effect on Operating Reason

Ratio
1. No Change Both Purchases and Closing Stock will increase and hence
Cost of Goods Sold will remain unchanged.

2. No Change Both Purchases and Closing Stock will decrease and hence
Cost of Goods Sold will remain unchanged.

3. No Change Both Purchases and closing Stock will decrease and hence
Cost of Goods Sold will remain unchanged

4. Increase Operating Cost increases By Rs. 7,000.

5,6 and 7 No Change Neither Cost nor sales will change.

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