122-

Total Liabilities

Overall Solvency Ratio Total Assets

3.
= Debentures +Bank loan
+Current.
rent liabil,
Total Liabilities 2.66
I1,52,000 z
2,66,M
=
+
60,000+54,000
=

Current assets
= Fixed assets +
Total Assets 4,46,000
=
80,000 + 3,66,000=7
2,66,000 0.60:1
Overall Solvency Ratio 4,46,000
Fixed Assets

4 Fixed Assets to Long Term Fund Ratio Long Term Funds

= 80,000
Fixed Assets
= Shareholders' fund + Debentures
Longterm Fund
+Bank lo
=
1,80,000 +60,000 +54,000 =7 2,94,0m
80,000
Fixed Asset Ratio = = 0.27:1
2,94,000

C . TURNOVER RATIOS
(ACTIVITY RATIOS)
The turnover ratios disclose the relationship between
the level of sales or cos
of goods sold and the investments in various assets.
It indicates the speed wI
which assets are being converted into revenue. The
turnover ratios reveal how wl
and efficiently the assets of the
company are being utilized.
means better utilisation of assets which retlects
Higher turnover ratio
TL ratios are calculated on the basIs or revenuehigher efficiency and profitability
from
sold. The turnover ratios include: operations or cost of goou
Inventory Turnover Ratio
Gi) Trade Receivables Turnover Ratio
Average Debt Collection Period (Debtors Turnover
(iii) Ratio)
Trade Payables Turnover Ratio
iv)
Period
(Creditors Turnover
(v) Average Payment Ratio)
(vi) Working Capital Turnover Ratio
Turnover Ratio
(vii) Capital
Fixed Assets
Turnover Ratio
(viii)
 Ratio Analys1s-
Inventory Turnover Ratio (Stock Turnover ratio or Stock Velocity)
(i)
This ratio indicates the relationship between the cost of revenue from operations
during the year and averageinventory kept during the year. This ratio is employed to
measure how quickly stock is converted into sales. The ratio is calculated as follow s:

Cost of goods sold (Cost of Revenue from Operation)

Inventory Turnover Ratio =

Average inventory
where.

Cost of goods sold = (Opening stock + Purchases + Direct expenses) - Closing stock

Average inventory = Opening stock +Closing stock

2
N.B: If there is no opening inventory. the closing inventory itsellf may be taken as
the average inventory.

Significance:
This ratio indicates the number of times stock is turned into sales during the
indicates that sales being made by
accounting period. Higher the ratio more are a

rupee of investment in stocks. So, higher the ratio it indicates efficiency and
profitability. Lower the ratio indicates that the concern is not selling its stock quickly.
lt reflects dull business. increased storage cost, blocking of funds etc.

No. of Days or Months in a year

Average Age of Inventory Inventory Turnover Ratio

(ii) Debtors Turnover Ratio (Trade Receivables Turnover Ratio)

This ratio expresses the relationship between net credit sales and average
account receivables. It measures the number of times the receivables are rotated in

actficiency terms of sales. It also indicates the efficiency of credit collection and
year in of credit policy. This ratio is also known as Trade Receivables Turnover
ratio or
Debtors' velocity.
Net Credit Revenue from operation
Trade Receivable Turnover Ratio Trade Receivables
Average

where
from operation =
Total sales Cash sales Sales returns
redit revenue
(Net credit sales)
T24

= Debtors + Bills receivables

Trade Receivables
Opening Trade Receivables + Closing Trade Receivables
Average Trade Receivables
=
2

N.B:

(1) If cash revenue from operation (cash sales) is not specifically given, the given
revenue from operation may be taken as credit sales.

trade receivable means debtors.

(2) Ifbill receivable is not given,
(3) If there is no opening trade receivables, the closing trade receivables itself

may be taken as average trade receivables.

Significance:
This ratio indicates the speed with which the amount is collected from trade
receivables. The higher the ratio means the amount from trade receivable is being
collected more quickly. It indicates less risk from debtors and ensures liquidity. A
lower ratio indicates the inefficient credit sales policy of the management.

(ii) Average Debt Collection Period

Average Debt collection period is the average number of days or month within
which the cash is collected from trade receivables. The ratio may be calculatedas
follows:

Average Debt Collection Period =

Average Trade Receivables
x 365
Net Credit Revenue from
(in days) operation
OR
No.of days in a year
Average Debt Collection Period =

Trade Receivables Turnover Ratio

Average Trade Receivables
Average Debt Collection PeriodNet Credit Revenue from operation (Net Credit Sales)x12
(in months)

Significance.
This ratio indicates the quality of debtors by measuring the rapidity or slowness
in the collection process. Shorter collection period implies
quick payment of debtors.
It indicates the better quality of debtors. A higher collection period
implies inefficient
collection process.
 125
Ratio Analsis

(iv) Creditors Turnover Ratio (Trade Payables Turnover Ratio)

This ratio expresses the relationship between net credit purchases and average
trade payables. This ratio is also known as trade payables turnover ratio or creditors
velocity. It indicates the credit period enjoyed by the firm in paying off its creditors.

It can be calculated as follows:

Net Credit purchases

Trade Payable Turnover Ratio =

Average Trade payables

where
Net Credit purchases Total Purchases- Cash Purchases - Purchases Returns

Trade Payables Creditors+ Bills Payable

Average Trade payables =

pening I rade payables +Closing Trade payables
2

N.B:
(1) Ifcash purchase is not specifically given, the given purchase may be taken as
credit purchase.
(2) If bills payable amount is not given, the trade payable means creditors.
(3) If there is no opening trade payable, the closing trade payable itself may be
taken as the average trade payable.

Significance
This ratio indicates whether the company is making payment to creditors in
time. Higher ratio means that the company enjoys a lower credit period and creditors
are being paid promptly. Lower ratio means the company enjoys a larger period of
credit and it shows better position of liquidity.
()Average Payment Period
Average payment period is the average number of days or month which is
normally taken by the firm to make payment to its trade payables. The ratio can be
calculated as follows:
Average Trade Payables 265
Average Payment Period
=

Net Credit purchases

(in days)
OR
No.of days in a year
Average Payment Period Trade payable Turnover Ratio
(in days)
 126- AN Gt AMI NI A HINTIN,

Average lrade Payables

Average Payment Period Net Credit purchases
(in months)

Significance
The ratio indicates the promptness with which the payment is made to he

suppliers in respect of credit purchases. Lower the ratio indicates the better liuuidis..
quidi y
position ofthe company. Higher the ratio indicates credit worthiness of the comnan.
but the liquidity position will not be good.
any,

(vi) Working Capital Turnover Ratio

This ratio establishes the relationship between Revenue from
Operations
(Net Sales) and net working capital. This ratio shows how much sales are generated

by each rupee which is invested in working capital. So, it indicates whether the
working capital is properly utilised or not. It can be caleulated as follows:

Net Revenue from

Working Capital Turnover Ratio = operations/Cost of goods sold
Net working capital

where,

Net Working Capital =

Current Assets -

Current Liabilities
N.B: In the absence of Net
sales, Cost of goods sold is considered.
Significance
It
indicates the number of times the
working capital is converted into se
higher ratio shows efficient use of
working capital and quick turnover or u rrent
assets. But a very
high ratio is a sign of over trading, ie,
for doing business. A lower shortage of workE pital
ratio indicates under-utilisation of A
very low ratio is a sign of
work ing capila
under-trading ie, working
requirements of business. This ratio is considered as better capital
than
is C
stoCk Tu
ratio
as this shows the
utilisation of total current
assets than stock
(vii)
oniy
Capital Turnover Ratio
Thisratio shows the relationship between | in the
net sales and capital
business. It indicates the c
efticiency of eapital
pal by by computing
computing how
how many time capilal
is turned over in a stated ma
period. The ratio can be calculated as to lows
 - 127
Rat Anuahsis

Net Revenue from operation (Net Sales)

Capital Turnover Ratio
Capital Enmployed

OR
Cost of Goods Sold
Capital Turnover Ratio =
Capital Employed

where.
+ Reserves and Surplus + Long Term
Capital Employed Share Capital
Borrowings -
Fictititous Assets

Significance
whether the capital employed has been effectively used or
The ratio ensures
Lower
not. Higher ratio indicates efficient rotation ofcapital and higher profitability.
capital employed is not utilised properly.
ratio indicates the

(vii) Fixed Assets Turnover Ratio

assets. It
relationship between net sales and net fixed
This ratio establishes the
investments made in fixed assets have really helped in
determines whether the
follows:
formula for caleulating this ratio is as
generating sales. The
Cost of Goods Sold
Net sales
or
Fixed Assets Turnover Kati0 Net Fixed Assets Net Fixed Assets

where,
Total Depreciation
Gross Fixed Assets
-

Net Fixed Assets

=

Significance of fixed
the efticiency and effective utilisation
measure
This ratio helps to Lower ratio
effective utilisation of fixed assets.
assets. Higher ratio indicates
assets.
indicates under utilisation of fixed

Ilustration 11 Calculate:
ending 31st March 2018.
relate to the year
ne following figures
.Inventory Turnover Ratio

. Trade Payables Turnover Ratio

S. Average Payment Period

 OU
128 UNTING

Net Revenue from operation (Sales) 5.40,000

on Revenue trom operation 20%
Gross protit
Opening Inventory 1.20,000
Closing Inventory 1,60.000
Credit Purchases 6.20.000
Purchase Returns (out of credit purchases) 20.000
Closing Creditors 1,00,000
Closing Bills payable 50,000

Solution Cost of Revenue from operation

1. Inventory Turnover Ratio
Average Inventory
Cost of revenue from operation = Revenue from operation - Gross Prof+t

(Sales)
20
5,40,000-5,40,000x 10
=
5,40,000- 1,08,000 =
7 4,32,000
Opening Inventory + Closing Inventory
Average Inventory

1,20,000+ 1,60,000 2,80,000 = 71,40,000

Inventory Turnover Ratio
2 Trade Payable Turnover Ratio
Net credit purchases
Average Trade Payable
2 2
4.32,000
3.1 Times
1,40,000
Net credit Purchases
Average Trade Payable
Credit purchases - Purchases return
=6,20,000 20,000 = 7 6,00,000
=

Closing Creditors + Closing bills paya

1,00,000+50,000 1,50,000
Trade Payable Turnover Ratio 6,00,000 = 4 Times
1,50,000
3. Average Payment Period Average Trade Payables 365
Net credit purchases
1,50,000 365 = 91days
6,00,000)
Alternatively=Te
No. of days in a year 36591 days
Trade Payable Turnover Ratio 4
Ratio Anahysis
129
Uhustration 12

From the following information. calculate:

(i) Inventory Turnover Ratio
(ii) Trade Receivables Turnover Ratio
(iii) Average Debt Collection Period

TRADING ACCOUNT

To Opening stock
14.000 By Sales 1.04.000
To Purchases 58,000 Less: Sales Returns 4,000)
Less: Purchase Returns (8,000) 50.000 1.00,000
To Carriage 2,000 By Closing stock 44.000
To Wages 38.000
To Gross profit
40.000
1.44.000 1.44.000
Additional information:
1. Closing Debtors amounted to20,000
2. Closing Bills receivables amounted
to 10.000
Solution
Cost of goods sold
1. Inventory Turnover Ratio =

Average lInventory
Cost of goods sold (Opening stock + Purchases + Direct expenses)

- Closing stock

=
(14.000+ 50.000 + 2.000+ 38.000) 44.000
= 60,000

Cost of goods sold Sales r o s s Profit

= 1.00.000 - 40.000 = 7 60,000

Opening inventory +Closing inventory

Average inventory
14,000+44,000 = 7 29,000
2
60,000 = 2.07 Times
Inventory Turnover Ratio =

29,000
Net credit Revenue from operation
Irade Receivables Turnover Ratio Average Trade Receivables
Net credit Revenue from operation Sales - Sales Returns

= 1.04.000 - 4.000 = 7 1,00,000

 Closing
Debtors + Bills R.
(Closing Bills Recei
130-
10,000=R30,000
A v e r a g e T r a d e R e c e i v a b l e s

+
= 20,000

1,00,000 3.33 Times

1urnover
ratio= 30,000
Receivables Average Trade Receivables
Trade
from operation
365
Period revenue
Collection Net credit
Debt
Average
(ii) 30,000
x 365 110days
1,00,000

OR

C'ollection Period
No.of Days in a year

Trade Receivables 3.33

36510days
Average Debt

Tllustration 13
or Inventon
Turnover Ratio and Average age ofInventory
Calculate lInventory
the follow ing:
Holding Period from
Sales 4,00,000
Gross Profit 25% on sales

Closing stock - 50.000

Solution Cost of goods sold

Inventory Turnover Ratio
Average Inventory
Cost of goods sold Sales - Gross Proit

=
4.00.000-(4.00,000 x 25/100)
=
4.00.000 1.00.000 =
3,00,000
= 7 50,000
Average inventory
3,00,000
. Inventory turnover ratio = 6 times
50,000

N.B:
) Here opening stock is not given, so closing stock is considered as averag

inventory.
12 months
of Inventory 12
(ii) Average Age Inventory Turnover Ratio 2 months
Illustration 14
Eram the following intormation calculate lrade
Receivables Turnover Ratio
Collection Period
and Average Debt
Ratio Analysis-

1.4.2018 31.03.2019

Bills Receivables
9,300 27.000
Sundry debtors
3,100 10,200
Provision for doubtful debts 1,800 6,000

Total Sales
-

2,60,400
Cash Sales - 7 49,600

Sale Returns - 7 12,400

Solution
Net Credit Sales
1. Trade Receivables Turnover Ratio Average Trade Receivables

Net credit sales Total Sales Cash Sales Sales Returns

2,60,400-49,600-12,400 =71,98,400
Average Trade Receivables
= (Openingdebtors+Opening B R)+ (Closing debtors-Closing BR)

(3,100+9,300)+(10,200 27,000)
2

12,400+37,200 = 24,800

Trade Receivables Turnover Ratio=

1,98,400
4 R00 = 8 times
24,800
No.of days months in a year
2. Average Debt Collection Period Trade Receivables Turnover Ratio

= 46 days

Alternatively
Average Debt Collection Period == 1.5 months
B
N. : Provision for doubtful debts need not be considered for the calculation of
Irade Receivables Turnover Ratio.
/Illustration 15
Fro
om the calculate Trade payables Turnover Ratio and Average
D following.
Payment Period.
 MANAGEMEN I ACCOU
OUNTING
Opening Creditors 1,00,0000
Opening Bills payable 3.750
Closing Creditors 1,25.000
Closing Bills Payable 21,250
Cash purchases 6,25,000
Purchases (Gross) 20,00,000
Return outwards 1,25,000
Provision for Discount on Creditors 5,000

Solution
Net Credit Purchases
(i) Trade Payables Turnover Ratio
Average Trade Payables
Net Credit Purchases =
Total Purchases Cash Purchases
- Return outwards

20,00,000-6,25,000-1,25,000 =R 12,50,000
Average Trade payables = (Openin credtors+ Opening BP)+ (Closingcreditors+Closing BP)
2

1,00,000+3,750+ 1,25,000+21.250
2
2,50,000 = 7 1,25,000
2

Trade Payable Turnover Ratio 12,50,000

10 times
1,25,000
(ii) Average Payment Period No.of days or months in a year
Trade payable turnover ratio
365
= 37 days
10
Alternatively
Average Payment Period 12
=1.2
10
Months
ND roVISIon for discount on creditors need not be considered for the calculation o
Trade payables turnover ratio.
Hlustration 16
Cost of
Revenue from operations 3,00,000
Inventory Turnover Ratio - 6 Times
Rato Anahsis -13.3

Find out the value of opening inventory, if opening inventory is 10.000 less
than the closing inventory.

Solution
Cost of revenue from operation
Inventory Turnover Ratio =

Average Inventory
3,00.000
Average lnventory
3,00.000
Average Inventory 6
50,000

Let opening stock be 'x', then closing stock will be 'x + 10.000°.

Average Inventory Opening inventory+Closing inventory

2
X+X+10,000
50,000
2
1.00,000 = 2x + 10,000

2x = 1 , 0 0 , 0 0 0 - 10,000

2x = 90,000

90,000
X 45,000
2

Opening inventory = 7 45,000

= x + 10,000
Closing inventory
= 45,000+ 10.000 55,000
Illustration 17
From the following Balance sheet of Malavika Ltd as on 31.03.2018, Calculate:

) Working Capital Turnover Ratio

(ii) Capital Turnover Ratio

ii) Fixed Asset Turnover Ratio
BALANCE SHEET

Liabilities Assets

Equity share capital 4,00,000 Fixed Assets 5,00.000

Debentures 2,00.000 Less:Depreciation (I00.000) 4.00,000
Current Liabilities 2,00,000 Current Assets 4,00,000
8,00,000 8,00,000

Sales amounted to ? 12.00,000.

 134- MANAGEMENT ACCOUNTN
Solution:
Net Sales
I. Working Capital Turnover Ratio Working Capital

=
Current Assets Current Liabilities
Working Capital
=
4,00,000 2,00,000 =

7 2,00,000
12,00,000
= 6 times
Working Capital Turnover Ratio 2,00,000
Net sales
2. Capital Turnover Ratio
Capital employed
Capital employed =
Equity share capital + Debentures
=
4,00,000 + 2,00.000 7 6,00,000
12,00,000
Capital turnover ratio = 2 times
6,00,000
Net sales
3. Fixed Assets Turnover Ratio
Net Fixed assets

12,00.000
4,00,0003times

D. PROFITABILITY RATIOS
The primary objective of every business is to earn profit. Profitability ratios
are used to evaluate the
performance and efficiency of the business concerns.
Profitability ratios are used by different stakeholders for analysing efticiency and
effectiveness of operations of a business concern. Profitability ratios can be classilied
in to two:
) Profitability ratios related to sales.
2)Profitability ratios related to investmem.
1) Profitability Ratios related to Sales
In these ratios the profits earned is
compared with the sales inorder to cva
the operational efficiency of the business concerns. It
includes
i) Gross Profit Ratio
ii) Net Profit Ratio
ii) Operating Ratio
iv) Operating Profit Ratio
v) Expense Ratio
 135
Ratio Analysis

Profitability Ratios related to Investment

2)
These ratios compare the earnings with investments ie, capital employed or

networth. It includes:

i) Return on Investment
ii)
ii) Return on shareholders' fund
iii) Return on Equity
iv) Return on Total Assets
v) Earnings Per Share
vi) Price Earning Ratio
vii) Dividend Yield Ratio
viii) Dividend Payout Ratio
(i) Gross Profit Ratio
This ratio establishes the relation between Gross profit and Revenue from
It expresses the gross percentage of sales. It is
operations (Net sales). margin as a

also known as 'Gross profit margin ratio.

Gross Profit
Gross ratio 100
profit =

Revenue from operations (Net Sales)

ie, Gross Profit Revenue from operations -Cost ofrevenue from operations
(Net sales - Cost of goods sold)

Cost of revenue from operations = Opening stock + Net purchases

+Direct expenses -Closing stock

= Total Sales - Sales returns
Revenue from operation

Significance
Higher ratio implies better profitability of the business concerns. Lower ratio
implies poor profitability position of the business concerns. It measures margin of
profit available on sales. It should be adequate to cover all operating as well as non

operating expenses.
ii) Net Profit
Ratio
It establishes the relationship between net profit and sales. It shows the net

PO margin to sales. It is also known as 'Net Profit Margin Ratio'.

 136- MANAGEMENT ACCOUNTING
Net profit after tax
Net profit x100
RatioRevenue from operations (Net Sales)
Significance
Higher the ratio means better the profitability and lower the ratio indicat
poor financial efficiency.
(ii) Operating Ratio
It establishes the relationship between cost of revenue from operations and
operating expenses to the net sales. The non-operating incomes and expenses are
not considered for the calculation of operating ratio.
Operating Cost
x100
Operating ratio
Revenue from operations (Net Sales)
ie. Operating cost = Cost of Revenue from operations (cost of goods sold)

+Operating expenses
N.B: Operating expenses include factory expenses, office and administration
expenses, selling and distribution expenses, Employee Benefit Expenses,
Depreciation, etc. Sometimes, it may include finance expense also.

Significance
It measures the operational efficiency of the business. It indicates the extent of
revenue from operation that is absorbed by the operating cost. Lower ratio indicates
better position and high margin of profit and vice versa.
iv) Operating Profit Ratio
It establishes the relationship between operating profit and revenue I
operations.
Operating Profit
- x 100)
Operating Profit Ratio Revenue from operations
OR
Operating Profit Ratio = 100- Operating Ratio

Operating Profit (Gross profit -Operating expenses) +Operating income

Or
Operating Profit = (Net profit before tax + Non operating expenses)
- Non operating income
 Rato Anahsis -
- 137

Significance
Higher ratio indicates better operational efficiency.
better indicator ot Operating profit ratio is a
operational efticiency than net profit ratio because it
non-operating expenses and incomes. ignores
() Expense Ratio
establishes the relation between various
It
from operations. I hese ratios disclose the
components of expenses to revenue
rious expenses.
portion of sales or revenue consumed by

Expense Ratio = Particular Expense

x100
Revenue from operations

Significance
Higher ratio indicates lower
profitability and lower ratio indicates
profitability.
higher

(vi) Return on Investment (Return on Capital Employed)

This shows the relationship between
profits earned and capital employed. This
is an indicator of overall profitability and
efficiency of a business. It is also known
as Rate of Return or Return on
Capital Employed.
Net profit Before Interest. Tax & Dividend
Return on Investment x 100
Capital Employed
N.B: Calculation of capital employed
Liability side Approach
Capital employed = (Equity share capital Preference sharecapital +Reserves
& Surplus + Long term liabilities) - Fictitious assets

Asset side Approach

apital employed = Non current assets +Working capital

OR
= (Tangible assets + I n t a n g i b l e a s s e t s + Non current

investments) +
(Current assets -

Current liabilities)

Significance
This ato shows the overall utilisation offunds by a business enterprise. Higher
tio. better will
be the position and vice versa.
 MANAGEMENT ACCOUNTING
140

Dividend per Equity share0

Dividend Payout Ratio =
Earnings per share

OR

Total Dividend paid to Equity shareholders00

D/P Ratio Profit availableto the Equity shareholders

Significance
It helps to find out the extent to which the earnings have been retained in the
business. The unpaid dividend is retained for future prospects of the business.

Illustration 18
From the following information, calculate:
i) Gross profit Ratio
ii) Operating Ratio
i) Operating profit Ratio
iv) Net profit Ratio
v)Expense Ratio: Administrative Expenses and Selling Expenses

Opening inventory 3,00,000

Closing inventory 4,20,000
Purchases 14,00,000
Wages 3,70,000
Carriage inwards 1,50,000
Administrative expenses 84,000
Selling expenses 36,000
Income tax 1,00,000
Profit on sale of fixed assets 20,000
Revenue from operations (Sales) 24,00,000
Solution:
Gross Profit
(i) Gross profit Ratio = x 100
Revenue from operations (Sales)
Gross profit Revenue from operations-Cost of revenue from operato
Cost ot Revenue ar )
=
(Opening inventory + Purchases + Wages+ Carriageinwards
from operations Closing inventor

Cost of Revenue = (3,00.000 + 14.00.000 +3,70,000 +1,50,000) -4,20,000

from operations
= 18,00,000
 - 141
Ratio Anah sis
Gross profit 24.00.000 18,00.000 = 7 6,00,000
6.00,000
Ratio
.. Gross profit 24.00,000
x 100 25%

Ratio =
Operating cost
(ii) Operating x100
Revenue from operations
Operating cost C o s t of Revenue from operations +Operating Expenses

Operating expenses= Administrative expenses + Selling expenses

=
84,000+ 36,000 =7 1,20,000
Operating cost = 18.00.0001,20,000 71,92,000

19.20,000
Operating Ratio = x 100 80%
24,00,000
Ratio
Operating profit x100
(ii) Operating profit
==

Revenue from operations (Sales)

Operating profit =
Gross profit Operating Expenses
-

=
6,00,000 1,20,000 =7 4,80,000
4,80,000 x100 20%
Operating rofit Ratio =

24.0,000
OR

Operating profit Ratio =

100 -

Operating Ratio
= 100 80 20%
Net profit After Tax
x100
iv) Net profit ratio Revenue from operations (Sales)
=Gross profit-(lndirect expenses
& losses+ Income Tax)
Net Profit After Tax
+IndirectIncome
6,00,000-(Administrative expenses Selling expenses
+

sale of fixed asset

+Income tax) + Profit on
+ 36,000 + 1,00,000) + 20,000
=
6,00,000
-

(84,000
= 4,00,000

4,00,000x 100 = 16.67%%

Net profit Ratio
24.00,000
Particular expense x100
(V) Expense Ratio Revenue from operation
Administrative Expenses
x100
(1) Administrative Expense RatioRevenue from operations

84,000x 100 3.5%

24,00.000
 Selling Expenses
- x 100
Ratio
(ii) Selling Expense Revenue from operation

36,000x 100 =1.5%

24.00.000

Illástration 19
From the following information calculate (i) Return on Capital Emploved
Equity. (iv) Return on Total assetsts
(ii) Return on Shareholders' Fund. (ii) Return on

BALANCE SHEET
as on 31.12.2019

Note 2019
Particulars
No.
I. EQUITY AND LIABILITIES
(1) Shareholders' Fund
(a) Share capital
85,000
(b) Reserves and Surplus (Profit for 2019)
25,000
(2) Non-Current Liabilities
Long Term Borrowings (12°% Debenture)
(3) Current Liabilities
2,00,000
50.000
Total 3.60,000
II. ASSETS
(1) Non-Current Assets:
Fixed Assets
Trade Investment 2,25.000
(2) Current Assets: 25.000
Inventories (Stock)
Trade Receivables (Debtors) 90,000
Cash and Cash 15.000
Equivalents 5,000
Total 3.60.000
Notes to Account

1. Share Capital

Equity share capital

10% Preference 70.000
share capital 15,000

Total 85,000

1)
Return Capital Employed Net profit Before lnterest& Tax
x100
Capital employed
 143
RatioAnahysis
Net Profit Before Interest & Tax = Net Profit +Interest on Debentures

25,000 + 24,000 = 7 49,000

12
where, Interest on Debenture 2.00,000x 24,000
T00
Capital Employed
i) Liabilities side Approach
Capital Employed = Shareholders' fund + Non-current liabilities

85,000+25.000+ 2,00,000 R 3,10,000

OR
ii) Assets side Approach
Capital Employed = Non current assets + Current assets - Current liabilities

2.25,000 +25,000 +90,000 + 15,000+ 5.000 50,000

= 3,10,000

49,000
Return on Capital Employed x 100 = 15.81%
3,10.000
. Net profit After Interest and Tax0
(2) Return on Shareholders' Fund =
Shareholders' fund
25,000x 100 = 22.73%
1,10,000
Notes
Shareholders' Fund = Share capital +Reserves & Surplus

85,000+25.000 7 1,10,000
Net profit afterInterest:Tax & Pre.Dividend
x 100
Return on Equity Equity share capital
Net profit after Interest
Tax and Pref. dividend Net profit after interest & tax Preference dividend
10
= 1.500
Preference Dividend =15,000x-
100
25,000 1.500 23,500

23.500
Return on equity x 100 33.58%
70,000
Net profit after Interest & 1a100
Return on Total Assets Total ASsets

25.000 100 69
3.60.000
 MANAGEME ACC OUNTING,
144-

llustration 20
information, calculate:
From the following
i) Earning per Share
ii) Price Earning Ratio
iii) Dividend Yield Ratio
iv) Dividend Payout Ratio

Net Profit Before Tax 1,44,000

Tax Rate 50%
20,000 Equity shares of 7 10 each 2,00,000
12% Preference share capital 1,00,000
Market price of Equity share 36
Dividend is declared 20%

Solution:
Net Profit after Interest, Tax and Preference dividend
() Earnings per share Number of Equity shares
Net profit after Interest.
Tax and Pre. dividend Net profit Before Tax -

Tax -

Preference Dividend
1,44,000- 72,000 - 12,000 = 7 60,000

where. (i) Tax 50

=
1,44,000x 72,000
100
12
(ii) Preference Dividend =
1,00,000x 100 =
7 12,0000
60,000
Earnings per share= 20,000RÍ per share

(2) Price Earning Ratio Market Price per share

EPS
36
1 2 Times
(3) Dividend Yield Ratio Dividend per share x 100
Market price per share
Dividend per share 20
= 10x
T00 =72
Dividend Yield ratio x 100 5.55%
=

36
(4) Dividend Dividend pershare
Payout Ratio =
x 100
EPS

10066.67%