Answer 1

1. Furniture purchased by X Ltd. for Rs 6,75,000 is considered to be an asset. Because

anything that can be converted into cash is referred to as an economic resource or
asset. As by selling furniture X ltd can get cash in return that’s why it is categorised
under assets.
2. The amount of capital owned or invested by an organization is referred to as equity. It is
a measure of the amount that can be returned to a company’s stakeholder if all the debts
are paid and all the assets are liquidated.
a. Equity = Asset - Liability
b. Thus 12 lakh deposited in a bank account would be considered as Equity.
3. Goods purchased on credit from Aman Enterprises for Rs 1,05,000 are considered as
liability as it is going to create a negative cash flow in future.
4. Goods sold on credit for Rs 4,00,000 will be categorised as assets as cash is received
in this situation. The cost of goods sold was Rs 3,00,000 so profit made by X ld by
selling this asset is of Rs 1,00,000
5. Purchased goods of Rs, 6,00,000 from Sneha enterprise are referred to as asset as
these can be converted into cash in future
To conclude Assets include

Assets list Amount

Purchased furniture ₹675,000
Profit made by Goods sold on
₹100,000
credit

Purchased goods from Sneha ₹600,000

Total Assets ₹1,375,000

Equity Amount
Cash introduced by owners ₹1,200,000

Liability Amount
Goods purchased on Credit ₹105,000

Assets = Equity + Liability = ₹1,200,000 + ₹105,000 = ₹1,305,000

Actual Asset value of X Ltd is equal to ₹1,375,000 which is greater than ₹1,305,000. This
depicts that X Ltd is making profit
Answer 2

Revenue from Operation: Revenue earned by a company by performing its core operation is
referred to as revenue from operation or operating revenue. An organization is running
successfully only if it has a steady flow of income. Health of an organization can be measured
by analysing the trend of its year to year operating revenue.

Other Income: The income earned by an organization from other business activities which are
not part of the core business of an organization are considered as other income. Other revenue
doesn’t produce consistent cash flow from year to year. That's why they can’t be used to
measure the performance of a business.

For example: The revenue earned by a mobile manufacturing factory (consider for this AB
mobiles) by selling the hardware or mobile phone is referred to as its operational revenue as
their core business is manufacturing mobile phones and selling them into the market to convert
the goods into cash. Operational revenue doesn’t exclude the cost of manufacturing the device,
income of its employee, and other operational expenses.

The revenue earned by the AB mobiles by selling its machines or by selling the land will be
referred to as Other income. This income can’t be steady and profit made out of it will be part of
that year’s other revenue and is registered separately in the income statement.

So, in this scenario total revenue or income of AB mobiles would be equal to the sum of
Operational revenue and Other Income. Under the cash flow statement total revenue is entered.

In case of Love Doodle, Rs 5,05,000 earned from the sale of gift hampers will be referred as
Operating Revenue or revenue from operation and Rs 4,200 bank interest is part of other
revenue. Total revenue earned by Love Doodle is equal to Rs 5,09,200.

Answer 3.a

All current assets are included in Current ratio and all liquid or quick assets are included in quick
ratio.They both define the ability of an organization to meet its current debt obligation and are
referred to as liquidity ratios. To define it further, quick assets are the assets that can be
converted into cash within 90 days or less than 90 days whereas current assets include all the
assets which can be converted to cash within a year.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
, ideal value of current ratio is 2:1 and

𝑄𝑢𝑖𝑐𝑘 𝑎𝑠𝑠𝑒𝑡
𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
, ideal value of Quick ratio is 1:1.
Current ratio of Aman Ltd. is 2:01 and Rozer Ltd is 1.6:1, these numbers signifies that Aman Ltd
have higher current ratio as compared to Pozer Ltd so, here Aman Ltd. excelled.

Quick ratio of Aman Ltd. is 1/35:1 and Rozer Ltd is 1:01, these numbers signifies that Aman Ltd
have higher quick ratio as compared to Rozer Ltd so, here Aman Ltd. excelled.

As both current and quick ratios of Aman Ltd are higher than Rozer Ltd thus financial
performance of Aman Ltd would be better than Rozer Ltd.

Answer 3.b

How efficiently a company is utilizing its assets to generate sales defines its return on
investment (ROI) ratio. The ROI helps organizations to choose the business in which they
want to make investment. Any investor would like to invest in a business that has higher ROI so
that he can receive higher return.

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
,

As the ROI of Aman Ltd (15%) is higher than ROI of Roger Ltd (13%) so from a business return
perspective Aman Ltd has a better return than Roger Ltd.

The Debt-to-equity ratio is also known as leverage ratio. It defines the extent to which a
company can operate via debt v/s wholly-owned funds. It defines to which extent all the debts
can be recovered by stakeholder equity

Debt-to-equity ratio = Total liabilities / Stockholders equity

Higher the leverage ratio, bigger would be the risk for stakeholders.

As debt to equity ratio of Roger Ltd is less than Aman Ltd thus risk is also lower for Roger Ltd.
Hence we can say that from a D/E ratio perspective Roger Ltd performance is better.