LEARNING OBJECTIVES:

(I) To calculate different types of Ratios.

(II) To understand the importance of Ratio analysis.

LEARNING OUTCOMES:

(I) Compare and relate the ratios to take decisions

(II) Evaluate the solvency position of the firm.

INTRODUCTION
Financial statements aim at providing financial information about a business enterprise to meet
the information needs of the decision-makers. Financial statements prepared by a business
enterprise in the corporate sector are published and are available to the decision-makers. These
statements provide financial data which require analysis, comparison and interpretation for
taking decision by the external as well as internal users of accounting information.
This chapter covers the technique of accounting ratios for analyzing the information contained in
financial statements for assessing the solvency, efficiency and profitability of the enterprises.

Meaning:
A ratio is a mathematical number calculated as a reference to relationship of two or more numbers
and can be expressed as a fraction, proportion, percentage and a number of times. When the
number is calculated by referring to two accounting numbers derived from the financial
statements, it is termed as accounting ratio. For example, if the gross profit of the business is Rs.
10,000 and the ‘Revenue from Operations’ are Rs. 1,00,000, it can be said that the gross profit is
10%,10000/100000*100 of the ‘Revenue from Operations’ . This ratio is termed as gross profit ratio.
Similarly, inventory turnover ratio may be 6 which imply that inventory turns into ‘Revenue from
Operations’ six times in a year.

Objectives of Ratio Analysis

1. To know the areas of the business which need more attention
2. To know about the potential areas which can be improved with the effort in the desired
direction
3. To provide a deeper analysis of the profitability, liquidity, solvency and efficiency levels in
the business;
4. To provide information for making cross-sectional analysis by comparing the performance
with the best industry standards; and
5. To provide information derived from financial statements useful for making projections and
estimates for the future.

Advantages of Ratio Analysis

1. Helps to understand efficacy of decisions: The ratio analysis helps you to understand
whether the business firm has taken the right kind of operating, investing and financing decisions.
It indicates how far they have helped in improving the performance.
2. Simplify complex figures and establish relationships: Ratios help in simplifying the complex
accounting figures and bring out their relationships. They help summaries the financial
information effectively and assess the managerial efficiency, firm’s credit worthiness, earning
capacity, etc.
3. Helpful in comparative analysis: The ratios are not be calculated for one year only. When
many year figures are kept side by side, they help a great deal in exploring the trends visible in
the business. The knowledge of trend helps in making projections about the business which is a
very useful feature.
4. Identification of problem areas: Ratios help business in identifying the problem areas as well
as the bright areas of the business. Problem areas would need more attention and bright areas
will need polishing to have still better results.
5. Enables SWOT analysis: Ratios help a great deal in explaining the changes occurring in the
business. The information of change helps the management a great deal in understanding the
current threats and opportunities and allows business to do its own SWOT (Strength Weakness-
Opportunity-Threat) analysis.
6. Various comparisons: Ratios help comparisons with certain bench marks to assess as to
whether firm’s performance is better or otherwise. For this purpose, the profitability, liquidity,
solvency, etc. of a business, may be compared: (i) over a number of accounting periods with itself
(Intra-firm Comparison/Time Series Analysis), (ii) with other business enterprises (Inter-firm
Comparison/Cross-sectional Analysis) and (iii) with standards set for that firm/industry
(comparison with standard (or industry expectations).

Limitations of Ratio Analysis

1. Lack of ability to resolve problems: Their role is essentially indicative and of whistle
blowing and not providing a solution to the problem.
2. Lack of standardized definitions: There is a lack of standardized definitions of various
concepts used in ratio analysis. For example, there is no standard definition of liquid liabilities.
Normally, it includes all current liabilities, but sometimes it refers to current liabilities less bank
overdraft.

3. Lack of universally accepted standard levels: There is no universal yardstick which specifies
the level of ideal ratios. There is no standard list of the levels universally acceptable, and, in India,
the industry averages are also not available.
4. Ratios based on unrelated figures: A ratio calculated for unrelated figures would essentially
be a meaningless exercise. For example, creditors of Rs. 1,00,000 and furniture of Rs. 1,00,000
represent a ratio of 1:1. But it has no relevance to assess efficiency or solvency. Hence, ratios
should be used with due consciousness of their limitations while evaluating the performance of
an organization and planning the future strategies for its improvement.

Types of Ratios
1. Liquidity Ratios: To meet its commitments, business needs liquid funds. The ability of the
business to pay the amount due to stakeholders as and when it is due is known as liquidity, and
the ratios calculated to measure it are known as ‘Liquidity Ratios’. These are essentially short-
term in nature.
2. Solvency Ratios: Solvency of business is determined by its ability to meet its contractual
obligations towards stakeholders, particularly towards external stakeholders, and the ratios
calculated to measure solvency position are known as ‘Solvency Ratios’. These are essentially
long-term in nature.
3. Activity (or Turnover) Ratios: This refers to the ratios that are calculated for measuring the
efficiency of operations of business based on effective utilization of resources. Hence, these are
also known as ‘Efficiency Ratios’.
4. Profitability Ratios: It refers to the analysis of profits in relation to revenue from operations
or funds (or assets) employed in the business. So these ratios are known as ‘Profitability Ratios.
Popular Groupings of Assets and Liabilities – Short Term and Long Term
List of Current Assets:
Cash in hand
Cash at bank
Bills receivable or notes receivable
Book debts or sundry debtors or receivables or accounts receivables
Stock or raw material, work-in-progress or finished goods
Marketable securities
Advance payments ( prepaid expenses etc)
Stores & spare parts
Loose tools
Preliminary expenses etc

List of Fixed Assets

Land & buildings
Plant & machinery
Furniture & fixtures
Lease hold land
Patents or trade marks
Copy rights, formulas, license etc

Good will

List of Current Liabilities

Trade creditors or accounts payable
Bills payable or notes payable
Outstanding accruals or expenses
Short term loans
Bank overdraft
Provision for taxes/ contingencies/ insurance etc
Unclaimed dividends
Advance payments & un expired discounts etc

List of Long Term Liabilities

Loan on mortgage
Debentures or bonds
 Bank loan
Loans from financial institutes etc

Capital
Preference share capital
Equity share capital

Reserves & Surpluses

Capital reserves
Capital redemption reserve
Share premium account
Proposed additions to reserves
P & L Account balance, etc.

Classification of Ratios:
Financial Ratios can be classified in many ways. Different authors have classified the Ratios in
different groups. The most common classification is as follows:
1. Liquidity Ratios (Short Term Solvency Ratios): These Ratios measure the ability of the firm to
meet its current obligations. They indicate whether the firm has sufficient liquid resources to meet
its short term liabilities. The various liquidity ratios are:-

(i) Current Ratio: This Ratio measures the ability of the firm to pay debts in the short term
Current Ratio = Current Assets (Ideal Ratio = 2:1)
Current Liabilities

(ii) Quick / Liquid / Acid-Test Ratio: This Ratio measures the short term debt paying
ability of the firm
Quick / Liquid / Acid-Test Ratio = Quick
Assets (Ideal Raito = 1:1)
Current Liabilities

(iii) Absolute Liquid Ratio / Cash position Ratio =

Cash in hand & at Bank + Short term Marketable securities
Current Liabilities
(Ideal Ratio = 0.75:1, or even 0.50:1)
(iv) Debtor’s Turnover Ratio: This Ratio is a measure of quality of Debtors and of the
effectiveness of the collection efforts.

Debtor’s Turnover Ratio = Debtors + Bills Receivable X No. of working days

Credit sales in a year

(v) Average Debt Collection Period: This Ratio measures the time taken to collect from
Debtors.

Average Debt Collection Period = Average Debtors

Net Sales / 360 days

(vi) Stock / Inventory Turnover Ratio: This Ratio measures the time taken to turn inventory
into sales.

Stock / Inventory Turnover Ratio = Cost of Goods sold

Average stock
(Where Average Stock = Opening stock + Closing Stock )
2
2. Solvency Ratios (Long Term): These Ratios measure the long term financial condition of the
firm. Bankers and creditors are most interested in liquidity. But shareholders, debenture holders
and financial institutions are concerned with the long-term financial prospects. The various
Solvency Ratios are:

(i) Debt-Equity Ratio: This Ratio measures the relationship between borrowed Capital
to own Capital. There are many variations to this Ratio. But, the most popular ones’ are : Debt
(or) Outsider’s funds (Ideal Ratio = 1:1)
Equity Share holders’ funds

(ii) Proprietary Ratio: Share holders’ Funds

Total Assets

(iii) Assets to Proprietary Ratios:

 (a) Fixed Assets to Proprietor’s Fund Ratio =
Fixed Assets after Depreciation (Ideal Ratio = 60% to 65%)
Shareholders’ Funds

(b) Current Assets to Proprietor’s Fund Ratio = Current Assets

Shareholders’
Funds

(iv) Interest Coverage Ratio: This Ratio measures the ability of the firm in meeting its interest
charges and thus gives the measure of protection to creditors for payment of interest. Interest
coverage ratio less than 2.0 suggest a risky situation

Interest Coverage Ratio = Profit before interest and Taxes

Interest Expense

3. Profitability Ratios: These Ratios measure the profitability of a firm’s business operations.
They may be related to sales (ex- Gross Profit Ratio) or investments (ex – Return on Assets or
Return on Capital Employed)
(i) Gross Profit Ratio = Gross Profit X 100
Sales
(ii) Net Profit Ratio = Net Profit X 100
Sales
(iii) Operating Ratio = Cost of Goods Sold + Operating Expenses X 100
Sales
(iv) Return on Capital Employed (ROCE): This Ratio measures the overall profitability
and efficiency of the business.

Where Capital Employed = Fixed Assets + Current Assets – Current Liabilities (or)
Shareholders’ Funds + Long Term Liabilities.
(v) Profit Margin: This Ratio gives the amount of Net Profit earned by each rupee of
revenue.

(vi) Asset Turnover: This Ratio measures the efficiency with which Assets are utilized
(vi) Return on Assets (ROA): This Ratio measures the profitability from a given
level of investment

(vii) Return on Equity (ROE):This Ratio measures the profitability on

Shareholders’ Funds.
Return on Equity (ROE) = Profit after Tax

(viii) Earnings Per Share (EPS): This Ratio measures the earnings on each
equity share. EPS) = Profit after Tax
No of Equity Shares
4. Activity Ratios: These Ratios indicate the number of times stock is replaced during a year. A
high Ratio indicates quick movement of stock and vice-versa, i.e., Activity Ratios measure the
efficiency of asset management. The efficient utilization of assets would be reflected by the speed
with which they are converted into sales.
(i) Stock / Inventory Turnover Ratio = Cost of Goods sold
Average stock
(Where Average Stock = Opening stock + Closing Stock )
2
(ii) Debtor’s Turnover Ratio = Debtors + Bills Receivable X No. of working days in a year

This Ratio shows the speed with which Debtors / Accounts Receivable are collected.
(iii) Creditor’s Turnover Ratio: This Ratio shows the no. of days taken by the firms to pay its
creditors.
Creditor’s Turnover Ratio = Creditors + Bill Payable X No of working days in a year
Credit Purchases
(iv) Fixed Assets Turnover Ratio: This Ratio indicates the sales generated by every rupee
invested in Fixed Assets
Fixed Assets Turnover Ratio = Sales
Net Fixed Assets
5. Capital Structure Ratio / Capital Gearing Ratio: This Ratio explains the relationship between
Equity Shareholders’ Funds and Fixed interest bearing funds + Preference Share Capital. If the
Ratio is more than 1, the Capital Structure is highly geared. If it is less than 1, the Capital Structure
is low geared).
Capital Structure Ratio / Capital Gearing Ratio
= Preference Share Capital + Fixed Interest Bearing Securities
Equity Shareholders’ Funds

6. Capital Market Ratios: These Ratios are usually related to the Stock Market and are highly
useful to the investors / potential investors.
(i) Price Earnings Ratio (P/E Ratio): This Ratio measures the amount investors
are willing to pay for a rupee of earnings.
Price Earnings Ratio (P/E Ratio) = Market Price per share (MPS)
Earnings per Share (EPS)
 (ii) Dividend Yield : This Ratio measures the current return to
investors Dividend Yield = Dividend per Share (DPS)
Market Price per share (MPS)
(iii) Beta: This Ratio measures the change in the price of a Company’s Share
relative to the market.
Beta =Change in the price of a Company’s Share
Change in the market price of all shares

Illustration 1: The following is the Balance sheet of a firm:

Liabilities Amount Assets Amount

Share Capital 30,000 Fixed Assets 16,500

Creditors 8,000 Cash 1,000
Bills Payable 2,000 Book Debts 6,000
Provision for Tax 3,500 Bills Receivable 2,000
Stock 17,500
Prepaid Expenses 500

Total 43,500 Total 43,500

Comment upon the liquidity of the firm.

Solution:
(i) Current Ratio = Current Assets
Current
Liabilities
Current Assets = Cash + Book Debts + Bills Receivable + Stock + Prepaid expenses
= (1000+6000+2000+17500+500) = Rs. 27,000
Current Liabilities = Creditors + Bills Payable + Provision for Tax
= (8000+2000+3500) = Rs. 13,500
Hence, Current Ratio = 27,000 = 2:1
13,500

(ii) Liquid Ratio = Liquid Assets

= (1000+6000+2000) = Rs.9,000
 Liquid Ratio = 9,000 = 0.67 : 1
13,500

Comments: In this exercise, current ratio is 2 :1, which is considered satisfactory, but quick ratio
is below the optimum ratio of 1 :1. This indicates that the liquidity position of the firm is not
satisfactory as it indicates that the firm can only meet its current obligations to the extent of 67%
only. A further analysis shows that stock forms a major part of current assets. This is a negative
indication as it may imply that stock may be slow moving. Only after further analysis of stock –
its quality, its movement etc, then only the liquidity position of the firm can be concluded.

Illustration 2: The following is the Balance sheet of a company as on 31st March

Liabilities Amount Assets Amount

Share Capital 2,00,000 Land & Buildings 1,40,000

Profit & Loss account 30,000 Plant & Machinery 3,50,000
General Reserve 40,000 Stock 2,00,000
12% Debentures 4,20,000 Sundry Debtors 1,00,000
Sundry Creditors 1,00,000 Bills Receivable 10,000
Bills Payable 50,000 Cash at Bank 40,000

Total 8,40,000 Total 8,40,000

Calculate:
i. Current Ratio
ii. Quick Ratio
iii. Inventory to Working capital
iv. Debt to Equity Ratio
v. Proprietary Ratio
vi. Capital gearing Ratio
vii. Current Assets to Fixed assets
Solution:
(i) Current Ratio = Current Assets
Current
Liabilities
 Current Assets = Stock + Sundry Debtors + Bills Receivable + Cash at Bank
= (2,00,000+1,00,000+10,000+40,000) = Rs 3,50,000
Current Liabilities = Sundry Creditors + Bills Payable
= (1,00,000+50,000) = Rs.1,50,000

Current Ratio = 3,50,000 = 2.33 :1

1,50,000

(ii) Quick Ratio = Liquid Assets

Quick Assets = Sundry Debtors + Bills Receivable + Cash at Bank

= (1,00,000+10,000+40,000) = Rs 1,50,000
Quick Ratio = 1,50,000 = 1:1
1,50,000

(iii) Inventory to Working capital = Inventory

Working
Capital

= Rs.3,50,000 – Rs.1,50,000 = Rs.2,00,000

Inventory to Working capital = 2,00,000 = 1:1
2,00,000

(iv) Debt to Equity Ratio = Long Term Debt

Shareholders’ Fund
Long Term Debt = Debentures = Rs.4,20,000
Shareholders’ Fund = Capital + Reserves and Surplus
= Rs.2,00,000 + 30,000 + 40,000 = Rs 2,70,000
Debt to Equity Ratio = 4,20,000 = 1.56: 1
2,70,000
(or)
Debt to Equity Ratio = Long Term Debt = 4,20,000 = 0.6: 1
Shareholders’ Fund + Long Term Debt 6,90,000
14
 (v) Proprietary Ratio = Shareholders’ Fund = 2,70,000 = 0.32:1
Total Assets 8,40,000

(vi) Capital gearing Ratio = Fixed interest bearing securities

Equity Share capital
Fixed interest bearing securities = only debentures = Rs.4,20,000
Capital gearing Ratio = 4,20,000 = 2.1:1
2,00,000

(vii) Current Assets to Fixed assets = Current Assets = 3,50,000 = 0.71:1

Fixed Assets 4,90,000

Illustration 3
From the following information given below, calculate (a) Current Liabilities and (b) Inventory.
Current Ratio = 2.5
Acid test Ratio = 1.7
Current Assets = Rs.2,50,000

Solution:
Current Ratio = Current Assets
Current Liabilities

2.5 = Rs.2,50,000
Current Liabilities
Current Liabilities = Rs. 2,50,000 = Rs.1,00,000
2.5
Acid Test Ratio / Liquid Ratio = Liquid Assets
Current Liabilities
By cross multiplication,
Liquid Assets = Liquid Ratio / Acid Test Ratio X Current
Liabilities = 1.7 X Rs.1,00,000 = Rs.1,70,000
Calculation of Inventory: Inventory = Current Assets – Liquid Assets
= Rs.2,50,000 – Rs.1,70,000 = Rs.80,000
Illustration 4
From the following information, calculate (i) Net assets turnover, (ii) Fixed assets turnover,
and (iii) Working

capital turnover ratios:

Amount Amount

Plant and
Preference shares capital 4,00,000 Machinery 8,00,000
Equity share capital 6,00,000 Land and Building 5,00,000
General reserve 1,00,000 Motor Car 2,00,000
Balance in Statement of Profit and 3,00,000 Furniture 1,00,000
Loss
15% debentures 2,00,000 Inventory 1,80,000
14% Loan 2,00,000 Debtors 1,10,000
Creditors 1,40,000 Bank 80,000
Bills payable 50,000 Cash 30,000
Outstanding expenses 10,000

Revenue from operations for the year 2014-15 were Rs. 30,00,000.
Solution:
Revenue from = Rs. 30,00,000
Operations
Capital Employed = Share Capital + Reserves and
Surplus + Long-term Debts (or Net
Assets)
= (Rs.4,00,000 + Rs.6,00,000)
+ (Rs.1,00,000 + Rs.3,00,000)
+ (Rs.2,00,000 + Rs.2,00,000) = Rs.
18,00,000
Fixed Assets = Rs.8,00,000 + Rs.5,00,000 + Rs.2,00,000
+ Rs.1,00,000 = Rs. 16,00,000
Working Capital = Current Assets Current Liabilities
= Rs.4,00,000 Rs.2,00,000 == Rs. 2,00,000
Net Assets Turnover = Rs.30,00,000/Rs.18,00,000 = 1.67 times
Ratio
Fixed Assets Turnover = Rs.30,00,000/Rs.16,00,000 = 1.88 times
Ratio
Working Capital Turnover Ratio= Rs.30,00,000/Rs.2,00,000 = 15 times.
Case study: 1
Ram & Company supplies you the following information regarding the year ended 31st
December. Find out the inventory ratio and implies the impact of inventory for the Ram &
Company.
Significance:
A high Inventory turnover ratio is better than a low ratio. A high ratio implies good inventory
‘management and an indication of under-investment. It will adversely affect the ability of a firm
to meet customers’ demand. At the same time, a higher ratio reflects efficient business activities.
A low inventory turnover ratio is dangerous. It is an indication of excessive inventory and over
investment in inventory. A low ratio may be result of inferior quality goods, stock of un-saleable
and absolute goods. A lower ratio reflects dull business and suggests that some steps should be
taken to push up sales.
Case study 2
Following is the summarized Balance Sheet of a concern as at 31st December:
Comments:
1. Liquidity and Solvency Position: Current Ratio is 2.9. It means current assets of Rs.2.90 are
available against each rupee of current liability. The position is satisfactory on the basis of current
ratio. However, the Liquid Ratio is 0.65: 1. It means greater part of current assets constitute stock;
the stock is slow-moving. Therefore, the liquidity position is not satisfactory.
2. Credit Terms: The collection system is faulty because debtors enjoy a credit facility for 96
days, which is beyond normal period. The performance of Debt Collection Department is poor.
3. Profitability: Gross Profit Ratio is 20% which is a healthy sign. But the Net Profit Ratio is
only 5%. It means operating expenses are higher.
4. Investment Structure: Debt-Equity Ratio is 0.34: 1. It means the firm is not dependent on
outside liabilities. The position is satisfactory. Capital Gearing Ratio is also satisfactory.
However, the fixed assets to proprietorship ratio reveals that the entire fixed assets were not
purchased by the proprietors’ equity. It means the firm depends on outside liabilities. It is not
desired.
5. Return on Proprietors’ Fund: 5% of the sales is net profit and are available for the
proprietors. The state of low return is not desirable.
6. Stock Turnover Ratio and Turnover to fixed assets indicate an unhealthy sign. Fixed assets
are not used properly. It is a sign of under trading. The economic condition of the firm is not
sound. The firm can increase the rate of return on investment by increasing production.

DU PONT ANALYSIS
Meaning:
DuPont Analysis is an extended examination of Return on Equity (ROE) of a company which
analyses Net Profit Margin, Asset Turnover, and Financial Leverage. This analysis was developed
by the DuPont Corporation in the year 1920.
In simple words, it breaks down the ROE to analyze how corporate can increase the return for
their shareholders.
Return on Equity= Net Profit Margin x Asset Turnover Ratio x Financial Leverage =
(Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Total Equity)
The company can increase its Return on Equity if it-
1. Generates a high Net Profit Margin.
2. Effectively uses its assets so as to generate more sales
3. Has a high Financial Leverage
Analysis: Du Pont Equation provides a broader of the return the company is earning on its equity.
It tells where a company’s strength lies and where there is a room for improvement.
DuPont Analysis Interpretation:
DuPont Analysis gives a broader view of the Return on Equity of the company. It highlights the
company’s strengths and pinpoints the area where there is a scope for improvement. Say if the
shareholders are dissatisfied with lower ROE, the company with the help of DuPont Analysis
formula can assess whether the lower ROE is due to low-profit margin, low asset turnover or
poor leverage.
Once the management of the company has found the weak area, it may take steps to correct it.
The lower ROE may not always be a concern for the company as it may also happen due to
normal business operations. For instance, the ROE may come down due to accelerated depreciation in the initial
years.

DuPont Analysis Example:

Let’s analyze the Return on Equity of Companies- A and B. Both the companies are into the electronics industry
and have the same ROE of 45%. The ratios of the two companies are as follows:
Ratio Company A Company B

Profit Margin 30% 15%

Asset Turnover 0.5 6

Financial Leverage 3 0.5

Even though both companies have the same ROE, however, the operations of the companies are totally different.
Company A is able to generate higher sales while maintaining a lower cost of goods which can be seen from its
high-profit margin.
On the other hand, company B is selling its products at a lower margin but having very high Asset Turnover
Ratio indicating that the company is making a large number of sales. Moreover, company B seems less risky
since its Financial Leverage is very low.
Thus DuPont Analysis helps compare similar companies with similar ratios. It will help investors to measure
the risk associated with the business model of each company.

Bottomline:
DuPont Analysis is very important for an investor as it answers the question what is actually causing the ROE
to be what it is. If there is an increase in the Net Profit Margin without a change in the Financial Leverage, it
shows that the company is able to increase its profitability.
But if the company is able to increase its ROE only due to increase in Financial Leverage, it’s risky since the
company is able to increase its assets by taking debt.
Thus we need to check whether the increase in company’s ROE is due to increase in Net Profit Margin or Asset
Turnover Ratio (which is a good sign) or only due to Leverage (which is an alarming signal).
SOLVED PROBLEMS

Problem ‐ 1

The following Trading and Profit and Loss Account of Fantasy Ltd. for the year 31‐3‐2000 is
given below:
Particular Rs. Particula Rs.
r
To Opening 76,250 By Sales 5,00,000
Stock “ 3,15,250 “ Closing stock 98,500
Purchases 2,000
“ Carriage and 5,000
Freight “ Wages 2,00,000
“ Gross Profit b/d 5,98,500 5,98,500

1,01,000 By Gross Profit b/d 2,00,000

To Administration 12,000 “ Non‐operating
expenses “ Selling and 2,000 incomes: “ Interest on 1,500
Dist. expenses “ Non‐ 7,000 Securities 3,750
operating expenses “ 84,000 “ Dividend on shares 750
Financial Expenses 2,06,000 “ Profit on sale of shares 2,06,000
Net Profit c/d
Calculate:
1. Gross Profit Ratio 2. Expenses Ratio 3. Operating Ratio
1. Net Profit Ratio 5. Operating (Net) Profit Ratio 6. Stock Turnover Ratio.

Solution – 1 (Problem related to Revenue Ratio)

Gross
1. Gross Profit Margin = profit X 100
Sales
2,00,000
X 100
5,00,000

= 40%

Op.
2. Expenses Ratio = Expenses X 100
Net Sales
1,13,000
X 100
5,00,000

= 22.60%
 Cost of goods sold + Op.
3. Operating Ratio = Expenses X 100
Net Sales
3,00,000 + 1,13,000
X 100
5,00,000

= 82.60%

Cost of Goods sold = Op. stock + purchases + carriage and Freight + wages – Closing Stock

= 76250 + 315250 + 2000 + 5000 ‐ 98500

= Rs.3,00,000

Net Profit
4. Net Profit Ratio = X 100
Net Sales

84,000
X 100
5,00,000

= 16.8%

Op. Profit
5. Operating Profit Ratio = X 100
Net Sales

Operating Profit = Sales – (Op. Exp. + Admin

Exp.)
87,000
X 100
5,00,000

= 17.40%
 6. Stock Turnover Ratio = Cost of goods
sold
Avg. Stock
3,00,000
87,375

= 3.43 times

Problem ‐ 2

The Balance Sheet of Punjab Auto Limited as on 31‐12‐2002 was as follows:

Particular Rs. Particula Rs.
r
Equity Share 40,000 Plant and 24,000
Capital Capital 8,000 Machinery Land 40,000
Reserve 32,000 and Buildings 16,000
8% Loan on 16,000 Furniture & 12,000
Mortgage Creditors 4,000 Fixtures Stock 12,000
Bank Debtors 4,000
overdraft 4,000 Investments (Short‐ 12,000
Taxation: 4,000 term) Cash in hand
Curren 12,000
t 1,20,000 1,20,000
Future
Profit and Loss A/c
From the above, compute (a) the Current Ratio, (b) Quick Ratio, (c) Debt‐Equity
Ratio, and (d) Proprietary Ratio.

Solution – 2 (Problem related to Balance Sheet Ratio)

Current Assets
1. Current Ratio =
Current liabilities
Current Assets = Stock + debtors + Investments (short
term) + Cash In hand

Current Liabilities = Creditors + bank overdraft +

Provision for Taxation (current &
Future)
CA = 12000 + 12000 + 4000 + 12000

= 40,000
CL = 16000 + 4000 + 4000 + 4000
 = 28,000
= 40,000
28,000

= 1.43 : 1

Quick Assets
2. Quick Ratio =
Quick
Liabilities

Quick Assets = Current Assets ‐ Stock

Quick Liabilities = Current Liabilities – (BOD + PFT

future)
QA = 40,000 – 12,000

= 28,000

QL = 28,000 – (4,000 + 4,000)

= 20,000

= 28,000
20,000

= 1.40 : 1

3. Debt – Equity Ratio = Long Term Debt

(Liabilities)
Shareholders Fund
LTL = Debentures + long term loans

SHF = Eq. Sh. Cap. + Reserves & Surplus +

Preference Sh.
Cap. – Fictitious Assets
LTL = 32,000

SHF = 40,000 + 8,000 + 12,000

= 60,000
 = 32,000
60,000

= 0.53 : 1

Shareholders’ Funds
4. Proprietary Ratio =
Total Assets

SHF = Eq. Sh. Cap. + Reserves & Surplus + Preference

Sh.
Cap. – Fictitious
Assets
Total Assets = Total Assets – Fictitious Assets

SHF = 40,000 + 8,000 + 12,000

= 60,000

TA = 1,20,000

= 60,000
1,20,000

= 0.5 : 1

Problem ‐ 3 [Sau. Uni. T. Y., April, 2000]

The details of Shreenath Company are as under:

Sales (40% cash sales) 15,00,000
Less: Cost of sales 7,50,000
Gross Profit: 7,50,000
Less: Office Exp. (including int. on debentures) 1,25,000
Selling Exp. 1,25,000 2,50,000
Profit before Taxes: 5,00,000
Less: Taxes 2,50,000
Net Profit: 2,50,000
 Balance Sheet
Particular Rs. Particula Rs.
r
Equity share capital 20,00,000 Fixed 55,00,000
10% Preference share 20,00,000 Assets 1,75,000
capital Reserves 11,00,000 Stock 3,50,000
10% 10,00,000 Debtors 50,000
Debentures 1,00,000 Bills 2,25,000
Creditors 1,50,000 receivable 1,00,000
Bank‐overdraft 45,000 Cash
Bills payable 5,000 Fictitious Assets
Outstanding expenses 64,00,000 64,00,000
Beside the details mentioned above, the opening stock was of Rs. 3,25,000. Taking 360 days
of the year, calculate the following ratios; also discuss the position of the company:
(1) Gross profit ratio. (2) Stock turnover ratio. (3) Operating ratio. (4) Current ratio. (5)
Liquid ratio. (6) Debtors ratio. (7) Creditors ratio. (8) Proprietary ratio. (9) Rate of return on
net capital
employed. (10) Rate of return on equity shares.

Solution – 3 (Problem related to Composite Ratio)

Gross
1. Gross Profit Margin = X 100
profit
Sales

7,50,000
X 100
15,00,000

= 50%

Cost of goods sold

2. Stock Turnover Ratio =
Avg. Stock
Avg. stock = Opening Stock + Closing
Stock

2
COGS = Sales – GP

3,25,000 + 1,75,000
2
 AS = 2,50,000

COGS = 15,00,000 – 7,50,000

7,50,000

= 7,50,000
2,50,000
= 3 times

Op.
3. Operating Profit Ratio = X 100
Profit
Net
Sales

Operating Profit = Sales – (Op. Exp. +

COGS.)
OP = 15,00,000 – (7,50,000 + 1,25,000
+
25,000)

= 6,00,000

(excluding Interest on Debentures)

= 6,00,000
X 100
15,00,000

= 40%

Current Assets
4. Current Ratio =
Current liabilities
Current Assets = Stock + debtors + Bills receivable + Cash

Current Liabilities = Creditors + bank overdraft + Bills

payable +
Outstanding expenses
CA = 1,75,000 + 3,50,000 + 50,000 + 2,25,000

= 8,00,000
 CL = 1,00,000 + 1,50,000 + 45,000 + 5,000

= 3,00,000
= 8,00,000
3,00,000

= 2.67 : 1

Liquid Assets
5. Quick Ratio / Liquid Ratio
= Liquid
Liabilities

(Liquid) Quick Assets = Current Assets ‐ Stock

(Liquid) Quick Liabilities = Current Liabilities

– BOD
QA = 8,00,000 – 1,75,000

= 6,25,000

QL = 3,00,000 – 1,50,000

= 1,50,000

= 6,25,000
1,50,000

= 4.17 : 1

6. Debtors Ratio = Debtors + Bills X 365 / 360 days

receivable Credit
sales
= 3,50,000 + 50,000
9,00,000 X 360 days
(60% of 15,00,000)
= 0.444 X 360 days

= 160 days
 7. Creditors Ratio = Creditors + Bills X 365 / 360 days
payable Credit
Purchase
= 1,00,000 + 45,000
7,50,000 X 360 days
Notes: If credit purchase could not find
out at that point Cost of Goods sold
consider Credit purchase
= 0.193 X 360 days

= 69 days

Shareholders’ Funds
8. Proprietary Ratio =
Total Assets

SHF = Eq. Sh. Cap. + Reserves & Surplus + Preference

Sh.
Cap. – Fictitious
Assets
Total Assets = Total Assets – Fictitious Assets

SHF = 20,00,000 + 20,00,000 + 11,00,000 – 1,00,000

= 50,00,000

TA = 64,00,000 – 1,00,000

= 63,00,000

= 50,00,000
63,00,000

= 0.79 : 1
Notes:

Rate of Return on Capital Rate of Return on Share Rate of return on Equity

Employed holders Fund Shareholders Fund

= EBIT X 100 = PAT X 100 = PAT – Pref. X 100

Capital employed SHF Div.
ESHF
CE = Eq Sh. Cap. + Pref. Sh. SHF = Eq. Sh. Cap. + Pref. Sh. ESHF = Eq. Sh. Cap. +
Cap. + Reserves & Surplus +
Debenture + Long Term Loan
– Fictitious Assets
Sales
Less: Cost of goods sold
Cap. + Reserves & Surplus – Reserves & Surplus
Fictitious Assets – Fictitious Assets
15,00,000
7,50,000

Gross profit 7,50,000

Less: Operating expenses (including Depreciation) 1,50,000

Earnings before Interest & Tax (EBIT) 6,00,000

Less: Interest Cost 1,00,000

Earnings before Tax (EBT) 5,00,000

Less: Tax liability 2,50,000

Earnings after Tax (EAT/ PAT) 2,50,000

Less: Preference share dividend 2,00,000

Distributional Profit 50,000

9. 10. 11.

Rate of Return on Capital Rate of Return on Share Rate of return on Equity

Employed holders Fund Shareholders Fund

= EBIT X 100 = PAT X 100 = PAT – Pref. X 100

Capital employed SHF Div.
ESHF
CE = Eq Sh. Cap. + Pref. Sh. SHF = Eq. Sh. Cap. + Pref. Sh. ESHF = Eq. Sh. Cap. +
Cap. + Reserves & Surplus + Cap. + Reserves & Surplus – Reserves & Surplus –
Debenture + Long Term Loan Fictitious Assets Fictitious Assets
– Fictitious Assets
CE = 20,00,000 + 20,00,000 SHF = 20,00,000 + 20,00,000 ESHF = 20,00,000 +
11,00,000 +10,00,000 – 11,00,000 – 1,00,000 11,00,000 – 1,00,000
1,00,000
 = 60,00,000 = 50,00,000 = 30,00,000

= 6,00,000 X 100 = 2,50,000 X 100 = 50,000 X 100

60,00,000 50,00,000 30,00,000
= 10% = 5% = 1.67 %

Problem = 4

From the following particulars extracted from the books of Ashok & Co. Ltd., compute the
following ratios and comment:
(a) Current ratio, (b) Acid Test Ratio, (c) Stock‐Turnover Ratio, (d) Debtors Turnover Ratio,
(e) Creditors' Turnover Ratio, and Average Debt Collection period.
1‐1‐2002 31‐12‐2002
Rs. Rs.
Bills Receivable 30,000 60,000
Bills Payable 60,000 30,000
Sundry Debtors 1,20,000 1,50,000
Sundry Creditors 75,000 1,05,000
Stock‐in‐trade 96,000 1,44,000
Additional information:
(a) On 31‐12‐2002, there were assets: Building Rs. 2,00,000, Cash Rs. 1,20,000 and Cash at
Bank Rs. 96,000.
(b) Cash purchases Rs. 1,38,000 and Purchases Returns were Rs. 18,000.
(c) Cash sales Rs. 1,50,000 and Sales returns were Rs. 6,000.
Rate of gross profit 25% on sales and actual gross profit was Rs. 1,50,000.

Solution – 4 (Problem related to find out missing item)

Notes: In this problem available information is not enough to solve ratios asked so
that need to prepare Trading Account to identify values which are not given in the question.

Trading Account

Particular Amount Particular Amount

Rs. Rs.
To Opening Stock 96,000 By Sales: Cash: 1,50,000

To Purchase: Cash: 1,38,000 Credit : 4,56,000

Credit: 3,78,000 6,06,000

5,16,000 Less: S/R 6,000 6,00,000

Less: P/R 18,000 4,98,000 By Closing Stock 1,44,000

To Gross Profit 1,50,000

7,44,000 7,44,000

Gross
1. Gross Profit Margin = X 100
profit
Sales

25% = 1,50,000 X 100

Sales

Sales = 1,50,000 X 100

25

Sales = 6,00,000

Current Assets
2. Current Ratio =
Current liabilities
Current Assets = Stock + debtors + Bills receivable +
Cash + Bank Balance

Current Liabilities = Creditors + Bills payable

CA = 1,44,000 + 1,50,000 + 60,000 + 1,20,000 + 96,000

= 5,70,000
CL = 1,05,000 + 30,000
= 1,35,000
= 5,70,000
1,35,000

= 4.22 : 1

Cash & Cash Equivalent

3. Acid Test Ratio =
Assets Liquid
Liabilities
 Cash & Cash equivalent Assets = Cash + Bank +
Short term Investments
(Liquid) Quick Liabilities = Current Liabilities
– BOD
= 1,20,000 + 96,000
= 2,16,000
QL = 1,05,000 + 30,000
= 1,35,000
= 2,16,000
1,35,000

= 1.6 : 1

Cost of goods sold

4. Stock Turnover Ratio =
Avg. Stock
Avg. stock = Opening Stock + Closing
Stock
2
COGS = Sales – GP

96,000 + 1,44,000
2

AS = 1,20,000

COGS = 6,00,000 – 1,50,000

4,50,000
= 4,50,000
1,20,000
= 3.75 times

5. Debtors Ratio =
Debtors + Bills X 365 / 360 days
(Avg. debt collection period) receivable Credit
sales

= 1,50,000 + 60,000 X 365 days

4,56,000
 = 0.461 X 365 days

= 168
days

6. Creditors Ratio = Creditors + Bills X 365 / 360 days

payable Credit
Purchase
= 1,05,000 + 30,000 X 365 days
3,78,000
= 0.357 X 365 days

= 130 days

Problem ‐ 5

Following is the summarised Balance Sheet of Mona Ltd. as on 31‐3‐04.

Particular Rs. Particula Rs.
r
Equity Shares of Rs. 10 each 10,00,000 Fixed Assets 20,00,000
10% Pref. Sh. of Rs.100 each 4,00,000 Investments 2,00,000
Reserves and Surplus 7,00,000 Closing Stock 2,00,000
15% 5,00,000 Sundry 4,60,000
Debentures 2,40,000 Debtors Bills 60,000
Sundry 1,60,000 Receivable 60,000
Creditors Bank Cash at Bank 20,000
Overdraft 30,00,000 Preliminary Expenses 30,00,000
Summarised Profit and Loss Account is as under for the year ending on 31‐3‐'04:
Rs.
Sales (25% Cash sales) 80,00,000
Less: Cost of goods sold 56,00,000
Gross Profit 24,00,000
Net profit (Before interest and tax 50%) 9,00,000
Calculate the following ratios:
(1) Rate on Return on Capital Employed (2) Ratio (3) Debt‐Equity (4) Capital
Proprietary gearing
Ratio (5) Debtors Ratio (365 days of the year.) (6) Rate of Return on Shareholders' Funds (7)
Rate of Return on Equity shareholders fund
Solution ‐ 5 Statement of Profitability

Sales 80,00,000
Less: Cost of goods sold 56,00,000

Gross profit 24,00,000

Less: Operating expenses (including Depreciation) 15,00,000

Earnings before Interest & Tax (EBIT) 9,00,000

Less: Interest Cost 75,000

Earnings before Tax (EBT) 8,25,000

Less: Tax liability (50%) 4,12,500

Earnings after Tax (EAT/ PAT) 4,12,500

Less: Preference share dividend 40,000

Distributional Profit 3,72,500

1. 6. 7.

Rate of Return on Capital Rate of Return on Share Rate of return on Equity

Employed holders Fund Shareholders Fund

= EBIT X 100 = PAT X 100 = PAT – Pref. X 100

Capital employed SHF Div.
ESHF
CE = Eq Sh. Cap. + Pref. Sh. SHF = Eq. Sh. Cap. + Pref. Sh. ESHF = Eq. Sh. Cap. +
Cap. + Reserves & Surplus + Cap. + Reserves & Surplus – Reserves & Surplus –
Debenture + Long Term Loan Fictitious Assets Fictitious Assets
– Fictitious Assets
CE = 10,00,000 + 4,00,000 SHF = 10,00,000 + 4,00,000 + ESHF = 10,00,000 + 7,00,000
7,00,000 + 5,00,000 – 20,000 7,00,000 ‐ 20,000 – 20,000
= 25,80,000 = 20,80,000 = 16,80,000
= 9,00,000 X 100 = 4,12,500 X 100 = 3,72,500 X 100
25,80,000 20,80,000 16,80,000
= 34.88% = 19.83% = 22.17 %
 Shareholders’ Funds
2. Proprietary Ratio =
Total Assets

SHF = Eq. Sh. Cap. + Reserves & Surplus + Preference

Sh.
Cap. – Fictitious
Assets
Total Assets = Total Assets – Fictitious Assets

SHF = 10,00,000 + 7,00,000 + 4,00,000 ‐ 20,000

= 20,80,000
TA = 30,00,000 –
20,000
= 29,80,000
= 20,80,000
29,80,000
= 0.70 : 1

3. Debt – Equity Ratio = Long Term Debt

(Liabilities)
Shareholders Fund
LTL = Debentures + long term loans

SHF = Eq. Sh. Cap. + Reserves & Surplus +

Preference Sh.
Cap. – Fictitious Assets
LTL = 5,00,000

SHF = 10,00,000 + 7,00,000 + 4,00,000 ‐ 20,000

= 20,80,000
= 5,00,000
20,80,000

= 0.24 : 1

4. Capital Gearing Ratio = Fixed Interest or Dividend

Securities Equity
Shareholders Fund
FIS = Debentures + Preference share capital
 ESHF = Eq. Sh. Cap. + Reserves & Surplus –
Fictitious Assets

LTL = 9,00,000

ESHF = 10,00,000 + 7,00,000 ‐ 20,000

= 16,80,000
= 9,00,000
16,80,000

= 0.54 : 1

5. Debtors Ratio =
Debtors + Bills X 365 / 360
(Avg. debt collection receivable Credit days
period) sales

= 4,60,000 + 60,000 X 365 days

60,00,000
= 0.461 X 365 days

= 31.63 days

= 32 days (Aprox.)

Problem ‐ 6

Two years' Balance sheets of Jamuna Company Ltd. are as follows:[S. U. T.Y.‐April, 1999]
Liabilities 31‐3‐03 31‐3‐04 Asset 31‐3‐03 31‐3‐04
s
Equity share capital 1,00,000 1,50,000 Land and 1,00,000 90,000
10%Pref. Sh. capital 50,000 50,000 Buildings 90,000 90,000
General Reserve Profit 30,000 30,000 Machinery 53,000 30,000
& Loss A/c 12% 20,000 ‐‐‐‐‐ Debtors 20,000 12,000
Debentures Creditors 1,00,000 50,000 Bills 75,000 90,000
Bills payable 30,000 35,000 Receivable 15,000 35,000
Bank 10,000 25,000 Stock 2,000 13,000
Overdraft 10,000 20,000 Bank Balance ‐‐‐‐ 10,000
O/s. 5,000 10,000 Cash Balance
Expenses 3,55,000 3,70,000 Profit & Loss 3,55,000 3,70,000
A/c
 Additional Information:
2002‐'03 2003‐04
Rs. Rs.
(1) Sales 3,65,000 2,19,000
(2) Cost of Goods sold 2,19,000 1,46,000
(3) Net profit (Before Pref. Dividend) 35,000 47,500
(4) Stock on 1‐4‐'02 71,000 ‐‐‐
Calculate following ratios and give your opinion about company position in 2003‐'04 in
comparison with 2002‐'03. Whether it is positive or negative?
(1) Current ratio (2) Liquid ratio (3) Debtors ratio (Take 365 days for calculations) (4) Gross
profit ratio (5) Stock Turnover ratio (6) Rate of return on equity share‐holders' funds.

Solution ‐ 6 (problem related to comparative analysis between two years)

Current Assets
1. Current Ratio =
Current liabilities
Current Assets = Stock + debtors + Bills receivable +
Cash + Bank Balance

Current Liabilities = Creditors + Bills payable

2002‐03:
= 53,000 +20,000 + 75,000 + 15,000 + 2,000
30,000 + 10,000 + 10,000 + 5,000
= 1,65,000
55,000

= 3 :1

2003‐04:
= 30,000 + 12,000 + 90,000 + 35,000 + 13,000
35,000 + 25,000 + 20,000 + 10,000
= 1,80,000
90,000

= 2:1

Liquid Assets
2. Liquid Ratio =
Liquid
liabilities
 (Liquid) Quick Assets = Current ‐ Stock
Assets
(Liquid) Quick Liabilities = Current Liabilities –
BOD
2002‐03:
= 1,65,000 ‐ 75,000
55,000 ‐ 10,000
= 90,000
45,000

= 2 :1

2003‐04:
= 1,80,000 ‐ 90,000
90,000 ‐ 20,000
= 90,000
70,000

= 1.29 : 1

3. Debtors Ratio =
Debtors + Bills X 365 / 360
(Avg. debt collection period) receivable Credit days
sales
2002‐03:
= 53,000 + 20,000 X 365 days
3,65,000
= 73,000
X 365 days
3,65,000
= 73 days

2003‐04:
= 30,000 + 12,000 X 365 days
2,19,000
= 42,000
X 365 days
2,19,000
= 70 days
 Gross
4. Gross Profit Margin = X 100
profit
Sales
GP = Sales ‐ COGS
2002‐03:
365000 ‐ 219000
= 1,46,000
2003‐04:
219000 ‐ 146000
= 73,000
2002‐03:
= 1,46,000 X 100
3,65,000

= 40%

2003‐04:
= 73,000 X 100
2,19,000

= 33.33%

Cost of goods sold

2. Stock Turnover Ratio =
Avg. Stock
Avg. stock = Opening Stock + Closing
Stock
2
2002‐03:
71000 + 75000
2
= 73,000
2003‐04:
75000 + 90000
2
= 82,500
2002‐03:
= 2,19,000
73,000
= 3 times
2003‐04:
 = 1,46,000
82,500
= 1.77 times

7. Rate of return on Equity Shareholders Fund:

2002‐03
= PAT – Pref. Div.
ESHF X 100

ESHF = Eq. Sh. Cap. + Reserves & Surplus

–
Fictitious Assets
ESHF = 1,00,000 + 30,000 + 20,000
= 1,50,000
= 35,000 ‐ 5,000 X 100
1,50,000
= 20 %

2003‐04:
ESHF: 1,50,000 + 30,000 ‐ 10,000
= 1,70,000
= 47,500 ‐ 5,000
X 100
1,70,000
= 25%

Problem ‐ 7

The Balance Sheet as on 2002 and 2003 are as under:

Liabilities 2002 2003 Asset 2002 2003
s
Equity share capital 1,00,000 1,25,000 Land and 50,000 75,000
General Reserve Profit 12,500 15,000 Buildings Plant 57,500 55,000
& Loss A/c Creditors 10,000 7,500 Machinery Stock 10,000 12,500
Bills payable 5,000 6,250 Debtors 7,500 10,000
O/s. 3,750 7,500 Cash & 5,000 7,500
Expenses 1,250 3,750 Bank 2,500 5,000
Provident 7,500 5,000 Bills 7,500 5,000
Fund 1,40,000 1,70,000 Receivable 1,40,000 1,70,000
Preliminary
Exp.
 Profit & Loss A/c.
Particulars 2002 2003 Particulars 2002 2003
To Op. Stock 5,000 10,000 By Sales 62,500 1,12,500
To Purchase 37,500 47,500 By Closing Stock 10,000 12,500
To Office 7,500 10,000 By Profit on Sale
Exp. To 5,000 12,500 of 2,500 ‐‐‐‐
Selling exp. 2,500 15,000 Furniture
To Fin. Exp. 17,500 30,000
To Net Profit 75,000 1,25,000 75,000 1,25,000
Find out (1) Current Ratio (2) Stock Turnover Ratio (3) Gross Profit Ratio (4) Liquid Ratio
(5) Debtor Ratio (working days 300) (6) Return on Equity Capital employed (7) Ownership
Ratio.

Solution ‐ 7

Current Assets
1. Current Ratio =
Current liabilities
Current Assets = Stock + debtors + Bills receivable +
Cash & Bank Balance

Current Liabilities = Creditors + Bills payable + O/s Exp.

+ PF
2002:
= 10,000 +7,500 + 5,000 + 2,500
5,000 + 3,750 + 1,250 + 7,500
= 25,000
17,500

= 1.43 :1

2003‐04:
= 12,500 + 10,000 + 7,500 + 5,000
6,250 + 7,500 + 3,750 + 5,000
= 35,000
22,500

= 1.56 : 1
 Cost of goods sold
2. Stock Turnover Ratio =
Avg. Stock
Avg. stock = Opening Stock + Closing
Stock
2
2002‐03:
5000 + 10000
2
= 7,500
2003‐04:
10000 + 12500
2
= 11,250
Gross Profit = Sales + Closing Stock ‐
(Opening Stock + Purchase)
COGS = Sales ‐ GP
2002: = 62,500 + 10,000 ‐ (5,000 + 37,500)
= 30,000
COGS = 62,500 ‐
30,000
= 32,500
2003: = 1,12,500 + 12,500 ‐ (10,000 + 47,500)
= 67,500
COGS = 1,12,500 ‐ 67,500
= 45,000
2002‐03:
= 32,500
7,500
= 4.33 times
2003‐04:
= 45,000
11,250
= 4 times
 Gross
3. Gross Profit Margin = X 100
profit
Sales
GP = Sales ‐ COGS
2002‐03:
2002: = 62,500 + 10,000 ‐
(5,000 + 37,500)
= 30,000
2003‐04: = 1,12,500 + 12,500 ‐
(10,000 + 47,500)
= 67,500
2002‐03:
= 30,000 X 100
62,500

= 48%

2003‐04:
= 67,500 X 100
1,12,500

= 60%

Liquid Assets
4. Liquid Ratio =
Liquid
liabilities
(Liquid) Quick Assets = Current Assets ‐ Stock

(Liquid) Quick Liabilities = Current Liabilities – BOD

2002‐03:
= 25,000 ‐ 10,000
17,500
= 15,000
17,500

= 0.86 :1

2003‐04:
= 35,000 ‐ 12,500
22,500
 = 22,500
22,500

= 1:1

5. Debtors Ratio =
Debtors + Bills X 300 days
(Avg. debt collection period) receivable Credit
sales
2002‐03:
= 7,500 + 2,500 X 300 days
62,500
= 10,000
X 300 days
62,500
= 48 days

2003‐04:
= 10,000 + 5,000 X 300 days
1,12,500
= 15,000
X 300 days
1,12,500
= 40 days

6. Rate of return on Equity Shareholders Fund:

2002
= PAT – Pref. Div.
ESH X 100
F
ESHF = Eq. Sh. Cap. + Reserves & Surplus
–
Fictitious Assets
ESHF = 1,00,000 + 12,500 + 10,000 ‐ 7,500
= 1,15,000
= 17,500 X 100
1,15,000
= 15.22 %

2003:
 ESHF: 1,25,000 + 15,000 + 7,500 ‐ 5,000
= 1,42,500
= 30,000
X 100
1,42,500
= 21.05%

Shareholders’ Funds
7. Ownership Ratio =
Total Assets

SHF = Eq. Sh. Cap. + Reserves & Surplus – Fictitious

Assets
Total Assets = Total Assets – Fictitious Assets

2002 = SHF = 1,00,000 + 12,500 + 10,000 ‐

7,500
= 1,15,000
TA = 1,40,000 ‐ 7,500
= 1,32,500
= 1,15,000
1,32,500
= 0.87 : 1
OR
= 87%
2003 = SHF = 1,25,000 + 15,000 + 7,500 ‐
5,000
= 1,42,500
TA = 1,70,000 ‐ 5,000
1,65,000
= 1,42,500
1,65,000
= 0.86 : 1
OR
= 86%
Problem ‐ 8

Following are incomplete Trading & Profit and Loss A/c. and
Balance Sheet.
Trading A/c.
Particular Rs. Particula Rs.
r
To Op. 3,50,000 By Sales (?)
stock To (?) By Closing Stock (?)
Purchase 87,000
To Purchase 7,18,421
Return To Gross 14,96,710 14,96,710
Profit

Profit & Loss A/c.

Particular Rs. Particula Rs.
r
To Office 3,70,000 By Gross 7,18,421
Exp. To Int. 30,000 Profit By (?)
on Deb. 18,421 Commission
To Tax. 3,50,000
Provision To (?) (?)
Net Profit
Balance Sheet
Particular Rs. Particula Rs.
r
Paid Up 5,00,000 Plant & 7,00,000
Capital (?) machinery Stock (?)
General (?) Debtor (?)
Reserve P & L (?) s Bank 62,500
a/c. 6,00,000 Other Fixed Assets (?)
10% Debenture (?) (?)
Current
Liabilities
Find out missing items with the help of other details are as under:
1. Current Ratio was 2:1.
2. Closing Stock is 25% of Sales.
3. Proposed Dividend was 40% of paid up capital.
4. Gross profit Ratio was 60%.
5. Amount transfer to General Reserve is same as proposed Dividend.
6. Balance of P & L Account is calculated 10% of proposed dividend.
7. Commission income is 1/7 of Net profit.
8. Balance of General reserve is twice the current year transfer amount.

Solution ‐ 8

Trading A/c.
Particula Rs. Particula Rs
r r .
To Op. stock 3,50,000 By Sales (?) 11,97,368
To Purchase (?) 3,41,289 By Closing Stock (?) 2,99,342
To Purchase Return 87,000
To Gross Profit 7,18,421
14,96,710 14,96,710
 Profit & Loss A/c.
Particular Rs. Particula Rs.
r
To Office Exp. 3,70,000 By Gross Profit 7,18,421
To Int. on Deb. 30,000 By Commission (?) 50,000
To Tax. Provision 18,421
To Net Profit 3,50,000
7,68,421 7,68,421

Balance Sheet
LIABILIT AMOUNT ASSETS AMOUNT
IES
Paid Up Capital 5,00,000 Plant & machinery 7,00,000
General Reserve (?) 6,00,000 Stock (?) 2,99,342
P & L a/c. (?) 20,000 Debtors (?) 8,38,158
10% Debenture (?) 3,00,000 Bank (?) 62,500
Current Liabilities 6,00,000 Other Fixed Assets 1,20,000
20,20,000 20,20,000

Gross
1. Gross Profit Margin = X 100
profit
Sales
60 = 7,18,421 X 100
Sales
Sales = 7,18,421 X 100
60

Sales = 11,97,368

2. Closing Stock = Sales x 25%

11,97,368 x 25%

CS = 2,99,342

3. Proposed Dividend = Paid up Capital x 40%

= 5,00,000 x 40%

PD = 2,00,000
 GR find out as per
4. General Reserve =
Proposed
Dividend
Proposed Dividend is
2,00,000
So that
Proposed Dividend =
General Reserve

GR = 2,00,000

5. Commission = It is 1/7 part of Net Profit

Commission = 3,50,000 x
1/7
Commission = 50,000

6. Profit & Loss Account = It is 10% of Proposed

Dividend
P & L A/c. = 2,00,000 x 10%

P & L A/c. = 20,000

7. Debenture = Rate of Interest is 10%

Interest amount is Rs.

30,000
So that, Debenture value is
= 30,000 x 10/100

= 3,00,000

Current Assets
8. Current Ratio =
Current liabilities
2 = Stock + debtors + Bank
Balance Current Liability

2 = 2,99,342 + debtors + 62,500

 6,00,000

12,00,000 = Debtors + 3,61,842

Debtors = 12,00,000 ‐ 3,61,842

Debtors = 8,38,158

Current Assets
8. Current Ratio =
Current liabilities
2 = Stock + debtors + Bank
Balance Current Liability
2 = 2,99,342 + debtors + 62,500
6,00,000

12,00,000 = Debtors + 3,61,842

Debtors = 12,00,000 ‐ 3,61,842

Debtors = 8,38,158

8. Balance of General
It is twice of current year provision for General
Reserve = Reserve
Current year provision is Rs. 2,00,000
So that, Balance of G. R. = 2,00,000 x 2
Balance of GR = 4,00,000
Now, General Reserve = 4,00,000 + 2,00,000
GR = 6,00,000
Problem ‐9
From the following information, prepare the Balance Sheet of ABB Ltd. Showing the
details of working:
Paid up capital Rs. 50,000
Plant and Machinery Rs. 1,25,000
Total Sales (p.a.) Rs. 5,00,000
Gross Profit 25%
Annual Credit Sales 80% of net
sales
Current Ratio 2
Inventory Turnover 4
Fixed Assets Turnover 2
Sales Returns 20% of sales
Average collection period 73 days
Bank Credit to trade credit 2
Cash to Inventory 1 : 15
Total debt to current Liabilities 3

Solution ‐ 9
1. Net Sales = Total Sales ‐ Sales Return
= 5,00,000 ‐ 1,00,000
= Rs. 4,00,000
2. Credit Sales = 80% of Net Sales
= 4,00,000 x 80%
= Rs. 3,20,000
3. Gross Profit = 25% of Net sales
= 4,00,000 x 25%
= Rs. 1,00,000
4. Cost of Goods Sold = Net Sales ‐ Gross Profit
= 4,00,000 ‐ 1,00,000
= Rs. 3,00,000
Cost of Goods
5. Inventory =
Sold Inventory
Turnover
= 3,00,000
4
= Rs. 75,000
365
6. Receivable = 73
Turnover = 5
 Credit Sales
Receivables =
Receivables
Turnover
= 3,20,000
5
= Rs. 64,000
7. Cash = 1/5 of Inventory
= 1/5 x 75,000
= Rs. 5,000
8. Total Current Assets = Inventory + Receivables + Cash
= 75,000 + 64,000 + 5,000
= Rs. 1,44,000
Current
9. Total Current Liabilities
Assets 2
=
= 1,44,000
2
= Rs. 72,000
10. Bank Credit = 2/3 x Current Liabilities
= 2/3 x 72,000
= Rs. 48,000
11. Trade Credit = 1/2 of Bank Credit OR 1/3 of Current Liabilities
Rs. 24,000
12. Total Debt = Current Liabilities x 3
72,000 x 3
= Rs. 2,16,000
13. Long term debt = Total Debt ‐ Current Liabilities
= 2,16,000 ‐ 72,000
= Rs. 1,44,000
14. Fixed Assets = 1/2 of Net Sales =
1/2 x 4,00,000
= Rs. 2,00,000
15. Other fixed Assets = Fixed Assets ‐ Plant & Machinery
= 2,00,000 ‐ 1,25,000
= Rs. 75,000
16. Total Assets = Fixed Assets + Current Assets
 = 2,00,000 + 1,44,000
= 3,44,000
17. Net worth = Total Assets ‐ Total Debt
3,44,000 ‐ 2,16,000
= Rs. 1,28,000
18. Reserves & Surplus = Net worth ‐ Paid Up capital
= 1,28,000 ‐ 50,000
= Rs. 78,000

Balance Sheet
LIABILIT AMOUNT ASSETS AMOUNT
IES
Paid Up Capital 50,000 Plant & machinery 1,25,000
Reserves & Surplus 78,000 Other Fixed Assets 75,000
Long term Debt 1,44,000 Inventory 75,000
Bank credit 48,000 Receivables 64,000
Trade credit 24,000 Cash 5,000
3,44,000 3,44,000

SOURCE:

http://content.inflibnet.ac.in/data-server/eacharya-
documents/53e0c6cbe413016f234436f6_INFIEP_18/3/SA/18-3-SA-V1-
S1__solved_problems_ra.pdf