General Certificate of Education (Advanced Level) Examination

ACCOUNTING
(English Medium)
THEORY – 2022

Ratio Analysis
 A ratio means,

Mathematical representation of relationship between two figures

An accounting ratio means,

Mathematical representation of relationship between two accounting figures

Few methods of presenting these ratios

(1) As a fraction ………………………………………………………………………………….

(2) As an inverse ………………………………………………………………………………….

(3) As a percentage ………………………………………………………………………………….

(4) As number of times ………………………………………………………………………………….

Objectives of ratio analysis

 Can recognize the status of a business analytically than the available information in
financial statements.
 Estimation of future financial status, profitability and liquidity.
 Can assess present status of the business.
 Can compare current year data with previous years or with other similar business
entities.
 Guide to make suitable decisions.

Classification of accounting ratios

Accounting ratios are classified as follows for the need of decision making.
1. Liquidity ratios
2. Leverage ratios
3. Profitability ratios
4. Efficiency ratios
5. Investment ratios

Ratio Analysis 1
 Liquidity ratios

Liquidity ratios assess the ability of a business to pay its short term liabilities as they fall
due. Liquidity ratios are important to assess the short term solvency.

Liquidity ratios can be used to make decisions relating to short term financing of a
business by comparing them with previous year or similar business entity.

1. Current Ratio

The current ratio compares total current assets to total current liabilities and indicates
whether there are sufficient short term assets to pay the short term liabilities
Current ratio used to measure the short term liquidity.
It shows the ability of repaying current liabilities. Standard ratio for current ratio is 2 : 1
(current assets : current liabilities). Current ratio can be calculated as

Current assets
or Current assets : Current liabilities
Current liabilities

2. Quick Ratio / Liquidity Ratio / Acid Test

Quick ratio is obtained by comparing the amount remained after deducting inventory and
prepaid expenses from current assets with current liabilities.

Liquid assets
or Liquid assets : Current liabilities
Current liabilities

Liquid assets = Current assets – [ Inventory + Prepayments ]

Ratio Analysis 2
 Leverage ratios

The ratios which calculate long term financial stability of a business are leverage ratios.
Long term solvency can be studied by comparing equity capital and debt capital

1. Debt Ratio

Debt ratio is used to measure the percentage of debt capital from total capital. Long term
loans with fixed interest rate are considered under debt capital.

Debt capital
X 100
Total capital

Debt capital = Long term loans with fixed interest rate

Total capital = Ordinary share capital + Reserves + Long term

2. Debt-Equity Ratio

Relationship between debt capital and equity capital is presented as Debt-equity ratio. If
debt capital is greater than equity capital it is recognized as high leverage where, debt
capital is lower than equity capital, it is referred as low leverage.

Debt capital
Debt capital : Equity capital or X 100
Equity capital

Equity capital = Ordinary share capital + Reserves

3. Interest Coverage Ratio

This ratio is considered whether business earned enough profit to cover the interest for long term
loans. High value for interest coverage ratio is exhibited the safety of loan provided.

Profit before tax + Interest

Interest

113
Ratio Analysis 3
 Profitability ratios

Ratios that measure ability of an entity to earn profits are named as profitability ratios.

Few methods that these ratios can be analyzed

i. Comparative with sales
ii. Comparative with introduced capital

1. Gross Profit Ratio / Margin

This ratio shows the gross profit earned for every Rs. 100 of sales.

Gross profit
X 100
Sales income

2. Net Profit Ratio

This ratio shows the net profit earned for every Rs. 100 of sales.

Net profit
X 100
Sales income

3. Return On Total Assets

Profit before tax + Interest

X 100
Total assets

Ratio Analysis 4
 4. Return On Equity

This shows profit for the period as a percentage of equity

Profit for the year

X 100
Equity capital
( Ordinary shares + Reserves )

Ratio Analysis 5
 Activity ratios

Ratios that measure ability of an entity to earn profits are named as profitability ratios.

1. Inventory Turnover Ratio

This ratio calculates the number of times a business sells and replaces its inventory in a
given period of time.

Cost of sales
Average inventory

Opening inventory + Closing inventory

Average Inventory =
2

2. Inventory Holding Period / Inventory Residence Period

This ratio calculates average number of days the inventory remained unsold

365
Inventory turnover

3. Trade receivable Turnover Ratio

This ratio calculates the number of times trade receivable pay money to the business in a
given period of time.

Credit sales
Average Trade receivable

Opening Trade receivable + Closing Trade receivable

Average Trade receivable =
2

Ratio Analysis 6
 4. Debt Collection Period

This ratio calculates time taken to receive cash from trade receivables

365
Trade receivable turnover

Investors ratios

Ratios that investors use for their investment decisions are investor ratio

1. Earnings Per Share (EPS)

It indicates how much of a company’s profit can be attributed to each ordinary share of a
company

Profit for the year

No. of Ordinary shares

2. Dividend Per Share

Dividends for ordinary shares for the year

No. of ordinary shares

Ratio Analysis 7
1 The following is an extract of statement of financial position of Nelaka PLC as at 31.03.2021 and
31.03.2022
31.03.2022 31.03.2021
(Rs.’000) (Rs.’000)
Inventory 450 500
Trade receivables 300 200
Cash and cash equivalents 150 300
Trade payables 250 350
Accrued expenses 50 50

Required:
Current ratio and quick ratio for two years separately

2 The following details relates to Hansini's business and its competitive business as at 31.03.2022
Hansini Ahinsa
(Rs.'000) (Rs.'000)
Inventories 6,000 7,000
Trade receivables 4,000 6,000
Prepaid expenses 2,000 3,000
Trade Payables 8,000 9,600
Accrued expenses 4,000 2,400
Cash and cash equivalents 6,000 8,000

Required:
1. Calculating following ratios from each business
• Current ratio
• Quick ratio
2. Which business is more efficient considering liquidity. Explain with reasons.

3 An extract of statement of financial position of Jeewaka PLC is given below

2022.03.31 2021.03.31
(Rs.'000) (Rs.'000)
Stated capital (Rs. 20) 12,000 8,000
Reserves 3,000 2,000
12% Bank Loan 4,000 5,000
Current liabilities 9,000 6,000
Profit before tax 1,440 1,200

Ratio Analysis 8
 Required:
Calculate the following ratios
1. Debt ratio
2. Debt equity ratio
3. Interest cover ratio

4 The following is an extract of statement of financial position of Rohan PLC

31.03.2022 31.03.2021
(Rs.'000) (Rs.'000)
Stated Capital Ordinary Shares at Rs. 25/- 24 000 20 000
General Reserves 6 000 4 000
Revaluation Reserves for PPE 9 000 5 000
Retained Earnings 6 000 11 000
12% Bank Loan 20 000 20 000
10% Mortgage loan (4 years) 2 000 5 000
Current liabilities 15 000 12 000

• Profit before tax is 10% of equity each year

Calculate the following ratios

1. Debt equity ratio
2. Debt ratio
3. Interest Coverage ratio

Ratio Analysis 9
5 The following details relates to Randika PLC
Randika PLC
Statement of Profit or Loss
31.03.2022 31.03.2021
(Rs.'000) (Rs.'000)
Sales 10 000 8 000
Cost of Sales (6 000) (5 600)
Gross Profit 4 000 2 400
Operating Expenses (1 500) (1 000)
Profit before tax 2 500 1 400
Income Tax (750) (420)
Profit for the Period 1 750 980

Randika PLC
Statement of Financial Position
31.03.2022 31.03.2021
(Rs.'000) (Rs.'000)
Non-current Assets 15,000 12,000
Current Assets 10,000 8,000
Ordinary Share Capital 12,000 10,000
Reserves 3,000 4,000
10% Long term Loans 2,000 2,000

Required
1. Gross profit ratio
2. Net profit ratio
3. Return on total assets
4. Return on equity

6 The following information were extracted from financial statements of Kalpani PLC, in which
financial year was ended at 31.03.2022
Rs.'000
Credit sales 90,000
Credit purchases 60,000
Inventory as at 01.04.2021 8,000
Trade receivable as at 01.04.2021 16,000
Inventory as at 31.03.2022 12,000
Trade receivable as at 31.03.2022 14,000
Operating expenses 9,000

Ratio Analysis 10
 Required:
Calculate cost of sales for the year ending 31.03.2022
1. Inventory turnover ratio
2. Inventory holding period
3. Trade receivable turnover ratio
4. Debt collection period

7 Extracts of statement of changes in equity for the year ended 31.03.2021 at Dewmini PLC given
below.
Ordinary General Retained
share capital reserve earnings
Balance as at 01.04.2021 10,000 2,000 1,000
Profit for the year - - 4,000
Transfers to general reserve - 500 (500)
Dividend paid (1,000)
Balance as at 31.03.2022 10,000 2,500 3,500

Consideration of an ordinary share as at 31.03.2022 was Rs. 20

Required:
1. Earnings per share
2. Dividend per share

Ratio Analysis 11
8 Income statement of Gagula Company prepared for the year ended 31st March 2022 is given below.

Income Statement
Rs. '000
Sales 1,200
Cost of sales (720)
Gross profit 480
Other incomes 20
500
Bank loan interest 80
Other operating expenses 180 260
Profit before tax 240
Income tax (48)
Profit for the year 192

Retained profit has changed as follows during the year.

Rs. '000
Balance as at 01.04.2021 300
Profit of the year 192
Ordinary shares dividend (150)
Balance as at 31.03.2022 342

Statement of financial position as at 31st March 2022 is as follows.

Statement of financial position
Rs. '000
Non current assets
Property plant and equipment 650
Current assets
Inventory 200
Trade receivable 100
Cash and bank balance 200 500
Total assets 1,150
Stated capital 300
General reserve 68
Retained profits 342
Total equity 710
Non current liabilities
Bank loan 378
Current liabilities
Trade payables 42
Accrued expenses 20 62
1,150

Ratio Analysis 12
 Calculate following accounting ratios
1. Gross profit ratio
2. Net profit ratio
3. Return on equity
4. Return on equity
5. Return on total assets

9 You have been provided the following information from financial statements of Dananjaya Co. Ltd.

Income statement
for the year ended 31st March 2022
Sales 8,000
Opening inventory 300
Purchases 3,900
4,200
Closing inventory (200) (4,000)
Gross profit 4,000
Bank loan interest 250
Other operating expenses 2,400 (2,650)
Profit before tax 1,350
Income tax (150)
Profit after tax 1,200

Statement of financial position

Non current assets 31.03.2021 31.03.2022
Property plant and equipment 9,500 11,000
Current assets
Inventory 300 200
Trade receivable 300 500
Cash and bank balance 100 300
Total assets 10,200 12,000

Stated capital 5,000 6,000

Reserves and retained profits 1,500 2,000
Non current liabilities
Bank loan 3,000 4,500
Current liabilities
Trade payables 600 400
Other payables 100 100
10,200 13,000

Ratio Analysis 13
 Rs. 400,000 of the purchases are cash purchases. All sales were made on credit. Calculate the
following ratios in relation to the year 2021/2022.
1. Current ratio
2. Quick ratio
3. Inventory turnover ratio
4. Inventory resident period (inventory holding period)
5. Trade receivable turnover ratio
6. Average collection period
7. Debt ratio
8. Debt equity ratio
9. Interest cover ratio

10 The following figures appeared in the financial statements of Srilak Traders.

Rs. Rs.
Current liabilities 150,000 Cash 30,000
15% Bank loan 200,000 Trade receivable 150,000
Stated ordinary share capital 400,000 Inventory 200,000
Revenue reserves 250,000 Fixed assets 620,000
1,000,000 1,000,000

From the income statement

Rs.
Sales 1,500,000
Cost of sales 1,080,000
Profit before tax 44,000

Calculate:
1. Current ratio
2. Return on total assets
3. Inventory turnover
4. Debt equity ratio

Ratio Analysis 14
11 The following information has been taken from the Financial Statements of Saradha Ltd.

I. Income statement for the year ended December 31, 2022.

Rs.'000s Rs.'000s
Sales (all sales are on credit) 1,560
Less: cost of sales (936)
Gross profit 624
Add: Other Income:
Dividend Income 51
675

Less: Expenses
Operating expenses 408
Depreciation 52
Interest expenses 70
Loss on sale of motor vehicle 5 (535)
Net profit before tax 140
Less : Income tax for the year (45)
Net profit after tax 95

II. Selected items from statement of financial position:

31.12.2021 31.12.2022
Rs.'000 Rs.'000
Trade receivable … 540 500
Inventory … 162 150
Prepaid operating expenses … 15 7
Trade payables … 566 490
Accrued interest … 40 10
Income tax payable … 20 15

Required:
Calculate the following for 2022, using the above information:
1. Gross Profit ration
2. Inventory turnover ratio
3. Current ratio
4. Interest cover ratio
5. Trade receivable collection period

Ratio Analysis 15
12 Statement of financial position of Anoma Co. Ltd. as at 31st December 2021 and income statement
for the year ending that date are given below.

Statement of financial position as at 31.12.2021 Rs. ‘000

Assets
Non current assets
Property plant and equipment 900
Investments 50
Current assets
Inventory 31.12.2021 300
Trade receivable 500
Cash and cash equivalents 200 1,000
Total assets 1,950
Equity and liabilities
Stated capital (ordinary shares) 800
Reserves 500
Total equity 1,300
Non current liabilities
Total non current liabilities 100
Current liabilities
Trade payables 150
Accrued expenses 150
Bank overdraft 250
Total current liabilities 550
Total equity and liabilities 1,950

Income statement for the year ended 31.12.2021 Rs. ‘000

Revenue (Note 1) 5,000
Less:
Cost of sales (Note 2) 3,800
Gross profit 1,200
Add:
Other incomes 100
Less:
Distribution cost 150
Administration expenses 300
Finance expenses 150
(600)
Profit before tax 700
Less:
Tax (100)
Profit for the year 600

Ratio Analysis 16
 Rs. '000
 (Note 1)
Revenue
Credit sales 2,000
Cash sales 3,000
5,000

 (Note 2)
Cost of sales
Inventory 01.01.2021 150
Purchases - Cash 1,450
- Credit 2,500
4,100
Less:
Inventory 31.12.2021 300
3,800

Calculate the following accounting ratios

1. Return on total assets
2. Return on equity
3. Gross profit ratio
4. Net profit ratio
5. Current ratio
6. Liquidity ratio
7. Interest covering ratio
8. Gearing ratio / debt equity ratio
9. Inventory holding period
10. Trade receivable turnover
11. Trade receivable collection period

Ratio Analysis 17
13 You have been provided the following details of Kanga PLC.

Income statement for the year ended 31st March 2022

Rs. '000
Sales 8,000
Cost of sales (4,000)
Gross profit 4,000
Distribution cost (900)
Administration cost (300)
Loan interest (400)
Net profit before tax 2,400
Income tax (400)
Profit for the year 2,000

Statements of financial position as at 31.03.2022 and 31.03.2021

31.03.2022 31.03.2021
Rs. ’000 Rs. ’000
Non current assets
Property plant and equipment 6,400 5,900
Current assets
Trading inventory 600 400
Trade receivable 2,500 1,500
Prepaid expenses 300 1,000
Cash and bank 200 600
10,000 9,000
Stated capital - Ordinary shares 5,000 5,000
Retained earnings 1,600 800
Non current liabilities
Bank loan 2,200 2,100
Current liabilities
Trade payables 900 500
Accrued expenses 300 600
10,000 9,000

Ordinary shareholders have been paid a dividend of Rs. 800,000 during the year ended 31.03.2022.
Calculate for the year ended 31st March 2022.
1. Gross profit ratio 2. Net profit ratio
3. Return on equity 4. Return on total assets
5. Current ratio 6. Quick ratio
7. Inventory turnover ratio 8. Inventory resident period
9. Trade receivable turnover ratio 10. Debt collection period
11. Debt-equity ratio 12. Debt ratio
13. Interest cover ratio

Ratio Analysis 18
14 You have been provided the following details of Upul PLC.

Income statement for the year ended 31st March 2022

Rs. Rs.
Sales 900,000
Cost of sales
Opening inventory 80,000
Purchases 300,000
380,000
Closing inventory (20,000) (360,000)
Gross profit 540,000
Administration expenses (80,000)
Distribution expenses (50,000)
Other expenses (10,000)
Finance expenses (25,000)
Profit before tax 375,000
Income tax (150,000)
Profit for the year 225,000

Statements of financial position as at 31.03.2022 and 31.03.2021

31.03.2022 31.03.2021
Non current assets
Rs. Rs.
Property plant and equipment 800,000 700,000
Current assets
Trading inventory 20,000 80,000
Trade receivable 160,000 140,000
Prepaid expenses 60,000 -
Treasury bills 50,000 60,000
Cash and bank 10,000 20,000
1,100,000 900,000
Financed by
Stated capital - Ordinary shares 450,000 400,000
General reserve 60,000 10,000
Retained earnings 90,000 70,000
Non current liabilities
Long term bank loans 300,000 300,000
Current liabilities
Trade payables 100,000 50,000
Income tax payable 70,000 55,000
Accrued interest 30,000 15,000
1,100,000 900,000

Ratio Analysis 19
 A dividend of Rs. 80,000 was paid during the year ended 31.03.2022.

Calculate for the year ended 31st March 2022

1. Gross profit ratio 2. Net profit ratio
3. Return on equity 4. Return on total assets
5. Current ratio 6. Quick ratio
7. Inventory turnover ratio 8. Inventory holding period
9. Trade receivable turnover ratio 10. Debt collection period
11. Debt-equity ratio 12. Debt ratio
13. Interest cover ratio

15 Income statement prepared by Raveendra Ltd. for two years, 2020 and 2021 and statement of
financial position prepared at the end of the years are given below

Summarized income statement for the years ended on 31st December

2020 2021

Sales 500,000 800,000

Less; cost of sales
Opening inventory 60,000 80,000
Purchases 320,000 480,000
380,000 560,000
Less; Closing inventory (80,000) (160,000)
Cost of sales (300,000) 400,000
Gross profit 200,000 400,000
Interest 20,000 40,000
Depreciation 30,000 30,000
Other expenses 50,000 (100,000) 90,000 (160,000)
Net profit before tax 100,000 240,000
Tax (20,000) (40,000)
Net profit after tax 80,000 200,000
Dividends:
for ordinary shares (50,000) (60,000)
Retained profit 30,000 140,000

Ratio Analysis 20
 Statements of financial position as at 31st December

2020 2021
Fixed assets 400,000 440,000
Current assets
Inventory 80,000 160,000
Trade receivable 40,000 80,000
Bank balance 80,000 200,000 160,000 400,000
Total assets 600,000 840,000

Ordinary share capital (20,000 shares) 300,000 300,000

Retained earnings 20,000 160,000
320,000 460,000
Long term liabilities
Bank loan 180,000 300,000

Current liabilities
Trade payables 60,000 20,000
Tax and accrued expenses 40,000 100,000 60,000 80,000
Total equity and liabilities 600,000 840,000

Trade receivable and Trade payables balances as at 01.01.2020 were Rs. 85,000 and 100,000
respectively

Calculate for two years

1. Gross profit ratio
2. Net profit ratio
3. Return on equity capital
4. Current ratio
5. Quick ratio
6. Inventory turnover ratio
7. Inventory holding period
8. Trade receivable turnover ratio
9. Debt collection period
10. Gearing (Debt equity ratio)
11. Return on total assets
12. Interest coverage ratio

Ratio Analysis 21
16 Income statements prepared by Senarathna Ltd. for two years, 2020 and 2021 and statement of
financial position prepared at the end of the years are given below
Summarized income statement for the years ended on 31st December
2020 2021

Sales 400,000 600,000

Less; cost of sales
Opening inventory 30,000 40,000
Purchases 240,000 360,000
270,000 400,000
Less; closing inventory (40,000) (80,000)
Cost of sales (230,000) 320,000
Gross profit 170,000 280,000
Interest 10,000 20,000
Depreciation 30,000 50,000
Other expenses 70,000 (110,000) 30,000 (100,000)
Net profit before tax 60,000 180,000
Tax (15,000) (30,000)
Net profit after tax 45,000 150,000
Dividends:
for ordinary shares (30,000) (50,000)
Retained profit 15,000 100,000

Statements of financial position as at 31st December

2020 2021
Fixed assets 600,000 900,000
Current assets
Inventory 40,000 80,000
Trade receivable 60,000 40,000
Bank balance 100,000 200,000 180,000 300,000
Total assets 800,000 1,200,000

Ordinary share capital (20,000 shares) 400,000 400,000

General reserve 50,000 50,000
Retained earnings 50,000 150,000

Long term liabilities

Bank loan 200,000 300,000

Current liabilities
Trade payables 40,000 80,000
Accrued expenses 60,000 100,000 220,000 300,000
Total equity and liabilities 800,000 1,200,000

Ratio Analysis 22
 Trade receivable and Trade payables balances as at 01.01.2020 were Rs. 140,000 and 20,000
respectively

Calculate for two years

1. Gross profit ratio
2. Net profit ratio
3. Return on total assets
4. Return on equity
5. Current ratio
6. Quick ratio
7. Inventory turnover ratio
8. Debt collection period

17 Financial statements of a Limited Company for the year ended 31.03.2022 are given below
Income statement
Rs.
Sales 240,000
Cost of sales
Inventory 01.04.2021 10,000
Purchases 180,000
190,000
Inventory 31.03.2022 (30,000) (160,000)
Gross profit 80,000
Expenses including bank loan interest (30,000)
Net profit before tax 50,000
Income tax (20,000)
Net profit after tax 30,000
Dividend (25,000)
Remaining profit 5,000

Statement of financial position

Ordinary shares 200,000 Land and buildings 200,000
(20,000 shares) Motor vehicles 40,000
Capital reserves 45,000 Investments 60,000
Revenue reserves 5,000 Inventory 30,000
10% Bank loan 100,000 Trade receivable 60,000
Trade payables 40,000 Cash and bank 10,000
Accrued expenses 10,000
400,000 400,000

Trade receivable as at 01.04.2021 Rs. 100,000

Trade payables as at 01.04.2021 Rs. 50,000

Ratio Analysis 23
Ratio Analysis 24
 Calculate the followings:
a. i. Current ratio
ii. Quick ratio

b. i. Gross profit ratio

ii. Net profit ratio
iii. Return on total assets
iv. Return on equity

c. i. Inventory turnover ratio and inventory holding period

ii. Trade receivable turnover ratio and debt collection period

d. i. Capital gearing ratio

ii. Debt total capital ratio
iii. Interest covering ratio

18 Summary results of Jaya Isuru Ltd. for the year ended 31st March 2022 are given below.

Statement of financial position as at March 31, 2022

Equity Rs. ‘000 Rs.’000 Fixed Assets Rs. ‘000 Rs. ‘000
Ordinary share capital Plant and machinery 250
(Rs. 10 each ) 300 Equipment 150 400
Retained earnings 200 500 Current Assets
Current liabilities Inventory 50
Trade payables 40 Trade receivable 95
Bills payable 60 100 Cash 55 200
600 600

Income statement for the year ended 31st March 2022

Rs. '000
Sales 400
Cost of sales (300)
Gross profit 100
Operating expenses (40)
Net profit 60

Ratio Analysis 25
 Required :
In relation to each of the ratios given in the following format indicate;
i. The formula for calculation
ii. Value of each ratio for Jaya Isuru Ltd.
iii. The purpose of each ratio
Ratio Formula Computation Purpose
1. Current ratio
2. Inventory turnover
3. Gross profit ratio
4. Return on capital employed

19 Following details were extracted from the books of two companies which are in the same industry
Dhara Company Wega Company
(Rs.) (Rs.)
Opening inventory 10,000 15,000
Closing inventory 20,000 25,000
Cost of sales 40,000 50,000
Sales 100,000 110,000
General expenses 40,000 45,000
Current assets at the end 50,000 40,000
Trade payables at the year end 20,000 15,000
Cash and cash equivalents 5,000 3,000

Calculate following ratios for two companies

i. Current ratio
ii. Quick ratio
iii. Trade receivable turnover ratio
iv. Debt collection period
v. Inventory turnover ratio
vi. Inventory resident period

Ratio Analysis 26
20 The summarized income statements of Madura PLC and Sumudu PLC for the year ending 31.03.2022
are given below.
Madura PLC (Rs.' 000) Sumudu PLC (Rs.' 000)
Sales …………………………………………………………. 6 000 7 500
Cost of sales ….………………………………………….. (4 000) (5 800)
Gross profit ………………………………………………. 2 000 1 700
Expenses ….……………………………...………………. (1 100) -800
Profit before tax ….….………………………………… 900 900
Income tax ….……………………………………………. (300) (300)
Profit for the year …………………………………….. 600 600

The following information is also available for the year ending 31.03.2022
Madura PLC (Rs.' 000) Sumudu PLC (Rs.' 000)
Average inventory …………………………………….. 1,600 2,900
Average trade receivable ………………..………… 2,400 2,500
Equity as at 31.03.2022 …………………………….. 3,000 2,400
Long term loans as at 31.03.2022 ……………… 3,600 1,800
Loan interest included in expenses …………… 300 200

Requires:
1. The following ratios both companies:
i. Return on equity
ii. Interest cover
iii. Inventory turnover
iv. Trade receivable turnover (Assume all sales are made credits basis)
v. Debt equity

2. Based on the calculation in (1) above, state the following with reasons
i. The company that generates a higher return for the owners
ii. The company that uses more debt capital
iii. The company that takes a longer period to collect money from Trade receivable
iv. The company that sells inventory within a shorter period
v. The company that has a higher ability to pay interest on loans

Ratio Analysis 27
21 Financial statements of Rukshan Co. Ltd. relevant to year 2020 and 2021 are given below.

2020 2021
Sales 120,000 90,000
Less:
Cost of goods sold 78,000 56,000
Gross profit 42,000 34,000

Less:
Administration and selling expenses 24,000 22,000
Loan interest 3,000 2,000
Income tax 5,000 4,000
32,000 28,000
Net profit 10,000 6,000
Profit brought forward 2,000 3,000
12,000 9,000
Ordinary dividend paid 8,000 7,000
4,000 2,000

Rs. Rs.
Non current assets
Land and buildings 60,000 60,000
Machinery 40,000 20,000
Current assets
Inventory 26,000 14,000
Trade receivable 12,000 10,000
Cash 6,000 8,000
144,000 112,000
Ordinary share capital 50,000 40,000
General reserve 10,000 10,000
Retained profits 4,000 2,000
Long term loans 60,000 45,000
Current liabilities
Trade payables 20,000 15,000
144,000 112,000

Using above financial statements, calculate the following ratios for the year 2021
1. Current ratio
2. Quick ratio
3. Net profit ratio
4. Return on total assets
5. Return on equity
6. Inventory turnover
7. Average debt collection period

Ratio Analysis 28
22 The following information relates to Amal Plc. For the year ended 31.03.2022
i. An extract of the balance sheet as at 31.03.2022:
(Rs. million)
Stated capital 400
Retained earnings 600
Current liabilities 500

ii. Selected accounting ratios for the year ended 31st March, 2022
Non-current liabilities to equity ratio 0.5 : 1
Total sales (Rs. Million) 4,000
Gross profit ratio 30%
Inventory turnover 4 times
Quick assets ratio 0.75 : 1
Net profit ratio on sales 10%
Required:
1. Non current liabilities as at 31.03.2022
2. Cost of goods sold for the year ended 31.03.2022
3. Inventory as at 31.03.2022
4. Current assets as at 31.03.2022
5. Return on total assets for the year ended 31.03.2022

23 The following information relates to ‘Chaya’ Plc.

i. Selected assets, income and expenses for the year ended 31st March 2022:
(Rs.)
Average Trade receivable 60,000
Average inventory 80,000
Cost of sales 400,000
Total assets 270,000
Total sales 540,000
st
ii. Selected ratios for the year ended 31 March 2021
Debt collection period 50 days
Total assets turnover ratio 1.2 times
Inventory turnover ratio 4 times
Return on total assets 18%.
iii. All sales are made on credit.
iv. Net profit margin on total sales for the year 2022 was 10%.
v. Assume that there are 360 days in a year.

Required:
1. Debt collection period, inventory turnover ratio, asset turnover ratio and return on total
assets for the year ended 31st March 2022
2. Indicate whether there is an improvement in the following, when compared with the
previous year’s ratios.
i. Liquidity position

Ratio Analysis 29
 ii. Total asset utilization efficiency
iii. Return on total assets

24 The following information has been extracted from the financial statements of Amila PLC for the
year ending 31.03.2022
Rs.'000
Stated ordinary share capital … 600
Retained earnings … 400
15% Bank loan … 500
Current liabilities … 300
Non-current assets … 1,250
Current assets
Inventory … 300
(Inventory as at 01.04.2021 - Rs. 500,000)
Trade receivable … 400
Cash and cash equivalent … 50
Sales … 3,000
Cost of sales … 2,200
Income tax for the year … 200
Profit for the year … 400

Required:
1. Quick Ratio
2. Inventory Turnover Ratio
3. Return on Total Assets Ratio
4. Debt-equity Ratio
5. Interest Cover Ratio

Ratio Analysis 30
25 Information given in the following table relates to three companies operating in a particular
industry.
Industry
A Ltd. B Ltd. C Ltd. Average
Total Assets (Rs. '000) 2,500 3,200 6,000 -
Profit before Tax (Rs. '000) 275 420 520 -
Interest Expenses (Rs. '000) 25 60 80 -
Net Assets (Rs. ‘000) 1,500 2,000 3,800 -
Return on Total Assets (Note 1) P 0.15 0.10 0.12
Total Assets Turnover Ratio 2.0 3.3 1.5 2.1
Debt to Equity (Note 2) 0.7 Q 0.6 0.6
Profit Margin 0.06 0.05 0.07 0.05
Interest Cover R 8.0 7.5 15
Current Ratio 2.0 1.2 2.8 1.8

Note 1 : Profit before tax and interest has been taken as the return for total assets.
Note 2 : Total liabilities have been considered as total debt.

Required:
1. Ratios represented by the letters P, Q and R in the above table.
2. The company which has relatively higher gearing.
3. With a reason, the company which is better in terms of Profitability.
4. Two reasons for ‘C Ltd.’ to have a low return on total assets.
5. Brief explanation on the debt servicing ability of ‘A Ltd.’ Compared to the industry and other
two companies.

Ratio Analysis 31
26 The following information is taken from the records of two companies in the same industry.
Balance Sheet Item : Company X Company Y
(Rs. '000) (Rs. '000)
Trade receivable 1,120 2,100
Plant and equipment 6,280 5,600
Trade payables 3,100 5,000
8% Bank loan 500 1,000
Stated ordinary share capital 3,000 5,000
Retained earnings 1,000 1,000

Income Statement Items :

Sales 5,600 8,400
Cost of goods sold 4,000 5,600
Operating expenses 600 400
Interest expenses 40 80
Income taxes 460 1,120
Dividend paid 50 300

Required :
(a) Calculate the following ratios for companies X and Y.
1. Return on equity
2. Interest coverage ratio
3. Trade receivable turnover ratio assuming all sales as credit sales

(b) Answer the following questions based on the relevant ratios calculated above.
1. Which company collects its receivables faster?
2. Which company retains a larger proportion of profits in the business?
3. In which company would you invest, if you are an investor? Give a reason

Ratio Analysis 32
27 The following information relates to Anura PLC for the year ending 31.03.2022.
Rs.'000
Sales revenue 9,000
Profit for the year 600
Income tax expense 40
Interest expenses 80
Further, the following balances were available as at 31.03.2022.
Rs.’000
Ordinary share capital (total no. of shares issued 150 000) 4,200
Total assets 8,400
Total assets and retained earnings as at 01.04.2021 were Rs. 6,600,000 and Rs. 1,200,000
respectively.
Assume that the liabilities of the company as at 31.03.2022 consisted only of long-term loans.

Required :
Calculate the following ratios for the year ending 31.03.2022:
(1) Net profit
(2) Interest cover
(3) Return on equity
(4) Earnings per share
(5) Debt to equity

***

Ratio Analysis 33