LESSON 6

A.)

Problem 1. From the data calculate :

(i) Gross Profit Ratio (ii) Net Profit Ratio (iii) Return on Total Assets

(iv) Inventory Turnover (v) Working Capital Turnover (vi) Net worth to Debt

Sales 25,20,000 Other Current Assets 7,60,000

Cost of sale 19,20,000 Fixed Assets 14, 40,000

Net profit 3,60,000 Net worth 15,00,000

Inventory 8,00,000 Debt. 9,00,000

Current Liabilities 6,00,000

Solution:

1. Gross Profit Ratio = (GP/ Sales) * 100 = 6

Sales – Cost of Sales Gross Profit

25,20,000 – 19,20,000 = 6,00,000

2. Net Profit Ratio = (NP / Sales)* 100 = 3

3. Inventory Turnover Ratio = Turnover / Total Assets) * 100= 1920000/800000= 2.4 times

Turnover Refers Cost of Sales

4. Return on Total Assets = NP/ Total Assets = (360000/3000000)*100 = 12%

FA+ CA +inventory [14,40,000 + 7,60,000 + 8,00,000] = 30,00,000

5. Net worth to Debt = Net worth/ Debt= (1500000/900000)* 100 = 1.66 times

6. Working Capital Turnover = Turnover/Working capital

Working Capital = Current Assets – Current Liabilitie

B.)

Formula:

Operating ratio is computed as follows:

operating-ratio-img1

The basic components of the formula are operating cost and net sales. Operating cost is equal to cost of
goods sold plus operating expenses. Non-operating expenses such as interest charges, taxes etc., are
excluded from the computations.

The following example may be helpful in understanding the computation of operating ratio:

Example:

The selected data from the records of Good Luck Company limited is given below:

Net sales: $400,000

Cost of goods sold: $160,000

Administrative expenses: $35,000

Selling expense: $25,000

Interest charges: $10,000

Required: Compute operating ratio for Good Luck Company Limited from the above data.

Solution:

= (220,000* / 400,000) × 100

= 55%

The operating profit ratio is 55%. It means 55% of the sales revenue would be used to cover cost of
goods sold and other operating expenses of Good Luck Company Limited.

*Computation of operating expenses:

Cost of goods sold + Administrative expenses + Selling expenses

= $160,000 + $35,000 + $25,000

= $220,000

Notice that the interest charges of $10,000 have not been included because they are categorized as
financial expenses, not operating expenses.
C.) The working capital of ABC Ltd. has deteriorated in recent years and now stands as under:

(a) Compute the current and quick ratios.

ADVERTISEMENTS:

(b) A further bank loan of Rs. 50,000 against debtors is under negotiation. Assuming the loan is received,
calculate the revised current and quick ratios.

(c) There is also a negotiation going on for discounting the debtors of Rs. 350,000 for Rs. 3,15,000 to a
collection agency for immediate cash. Also obsolete stocks worth Rs. 1,25,000 are being sold for Rs.
80,000. Of the cash to be realised by the two transactions, the bank loan is proposed to be reduced to
Rs. 1,00,000. Calculate the current ratio after the transactions are put through.