RAJESH NANGALIA CLASSES 9903133927

RATIO ANALYSIS
Ratio analysis is the most widely used tool of analysis of financial statements. A comparative
study of relationship between various items of financial statements, expressed as ratios,
reveals the profitability, liquidity, solvency as well as the overall financial position of the
enterprises. But ratios need to be studied, analysed and interpreted only in the context of the
details from which they have been derived Reference to Context is a must otherwise the
ratios loss their significance.
Though ratios are used for making decisions, it cannot be taken as final proof for results.
They are meaningless if detached from the details from which they are derived. The total
dependence on ratios may prove quite dangerous. It only offers the supplementary means to
verify certain date. As there are no standard ratios it may be quite misleading in cases if it is
looked in isolation without taking the inter-related factors into consideration. Thus ratio
should be read and interpreted together with the relevant data to get the desired result.
Limitations of Ratio Analysis
(i) Usefulness of ratios is affected by the bias of persons using them.
(ii) Ratios are worked out on the basis of money values only; real values are ignored. Thus,
the technique is not realistic in its approach.
(iii) Historical values are used in arriving the ratios. Effect of changes in price levels of
various items ignored.
(iv) One particular ratio in isolation is insufficient to review the whole business.
(v) Since management and financial policies and practices may differ from concern to
concern, similar ratios may not reflect similar state of affairs. Thus, comparisons of
performance on the basis of ratio may be confusing.
(vi) Ratio analysis is only a technique for making judgments and not brings out the correct
position.
(vii) Ratios are at best only symptoms. Only a careful investigation brings out the correct
position.
(viii)Ratios are only as accurate as the accounts on the basis of which they are established.
(ix) Since ratios are calculated on the basis of financial statements which are greatly affected
by the firm’s accounting policies and changes therein, ratios may not be able to bring out
the real situations.

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RAJESH NANGALIA CLASSES 9903133927
Advantages of Ratio Analysis
The following are the advantages attributed to the technique of ratio analysis:
(a) It helps to analyse and understand financial health and trend of a business, including past
performance and makes it possible to forecast of future periods. They diagonise the
financial health by evaluating liability, solvency, profitability, etc.
(b) It serves as a useful tool in the management control process for decision making and
cost control purposes.
(c) It plays a significant role in cost accounting, financial accounting, budgetary control and
auditing.
(d) It helps in the identification, tracing and fixing of the responsibilities of managerial
personnel at different levels.
(e) It accelerates the institutionalization and specialization of financial management.
(f) It summarizes and systematizes the accounting figures in order to make them more
understandable in lucid form. They highlight the inter-relationship which exists between
various segments of the business expressed by accounting statements.

Objectives of financial statement analysis

Financial Statement Analysis is very much helpful in assessing the financial position and
profitability of a concern. The objectives of financial statements are as under:
(i) The analysis would enable the present and the future analysis, would enable the
present and the future earning capacity and the profitability of the concern.
(ii) The operational efficiency of the concern as a whole as well as department wise can be
assessed resulting in identification and efficient and inefficient areas.
(iii) The solvency of the firm can be determined as financial tool, for the benefit of various
end users.
(iv) The comparative study with one firm and another firm or with one department and the
other is possible.
(v) The analysis of past results in respect of earning and financial position of the enterprise
is of great help in forecasting future results for the preparation of budgets.
(vi) The long-term liquidity position of funds can be assessed by the analysis of financial
statements.

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RAJESH NANGALIA CLASSES 9903133927
LIQUIDITY RATIOS ( To Check financial strength to pay its short term obligations ) –
Expressed in Proportion :

A. Current Ratio / Working Capital Ratio: Current Ratio in a business concern indicates
the availability of Current Assets to meet its Current Liabilities. Higher the ratio the better
is coverage. Traditionally, Current Ratio of 2:1 is considered good. However, the
standard level of Current Ratio varies from industry to industry. Current Ratio is given by:

Current Ratio = Current Assets / Current Liabilities.

Current Assets = Inventories + Sundry Debtors + Cash & Bank balances + Receivables /
Accruals + Short Term Marketable Securities
Current Liabilities = Creditors for goods and services + Short Term Loans + Bank
Overdraft + Outstanding Expenses + Provision for Taxation + Proposed Dividend +
Unclaimed Dividend.

B. Quick Ratio / Acid Test Ratio / Liquid Ratio : Quick Assets consist only of cash and
near Current Assets. Inventories and Prepaid Expenses are deducted from Current Assets
to arrive at Quick Assets. Inventories are deducted on the assumption that they are not
quickly realizable – taking into account the time lag involved in conversation of
inventories into finished goods, its sale and collection from debtors. However, inventories
may be considered as quick Assets in case there are fast moving and where debtors are
quickly realizable.
Quick Liabilities do not include bank Overdraft as these are generally renewed from
time to time and are not payable as such in near future. As such, Quick Liabilities are
arrived at by deducting from Current Liabilities the Bank Overdraft. Thus Quick Ratio is
given as under:

Quick Ratio = Quick Assets/Quick Liabilities

Quick Assets = Current Assets – Inventories – Prepaid Expenses
Quick Liabilities = Current Liabilities

Tutorial Notes :
If nothing is given regarding Prepaid Expenses, Bank O/D & Prereceived Incomes then it is
to be assumed that their values are NIL. But don’t assume that stock is NIL because in
business there is always some amount of stock available.

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RAJESH NANGALIA CLASSES 9903133927
Capsules :
1. From the following information calculate Current Ratio & Quick Ratio :
Liabilities Amount Assets Amount
Share Capital 21000 Fixed Assets ( Net ) 17000
Reserves 1500 Stock 6200
Annual Profits 2500 Debtors 3200
Bank overdraft 2000 Cash & Bank 3600
Creditors 5000 Prepaid Exps 3000
Prereceived Incomes 1000

2. Calculate Current Ratio & Liquid Ratio :

Working Capital Rs. 60,000 , Total Debts Rs. 1,30,000, Long Term Debts Rs. 1,00,000,
Stock Rs. 25,000, Prepaid Exps Rs. 5,000.

3. Calculate Currents Assets, Currents Liabilities, Liquid Assets & Stock :

Current Ratio 2.5, Liquid Ratio 1.5, Working Capital Rs. 60,000

4. Acid Test Ratio 2 : 1. Stock Rs. 20,000, Current Liabilities Rs. 50,000. Calculate Current
Ratio.

5. Current Ratio 4.5, Liquid Ratio 3, Inventory Rs. 72,000. Calculate Current Assets &
Current Liabilities.
6. Current Ratio 2 : 1. State giving reasons which of the following transaction would (i)
Improve (ii) Reduce (iii) Not alter the Current Ratio :
 Repayment of current liability.
 Sale of stock ( Cost Rs. 10,000 ) for Rs. 11,000.
 Sale of stock ( Cost Rs. 5,000 ) for Rs. 5,000 on credit.
 Sale of office furniture ( Book value Rs.4,000) at a loss of Rs. 3,000

7. Current Ratio 4:5. State giving reasons which of the following transaction would (i)
Improve (ii) Reduce (iii) Not alter the Current Ratio :
 Payment made to supplier of goods .
 Purchase of goods on credit.
 Sale of stock ( Cost Rs. 5,000 ) for Rs. 11,000.
 Sale of office furniture ( Book value Rs.4,000) at a Profit of Rs. 3,000.
 Purchase of goods for cash.

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RAJESH NANGALIA CLASSES 9903133927
8. Quick Ratio 2:1. State giving reasons which of the following transaction would (i) Improve
(ii) Reduce (iii) Not alter the Quick Ratio :
 Payment made to supplier of goods .
 Purchase of goods on credit.
 Sale of stock ( Cost Rs. 6,000 ) for Rs. 5,000.
 Sale of office furniture ( Book value Rs.10,000) at a Profit of Rs. 3,000.
 Purchase of goods for cash.

9. A firm had current assets of Rs. 3,00,000. It then paid a current liability of Rs. 60,000.
After this payment current ratio was 2:1. Determine current liabilities & working capital
before and after payment was made.
10. Current Ratio 1.5. Current Assets Rs. 6,00,000. Accountant of this firm is interested in
maintaining a current ratio of 2:1 by paying some part of current liabilities. You are
required to suggest him the amount of current liabilities which must be paid for this
purpose.
11. Quick assets Rs. 90,000, Stock Rs. 1,08,000, Prepaid Exps. Rs. 2,000, Working Capital
Rs. 1,50,000. Calculate Current Ratio.
12. From the given information calculate Current Ratio & Quick Ratio.

Liabilities Amount Assets Amount

ESC 360000 Plant 240000
12% PSC 120000 Furniture 108000
Capital Reserve 216000 Stock 600000
Reserve 120000 Debtors 3,00,000
14% Public Deposit 168000 Less : PBDD 12,000 288000
16% Bank Loan 192000 Bills Receivable 24000
Provision for Taxation 48000 Investments ( Short Term ) 72000
Creditors 192000 Prepaid Expenses. 48000
Bank Overdraft 72000 Bank 120000
Bills Payable 48000 Preliminary Expenses 36000

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RAJESH NANGALIA CLASSES 9903133927

CAPITAL STRUCTURE RATIOS / SOLVENCY RATIOS: ( To check financial strength to pay long
term obligations ) – Expressed either in Times or in Proportion :

BALANCE SHEET

FIXED CAPITAL
SHARE CAPITAL i.e ESC+PSC (FIXED ASSETS)
UNDISTRIBUTED PROFITS SOURCES APPLICATIONS
(UNDISTRIBUTED LOSSES) WORKING CAPITAL
LONG TERM LOANS (CA-CL)*

*CA  CURRENT ASSETS and CS  CURRENT LIABS.)

Tutorial Notes :

Capital Employed / Investment in Business :

 ESC + PSC + Undistributed Profits {Reserve Fund/General Reserve/P/L a/c (Cr.)} –
Undistributed Losses {Preliminary Exps., P/L (Dr.), Discount on issue of Shares or
Debentures, Misc. Exps.} + Long Term Loans + Debentures.
OR
Shareholders’ Fund + Long Term Loans ( Including Debentures )

 Fixed Assets + Current Assets – Current Liabilities

OR
Fixed Assets + Working Capital

Shareholder’s Equity / Proprietors’ Fund / Owners’ Fund / Net worth / Equity :

 ESC + PSC + R&S {Reserve Fund / General Reserve / P/L a/c (Cr.)} – Fictitious
Assets { Preliminary Exps., P/L (Dr.), Discount on issue of Shares or Debentures,
Misc. Exps.}

Equity shareholders’ Fund :

 ESC + R&S {Reserve Fund / General Reserve / P/L a/c (Cr.)} – Fictitious Assets {
Preliminary Exps., P/L (Dr.), Discount on issue of Shares or Debentures, Misc. Exps.}

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Total Debt :
 Long Term Debt { Long term Loans , Debentures Etc.} + Short Term Loans { Current
Liabilities }

(i) Debt-Equity Ratios: It measures the ratio of long term or total debt to shareholders
equity. One approach to calculate the debt- equity ratio is to express relative proportion of
long term debt and shareholder’s equity.Thus,

D / E EQUITY RATIO = Long Term Debt / Shareholder’s Equity

Another approach of calculating debt equity ratio is to express total debt to shareholder’s
Equity. That is,
D / E EQUITY RATIO = Total Debt / Shareholder’s Equity

(ii) Proprietory Ratio: Proprietory Fund / Total Assets

Notes : Proprietory Fund includes Equity Share Capital + Preference Share Capital +
Reserves and Surplus – Fictitious Assets.

(iii) Debt to Total Asset Ratio : Long Term Debt / Total Asset

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RAJESH NANGALIA CLASSES 9903133927
Capsules :
1) Total Assets Rs. 37,50,000, Total Debt Rs. 30,00,000, Current Liabilities Rs. 15,00,000.
Calculate Debt Equity Ratio.

2) ESC – 10,000 Shares of Rs. 10 each, Reserves Rs. 45,000, Accumulated Profits Rs.
30,000, 10 % Debentures Rs. 75,000, Creditors Rs. 40,000, Outstanding Expenses Rs.
10,000. Calculate Debt Equity Ratio.

3) 13% PSC Rs. 30,00,000, ESC Rs. 60,00,000, Reserves Rs. 30,00,000, 15% Debentures
Rs. 90,00,000,
Secured Loans Rs. 60,00,000, Sundry Creditors Rs. 30,00,000. Calculate Debt to Total
fund Ratio.
4) Debt Equity Ratio 1:2. Which of the following suggestions would increase, decrease or not
alter it :
 Redemption of debentures.
 Issue of Equity Shares.
 Sale of goods on cash basis.
 Sale of goods on credit.
 Purchase of goods on credit.
 Cash received from debtors.
 Sale of fixed assets at profit.
5.

Liabilities Amount Assets Amount

ESC 360000 Plant 240000
12% PSC 120000 Furniture 108000
Capital Reserve 216000 Stock 600000
Reserve 120000 Debtors 3,00,000
14% Public Deposit 168000 Less : PBDD 12,000 288000
16% Bank Loan 192000 Bills Receivable 24000
Provision for Taxation 48000 Investments ( Short Term ) 72000
Creditors 192000 Prepaid Expenses. 48000
Bank Overdraft 72000 Bank 120000
Bills Payable 48000 Preliminary Expenses 36000

Calculate : 1) Debt Equity Ratio, 2) Debt to Total Fund Ratio, 3) Equity to Total Fund
Ratio, 4) Proprietary Ratio.

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RAJESH NANGALIA CLASSES 9903133927
ACTIVITY RATIOS / Turnover Ratios / Performance Ratio : ( To Check efficiency of
investment made to earn sales ) – Expressed in Times :
These ratios are also called Turnover Ratios or Performance Ratios. These ratios are
employed to evaluate the efficiency with which the firm manages and utilizes its assets.
These ratios usually indicate the frequency of sales w.r.t. its assets. These assets may be
capital assets or working capital or average inventory. These ratios are usually calculated
with reference to sales/cost of goods sold and are expressed in terms of rate or times. Several
activity ratios are as follows:
(i) Sales
Capital Turnover Ratio = -------------------------
Capital Employed
This ratio indicates the firms ability of generating sales per rupee of long-term investment.
The higher the ratio, the more efficient the utilization of owner’s and long-term creditor’s
funds.
(ii) Sales
Fixed Assets Turnover Ratio = ----------------
Capital Assets
A high fixed assets turnover ratio indicates efficient utilization of fixed assets in generating
sales. A firm whose plant and machinery are old may show a higher fixed assets turnover
ratio than the firm which has purchased them recently.

(iii) Sales
Working Capital turnover = ----------------------
Working Capital
Working Capital Turnover is further segregated into Inventory Turnover, Debtors’ Turnover,
Creditors’ Turnover.

(a) Inventory Turnover Ratio / Stock Turnover Ratio(STR) : This ratio, also known as
Stock Turnover Ratio, establishes the relationship between the cost of goods sold during
the year and average inventory held during the year. It is calculated as:
Sales
Inventory Turnover Ratio = -------------------------
Average Inventory*

Opening Stock + Closing Stock

*Average Inventory = ---------------------------------------------
2
Very Often inventory turnover is calculated with reference to cost of sales instead of sales.
In that case inventory turnover will be calculated as:
Cost of RFO
Average Stock
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Tutorial Notes :
 If nothing is given regarding opening stock then take closing stock as Average stock.
 Inventory Holding Period : 365 or 366 or 12 or 52 / STR

(b) Trade Receivable Turnover Ratio(DTR): In case a firm sells goods on credit, the
realization of sales revenue is delayed and the receivable are created. The cash is realized
from these receivable are created. The cash is realized from these receivables later on. The
speed with which these receivables are collected affects the liquidity position of the firm.
The debtors’ turnover ratio throws light on the collection and credit policies of the firm. It
is calculated as:
Sales
Trade Receivable Turnover Ratio = ------------------------------------
Average Accounts Receivables
As accounts receivables pertains only to the credit sales, it is often recommended to
compute the debtor’s turnover with reference to credit sales instead of total sales. Then the
debtors’ turnover would be:
Credit Sales
Average Accounts Receivables

Tutorial Notes :
 Receivables = Debtors + Bills Receivables
 Average Receivables = Opening Receivables + Closing Receivables / 2
 Average Collection Period = 365 or 366 or 12 or 52 / DTR

(c) Trade Payable Turnover Ratio(CTR): This ratio is calculated on the same lines as
receivables turnover is calculated. This ratio shows the velocity of debt payment by the
firm. It is calculated as:
Annual Net Credit Purchase
Creditors’ Turnover Ratio = --------------------------------------------
Average accounts payable
Tutorial Notes :
 Payables = creditors + Bills payables
 Average Payables = Opening Payables + Closing Payables / 2
 Average Collection Period = 365 or 366 or 12 or 52 / CTR

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RAJESH NANGALIA CLASSES 9903133927
Capsules :
1. Opening stock Rs. 29,000, Closing stock Rs. 31,000, Sales Rs. 3,20,000 and Gross Profit
25% on sales. Calculate Stock Turnover Ratio.
2. Opening stock Rs. 24,000, Closing stock Rs. 26,000, Purchases Rs. 73,000, Wages Rs.
20,000, Sales Rs. 1,20,000, Carriage inwards Rs. 9,000. Calculate STR.
3. Opening stock Rs. 72,500, Closing stock Rs. 77,500, Sales Rs. 10,00,000 and Gross Profit
33.3333% on cost. Calculate Stock Turnover Ratio.
4. STR 4 times, Closing Stock was Rs. 10,000 in excess of Opening stock, Purchases Rs.
1,10,000, Calculate Opening & Closing Stock.
5. DTR 4 times, Cost of goods sold Rs. 6,40,000, GP Ratio 20%, Closing Debtors were Rs.
20,000 more than at the beginning, cash sales being 1/3rd of credit sales. Calculate Opening
& Closing Debtors.
6. Opening Stock Rs. 60,000, Closing Stock Rs. 1,00,000, STR 8 times, Selling price 25%
above cost. Compute Gross profit & Sales.
7. Calculate DTR :

Particulars Year 1 Year 2

Gross sales 950000 800000
Sales Returns 50000 50000
Debtors at the beginning 86000 114000
Debtors at the end 114000 106000

8. Calculate Average Collection Period :

Total sales Rs. 1,00,000, Cash sales ( included in total sales ) Rs. 20,000, Sales Returns Rs.
7,000, Closing Debtors Rs. 11,000, Closing Bills Receivables Rs. 4,000, PBDD Rs. 600
and Creditors Rs. 10,000.
9. Average Stock Rs. 40,000, STR 8 times, GP 20% on sales, find out profit.
10. Opening Debtors Rs.30,000, Cost of Goods sold Rs. 1,50,000, Cash sales being 20% of
credit sales, Excess of closing debtors over opening debtors Rs. 10,000, GP Rs. 60,000.
Calculate DTR.
11. Capital Employed Rs. 12,00,000, Working Capital Rs. 2,40,000, Cost of Goods Sold
Rs. 38,40,000, GP Rs. 9,60,000. Calculate Fixed Assets Turnover Ratio.
12. Shareholders’ Fund Rs. 60,000, Long Term Debt Rs. 1,20,000, Net Fixed Assets Rs.
1,20,000, Gross Profit at 20% on Cost was Rs. 1,20,000. Calculate Working Capital
Turnover Ratio.

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RAJESH NANGALIA CLASSES 9903133927
13. Calculate STR :
Particulars Amount Particulars Amount

Opening stock 27000 Sales 147750

Purchases 101550 Closing Stock 37500
Carriage inward 4500
Wages 12000
Gross Profit 40200

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RAJESH NANGALIA CLASSES 9903133927
PROFITABILITY RATIOS ( To check Profitability strength of Organization ) –
Expressed in Percentage ;

 Gross Profit Ratio = Gross profit / Net sales

 Net Profit Ratio = Net Profit / Net sales
 Operating Profit Ratio : Operating Profit / Net Sales
Notes : Operating Profit : Net Profit + Abnormal Losses – Abnormal Gains
OR
Gross Profit – Operating Exps. { i.e Office & Administration Exps. and
Selling & Distribution Exps. }
 Operating Ratio : Operating Cost / Net Sales

Tutorial Notes :
 Operating Cost = Cost of Goods sold + Operating Exps. { i.e Office &
Administration Exps. and Selling &Distribution Exps. }
 Cost of Goods Sold = Sales – Gross Profit
OR

Opening stock + Purchases + Direct Exps – Closing stock

Capsules :

1. Gross Profit Rs. 21,000, Gross Sales Rs. 1,60,000, Sales Return Rs. 10,000. Calculate GP
Ratio.
2. Net Profit Rs. 20,000, Gross Sales Rs. 86,000, Sales Returns Rs. 6,000. Calculate NP
Ratio.
3. Calculate Operating Ratio & Operating Profit Ratio : Cost of Goods Sold Rs. 2,60,000,
Operating Expenses Rs. 90,000, Gross Sales Rs. 4,40,000, Sales Returns Rs. 40,000.

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4. In a meeting held at Solan towards the end of 2008, the Directors of M/s HPCL Ltd. have
taken a decision to diversify. At present HPCL Ltd. sells all finished goods from its own
warehouse. The company issued Debentures on 1.1.2009 and purchased Fixed Assets on
the same day. The purchase prices have remained stable during the concerned period.
Following information is provided to you:
INCOME STATEMENTS
2008(Rs.) 2009 (Rs.)
Cash sales 30,000 32,000
Credit sales 2,70,000 3,42,000
3,00,000 3,74,000
Less: Cost of Goods Sold 2,36,000 2,98,000
Gross Profit 64,000 76,000
Less: Expenses:
Warehousing 13,000 14,000
Transport 6,000 10,000
Administrative 19,000 19,000
Selling 11,000 49,000 14,000
Interest on Debenture 2,000 59,000
Net Profit 15,000 17,000

BALANCE SHEET
2008 (Rs.) 2009(Rs.)
Fixed Assets (Net Block) 30,000 40,000
Debtors 50,000 82,000
Cash at bank 10,000 7,000
Stock 60,000 94,000
Total Current Assets (CA) 1,20,000 1,83,000
Creditors 50,000 76,000
Total Current Liabilities (CL) 50,000 76,000
Working Capital (CA-CL) 70,000 1,07,000
Total Assets 1,00,000 1,47,000
Represented by:
Share Capital 75,000 75,000
Reserves & surplus 25,000 42,000
Debentures ---------- 30,000
1,00,000 1,47,000

You are required to calculate the following ratios for the years 2005 and 2006.
(i) Gross Profit Ratio
(ii) Operating Ratio
(iii) Operating Profit Ratio
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RAJESH NANGALIA CLASSES 9903133927
(iv) Capital turnover Ratio
(v) Stock Turnover Ratio
(vi) Net Profit to Net Worth Ratio, and
(vii) Debtors Collection period

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RAJESH NANGALIA CLASSES 9903133927
Additional Ratios ( To check various strength )

Income Statement :

Sales ***
Less : Variable Cost ***

Contribution ( Amount of sales available to charge fixed cost ) ***

Less: Fixed Cost ( Other than Interest & Financial Charges ) ***
Earning Before Interest & Tax ( EBIT ) *** Return on Investment / Capital Employed
Less : Interest & Financial Charges ***
Profit before Tax (PBT) ***
Less : Tax ***
Profit after Tax (PAT) *** Return on Shareholders’ Fund
Less : Preference Dividend ***
Equity Earnings / Profit available for Equity Shareholders *** Return on Equity / Equity SHs Fund
Less: Equity Dividend ***
Retained Earnings ***

 Contribution Ratio ( Generally Known as Profit Volume Ratio ) = Contribution / Net Sales
 ROI = EBIT / Capital Employed
 Return on Shareholders’ Fund = PAT / Shareholders’ Fund
 Return on Equity = Equity Earnings / Equity Shareholders’ Fund
 Earnings Per Share ( EPS ) = Equity Earnings / No. of Equity Shares
 Dividend Payout = Equity Dividend / Equity Earnings
 Retention Ratio = Retained Earnings / Equity Earnings
 Dividend Yield = EPS / Market Price per Share ( MPS )
 Price Earning Ratio ( P/E Ratio ) = MPS / EPS
 Interest Coverage Ratio : EBIT / Interest

Tutorial Notes :
Capital Employed / Investment in Business :
 ESC + PSC + Undistributed Profits {Reserve Fund/General Reserve/P/L a/c (Cr.)} –
Undistributed Losses {Preliminary Exps., P/L (Dr.), Discount on issue of Shares or
Debentures, Misc. Exps.} + Long Term Loans + Debentures.
OR
Shareholders’ Fund + Long Term Loans ( Including Debentures )

 Fixed Assets + Current Assets – Current Liabilities

OR
Fixed Assets + Working Capital

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RAJESH NANGALIA CLASSES 9903133927
Shareholder’s Equity / Proprietors’ Fund / Owners’ Fund / Net worth / Equity :
 ESC + PSC + R&S {Reserve Fund / General Reserve / P/L a/c (Cr.)} – Fictitious
Assets { Preliminary Exps., P/L (Dr.), Discount on issue of Shares or Debentures,
Misc. Exps.}

Equity shareholders’ Fund :

 ESC + R&S {Reserve Fund / General Reserve / P/L a/c (Cr.)} – Fictitious Assets {
Preliminary Exps., P/L (Dr.), Discount on issue of Shares or Debentures, Misc. Exps.}

Total Debt :
 Long Term Debt { Long term Loans , Debentures Etc.} + Short Term Loans { Current
Liabilities }

Capsules :
1. Net Profit after Interest & Tax Rs. 6,00,000, Income Tax 50%, 15% Debentures Rs.
5,00,000, 12% Long Term loan Rs. 5,00,000. Calculate Interest Coverage Ratio.
2. Calculate EPS : Net profit after tax Rs. 2,50,000, 10% PSC Rs. 5,00,000, ESC ( Of Rs.
10 each ) Rs. 5,00,000.
3. ESC Rs. 16,00,000, PSC Rs. 4,00,000, General Reserve Rs. 7,56,000, 10% Debentures
Rs. 16,00,000, Current Liabilities Rs. 4,00,000, Discount on issue of shares Rs. 20,000, Net
Profit after Debenture interest but before Income Tax Rs. 3,20,000. Calculate Return on
Investment.
4. ESC Rs. 5,00,000, P/L a/c ( Cr.) Rs. 1,89,000, 10% Debentures Rs. 4,00,000, Current
Liabilities Rs. 1,00,000, Preliminary Expenses Rs. 5,000, Net Profit after Income Tax. Rs.
60,000. Calculate Return on Equity.

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5.
Liabilities Amount Assets Amount

ESC of Rs. 10 each 1050000 Land & Building 1750000

10% PSC 700000 Plant 700000
Reserves 350000 Stock 700000
Dividend Equalisation Fund 35000 Debtors 350000
15% Debentures 280000 Cash & Bank 140000
Current Liabilities 1260000 Underwriting Commission 35000

Additional Information :
 Net Profit before Interest & Tax Rs. 10,92,000.
 Rate of Income Tax 50%.
Calculate :
 ROI
 Return on Shareholders’ Fund
 Return on Equity
 EPS
 Interest Coverage Ratio.

Rs.
6. Sales 10,00,000
Operating expenses 8,00,000
Interest 6,000
Depreciation 50,000
Tax 15,000
Balance Sheet
Liabilities Rs. Assets Rs.
Share Capital at Rs. 10 each 1,00,000 Fixed Assets 1,50,000
Reserve and surplus from 50,000 Inventory 2,00,000
retained earnings 1,00,000 Sundry debtors 1,10,000
6% long term loan 2,00,000 Loans and Advances 40,000
Sundry creditors 1,00,000 Cash at Bank 50,000
Provision for Tax 5,50,000 5,50,000
Market value per share is Rs. 8.
Calculate :
 ROE
 ROI
 Interest Coverage Ratio
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RAJESH NANGALIA CLASSES 9903133927
 EPS
 P/E Ratio

Additional Capsules :
1. Proprietory ratio (fixed assets / proprietory funds) 0.75; Working capital Rs. 60,000.
Calculate Fixed Assets.
2. From the following information make out Balance Sheet:
(i) Current ratio 2.5;
(ii) Liquid ratio 1.5;
(iii) Proprietory ratio (fixed assets / proprietory funds) 0.7;
(iv) Working capital Rs.60,000;
(v) Reserves and surplus Rs.40,000;
(vi) Bank overdraft Rs.10,000; and
There is no long-term loan or fictitious asset.

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 Ratio Analysis as per ISC 2023

A. Liquidity Ratios:
(i) Current Ratio:
� �
=
�

Current Assets = Current Investments + Inventories (excluding Loose Tools and Spare Parts) + Trade
Receivables + Cash and Bank Balance + Short-term Loans and Advances + Other Current Assets
Current Liabilities = Short term borrowings + Trade payables + Other Current Liabilities + Short term
Provisions
(ii) Quick Ratio / Liquid Ratio / Acid Test Ratio:
�
=
�
OR
� � � − ( & )− �
=
�
OR
�
=
�

B. Solvency Ratios:
(i) Debt to Equity Ratio:
� ⁄ �
=
� ⁄ ℎ ℎ �
Debt = Long Term Borrowings + Long Term Provisions
Equity / Shareholders’ Funds = Share Capital + Reserves and Surplus
OR
= Non-Current Assets + (Current Assets – Current Liabilities) – Non-Current Liabilities
OR
= Non-Current Assets + Working Capital – Non-Current Liabilities
OR
= (Property, Plant & Equipment + Intangible Assets + Non-Current Investments + Long Term Loans
and Advances) + Working Capital – (Long Term Borrowings + Long Term Provisions)

(ii) Proprietary Ratio:

ℎ ℎ � ⁄�
=
�

13
 Total Assets = Non-Current Assets + Current Assets
= Property, Plant & Equipment + Intangible Assets + Non- Current Investments + Long
Term Loans and Advances + Current Investments + Inventories (including Loose Tools
and Spare Parts) + Trade Receivables + Cash and Bank Balance + Short-term Loans and
Advances + Other Current Assets

(iii) Debt to Total Assets Ratio:

�
=
�
(iv) Interest coverage ratio:

=
� �ℎ

Fixed Interest Charges includes interest on only long-term borrowings.

C. Activity Ratios:
(i) Trade Receivables Turnover Ratio:
�
=
�

Credit Revenue from Operations = Revenue from Operation – Cash Revenue from Operation
Average Trade Receivables:
+�
=
2
(ii) Trade Payables Turnover Ratio :
� ℎ
=
�
Average Trade Payables:
+�
=
2
(iii) Working Capital Turnover Ratio :

=
�

14
 (iv) Inventory Turnover Ratio :
�
=
�
Cost of Revenue from Operations = Revenue from Operations – Gross Profit
OR
Cost of Material Consumed (including direct expenses) + Change in inventories of WIP and Finished
Goods
OR
Opening Inventory + Net Purchases+ Direct Expenses – Closing inventory
Average Inventory:
+�
=
2
D. Profitability Ratios:
(i) Gross Profit Ratio:
�
= × 100

Gross Profit = Revenue from Operations – Cost of Revenue from Operations/ Cost of Goods Sold
Cost of Revenue from Operations = Cost of Material Consumed (including direct expenses) + Change
in inventories of WIP and Finished Goods.
OR
Opening Inventory + Net Purchases + Direct Expenses – Closing inventory

(ii) Net Profit Ratio:

= × 100

Net Profit = Gross profit + Other Income – Indirect Expenses – Provision for Tax

(iii) Operating Ratio:

� + �
= × 100

OR
� + � −
× 100

Operating Expenses = Employee Benefit Expenses + Depreciation of Tangible Assets + Selling and
Distribution Expenses+ Office and Administrative Expenses.

Operating Income = Commission received, Cash discount received.

15
 (iv) Operating Profit Ratio:

= × 100

Net operating profit = Net Profit after Tax+ Provision for Tax +Non-Operating Expenses –
Non-Operating Incomes
OR
Gross Profit – Operating Expenses + Operating Incomes
Non-Operating Expenses = Finance Cost (Interest on Long-term Borrowings) + Loss on sale of Non-
Current Assets + Amortisation of Intangible Assets + Writing off capital
losses

Non-Operating Incomes = Interest and Dividend Received on Investment + Profit on sale of Non-
Current Assets.
(v) Earning per share:
�
=
. � ℎ

(vi) Price Earning Ratio:

� ℎ
=
� ℎ
(vii) Return on Investment:

= × 100
� �
NOTE:
1. Current Ratio includes Net Debtors (Gross Debtors – Provision for doubtful debts) while Trade
Receivables Turnover Ratio includes Gross Debtors.
2. Other Current Assets’ is restricted to Prepaid Expenses and Accrued Income.
3. Capital employed = Shareholders’ Funds + Non-current Liabilities – Non-trade Investments
OR
Non-current Assets (excluding Non-trade Investments) + Working Capital
OR
Property, Plant & Equipment & Intangible Assets + Trade Investments + Working Capital
4. Investments to be taken as non-trade investments unless specified as trade investments.
5. In Return on Investments Ratio- Net Profit before interest and tax will not include interest on non-trade
investments.
6. Revenue from operations (for a manufacturing company)
• Net Sales
For a manufacturing company
• Sale of scrap

16
 Other Income: (for a manufacturing company)
• Rent received (non- operating)
• Commission received (operating)
• Interest and Dividend Received (non- operating)
• Profit from Sale of Fixed Assets (non- operating)
• Cash discount received (operating)
7. Problems on effect of transactions on ratios to be restricted to Current Ratio, Quick Ratio and Debt-
Equity Ratio.
8. Net Profit Ratio is to be calculated on ‘Net Profit after Tax’.

17
 Ratio Analysis as per CBSE 2023

 state the meaning, objectives and

 Financial Statement Analysis: Meaning,
Significance Objectives, importance and
limitations.
 Tools for Financial Statement Analysis:
Cash flow analysis, ratio analysis.
 Accounting Ratios: Meaning, Objectives,
Advantages, classification and computation.
 Liquidity Ratios: Current ratio and Quick
ratio.
 Solvency Ratios: Debt to Equity Ratio, Total
Asset to Debt Ratio, Proprietary Ratio and
Interest Coverage Ratio. Debt to Capital
Employed Ratio.
 Activity Ratios: Inventory Turnover Ratio,
Trade Receivables Turnover Ratio, Trade
Payables Turnover Ratio, Fixed Asset
Turnover Ratio, Net Asset Turnover Ratio
and Working Capital Turnover Ratio.
 Profitability Ratios: Gross Profit Ratio,
Operating Ratio, Operating Profit Ratio, Net
Profit Ratio and Return on Investment.
significance of different types of ratios.
 develop the understanding of computation of
current ratio and quick ratio.
 develop the skill of computation of debt equity
ratio, total asset to debt ratio, proprietary ratio
and interest coverage ratio.
 develop the skill of computation of inventory
turnover ratio, trade receivables and trade
payables ratio and working capital turnover
ratio and others.
 develop the skill of computation of gross
profit ratio, operating ratio, operating profit
ratio, net profit ratio and return on investment.

Note: Net Profit Ratio is to be calculated on the basis of profit before and after tax.

18
CA RAJESH NANGALIA 9903133927

2005 :
? .

, .I
A . 1:1.
: .
I :
= A /
;
A =C A I E
=C B - I

2008 :
A , ?

A , :

 E

2008:
B .

B :
 D E :

/
;
D = &D ;
E =E C+ C+ & F /G / / / (C .) F A
E ., / (D .), D D , .E .

 C :
A /
;
C A = I + D + C & B + /A +

C =C + +B +
E + + D + D .
2009:
& ?

=G /
I . . & ;

= /
I .

9
CA RAJESH NANGALIA 9903133927
2011 :
C &

2012 :
A D E 2 : 1, ,
:
 I ( )
 B ( )

20
CA RAJESH NANGALIA 9903133927

2005 : & / / 31.03.08

A A

15250 100000
63050 C 19600
C 400
1000
G / 40000
A E . 20200 G / 40000
E . 2400 I 1200
F E . 1400
E . 400
/ 16800

B 31.03.08

A A A
C 70000 F A 60100
1200 19600
/ / 16800 D 9000
C 3700 B 3000

C :
G ; ; ; ;C ;

2006 : . 2,00,000; C G . 1,20,000; E . . 30,000; C A . 60,000;

C . 30,000; C E . 2,40,000; D . 1,60,000. C :

C
D E
G

2007 : & / / 31.03.08

A A

50000 500000
200000 C 80000
D E 50000
G / 280000
A E . 20000 G / 280000
E . 30000
I 25000
F 40000
/ 165000

21
CA RAJESH NANGALIA 9903133927

B 31.03.08

A A A
3000, 5% C . 100 300000 F A 720000
4000 E C .100 400000 80000
150000 D 120000
10000 C 15000
/ / 106000 B 45000
C 20000 E . 5000
B 4000 .E . 5000

C :
A
G
E

D E

2009 : F . 50,000; 10% D .25,000; A . 1,75,000; C . 2,70,000;

C . 1,80,000; A D . 30,000; A C . 16,000; C G .
2,16,000; E . 24,000. C :
D
A

D
C

2010 :
C .
G ; ; ; ; ; ;
:
&
31 2015
A
( ) 68,000
I 1 1,000
(A) 69,000

 28,000
 C I 2 (10,000)
 E 3 26,000
(B) 44,000
(A-B) 25,000

22
CA RAJESH NANGALIA 9903133927
A
A ( .)
1.
 I 1,000
2.
 I 30,000
 (-) C I (40,000) (10,000)
3.
 E 10,000
 E 9,000
 F E 5,000
 2,000
B
A 31 2015
. . . A ( .)
1. &

 C 1 1,50,000
 & 25,000

 B (10% D ) 30,000

 2 30,000

2,35,000

2. A
A
 F A 1,40,000

A
 I 40,000
 20,000
3 35,000
 C &C E
2,35,000

A
. . A ( .)
1.
 E C 1,20,000
 C 30,000
1,50,000
2.
 B 10,000
 C 20,000
30,000
3. &
 B 10,000
 C 25,000
35,000

23
CA RAJESH NANGALIA 9903133927
2011 :
C .
A ( .)
12,00,000
5,00,000
A E 65,000
&D E 35,000
G 20%
A 10,00,000
A 40,00,000
E C .10 10,00,000
10% C .10 3,00,000
& 2,00,000
8% D 8,00,000
D 1,20,000
C D 80,000
B 60,000
C B 40,000
C 1,30,000
C C 70,000
B 50,000
C B 1,10,000
F ,
()
( ) D
( )
( )
( ) E
( )D
( ).C

2012 :
F , ( )
,C , , C ,G , ,
:
A ( .)
C 6,00,000
E 50,000
8,00,000
10,000
A 3,00,000
C 1,00,000
A 7,00,000
C 30,000
I 5,000
E 6,000
C 5,60,000
& 40,000

24
CA RAJESH NANGALIA 9903133927
2013 :
1
F F A
A ( .)
E C 1,00,000
8% C 40,000
& 60,000
I 30,000
C A 70,000
0.8 : 1
2
D
C 4,00,000
C 90,000
20%
C 10
3
C
8,00,000
I 40,000
C I 50,000
4
C C &A
50,000 70,000
D 40,000 10% C 5,00,000
B 10,000 E C 7,00,000
A 4,000 A 1,40,000
C I H 30,000
C 60,000
B 40,000
B 4,000
2014 :
) F ,
 C . 9,60,000
 G . 1,90,000
 B . 50,000
 BDD . 10,000
) F , ( )
( ) D E
( ) I C
( )

.
E C 2,00,000
5% C 60,000
G 1,20,000
F A 5,05,000
C A 1,20,000
C 40,000
@ 10% I 5,00,000
30,000
& (A ) 90,000

25
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27
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