The Commerce Villa

Time: 1.5 Hour Marks: 40

Topic: Ratio & Goodwill (AC – 07)

1. Which one of the following is correct? 1

(i) Current ratio is always more than Quick Ratio.
(ii) High Inventory Turnover ratio is good for the organisation, expect when goods are bought in small lots or
sold quickly at low margins to realise cash.
a) Only (i) b) Only (ii) c) Both (i) and (ii) d) Neither (i) Nor (ii)

2. Purchased goodwill arises at the time of opening of a new business. True / False. 1

3. Revenue from operation Rs 9,00,000, Gross profit 25% on cost, Operating expenses Rs 90,000, operating ratio will
be:
a) 100% b) 90% c) 50% d) 10% 1

4. From the following information, calculate Inventory Turnover Ratio: Net Sales Rs 40,000; Average Inventory Rs
5,500; Gross Loss on Sales is 10%. 1

5. The ……….ratios are primarily measures of return.

a) Liquidity b) activity c) debt d) profitability 1

6. How does the market situation affect the value of goodwill of a firm? 1

7. A transaction that increases both Current ratio and Quick ratio is: 1
a) Purchase of stock in trade on credit b) Sale of stock at loss
c) Cash payment of non-current liability d) Sale of non - current asset for cash

8. A firm has inventory turnover of 3 and cost of revenue from operations is Rs 1,35,000. If the inventory turnover is
increased to 5, it would result in …………… 1
a) Increase in inventory by Rs 27,000 b) Decrease in inventory by Rs 18,000
c) Increase in cost of goods sold by Rs 10,000 d) Decrease in inventory by Rs 45,000

9. Why ‘goodwill’ is considered an ‘Intangible asset’ but not a ‘fictitious asset’? 1

10. State, giving reason, following transaction would increase, decrease or not change the inventory turnover ratio:
Sale of goods for Rs 25,000 (costing Rs 20,000). 1

11. Debt to Capital Employed ratio is 0.3: 1. State whether the following transaction, will improve, decline or will have
no change on the Debt to Capital Employed Ratio. Also give reasons for the same. 2
(i) Purchased Goods on Credit for Rs 1,00,000 for a credit of 15 months, assuming operating cycle is of 18
months.
(ii) Conversion of irredeemable debentures into equity shares of Rs 2,00,000.

12. On 1st April, 2019 an existing firm had assets of Rs 75,000 including cash of Rs 5,000. The partners’ capital accounts
showed a balance of Rs 60,000 and reserves constituted the rest. If the normal rate of return is 20% and the
goodwill of the firm is valued at Rs 24,000 at 4 years purchase of super profits, find the average profits of the firm.
3
13. From the following information, calculate the value of goodwill of the firm of Chander and Gupta: 3
a) On the basis of capitalisation of super profits.
b) On the basis of capitalisation of average profits.
i) Average capital employed in the business Rs 7,00,000.
ii) Net trading results of the firm for the past years -
Profit 2014 - Rs 1,47,600
Profit 2015 - Rs (1,48,100)
Profit 2016 – Rs 4,48,700
iii) Rate of interest expected from capital having regard to the risk involved 18%.
iv) Remuneration to each partner for his service Rs 500 per month.

14. Calculate goodwill of the firm on the basis of 3 years purchase of the average profits of the last five years. The
profits of the last five years were: 4
Year Amount (Rs)
2013 - 14 4,00,000
2014 - 15 5,00,000
2015 - 16 (60,000)
2016 - 17 1,50,000
2017 - 18 2,50,000
Additional information:
i) On 1st January, 2016, a fire broke out which resulted into a loss of goods of Rs 3,00,000. A claim of Rs
70,000 was received from the insurance company.
ii) During the year ended 31st March, 2017 the firm received an unexpected tax refund of Rs 80,000.
iii) Stock was overvalued by Rs 10,000 on 31st March, 2015.
iv) On 1st January, 2017, a Motor Bike costing Rs 50,000 was purchased and debited to travelling expenses
a/c, on which deprecation is to be charged @ 10% p.a by straight line method.

Attempt any three out of Question no 15 to 18.

15. Following information is obtained from financial statements of JD Ltd:- 6

Particulars Rs
Equity share capital 5,00,000
General Reserve 60,000
Securities Premium Reserve 40,000
Statement of profit and Loss (10,000)
9% Debentures 2,00,000
Land and Building 6,50,000
Equipments 3,00,000
Debtors 20,000
Cash 30,000
Income Tax 5,000
Calculate:
(i) Debt – Equity Ratio
(ii) Proprietary Ratio
(iii) Interest Coverage Ratio
(iv) Total Assets to Debt Ratio

16. From the following information calculate the following ratios (up to two decimal places): 6
i) Current Ratio ii) Inventory Turnover Ratio
iii) Return on Investments iv) Working Capital Turnover Ratio
Particulars
Net Profit after Interest and Tax 2,40,000
 Tax 1,60,000
Property plant and equipment and intangible assets 10,00,000
Non- current investments
i) Trade Investment Rs 50,000
ii) Non - trade investment Rs 75,000 1,25,000
Equity share capital 4,25,000
15% Preference share capital 1,00,000
Reserves and surplus (including surplus of the year under consideration) 2,00,000
10% Debentures 4,00,000
Revenue from Operations 10,00,000
Current liabilities 1,00,000
Quick ratio 0.75
Gross Profit 30%
Opening Stock 50,000
Closing Stock is Rs 50,000 more than opening stock

17. Gross Profit Ratio 20% 6

Trade payable turnover ratio 5 times
Opening Trade Payable were 1/3rd of closing Trade payable
Revenue from operation Rs 10,00,000
Cash purchases being 1/4th of credit Purchases
Opening Inventory Rs 1,00,000
Closing Inventory Twice the opening inventory
Administrative Expenses Rs 40,000
Selling expenses Rs 1,00,000
Dividend on shares Rs 10,000
Loss by theft Rs 25,000
Sales Return Rs 2,00,000
Carriage inward Rs 1,50,000
Calculate:
(i) Opening Trade Payables and closing Trade payables
(ii) Operating Profit Ratio
(iii) Net Profit Ratio

18. A company sells its products on cash as well as credit. The following relevant information has been extracted from
its books. 6
Total Gross sales Rs 2,00,000
Sales Return Rs 20,000
Cash Revenue from operations Half of credit Revenue from operation
Credit Revenue from operations ?
Total Creditors as on 31st march, 2021 Rs 20,000 (including Rs 5,000 due to a supplier of computer)
st
Total Debtors and bills receivables as on 31 March, 2021 were Rs 18,000 and Rs 4,000 respectively. On this date,
Provision for Doubtful Debts were Rs 200. Other Current Assets (including spare parts of Rs 10,000) were Rs 30,000
Calculate;
a) Trade Receivable turnover Ratio
b) Current Ratio
c) Collection Period (in days)