FINANCIAL

STATEMENT
ANALYSIS
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FINANCIAL STATEMENT
ANALYSIS/RATIO ANALYSIS

 Financial Statement includes:

 Income Statement

 Trading A/C
 Profit and Loss A/C
 Balance Sheet – Assets and Liabilities

 ..\Annual Reports of co\tata-steel-ir-2021-

22.pdf
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 BALANCE SHEET
Liabilities Amount Assets Amount

Capital: Fixed Assets:

Equity Share Capital xxx Land & Building xxx
Preference Share Capital xxx Plant & Machinery xxx
Reserve fund xxx Furniture & fitting xxx
Undistributed Profits xxx Business premises xxx

Long Term Liabilities: Intangible Assets:

Mortgage loans xxx Patents & trademarks xxx
Bank loan xxx Good will xxx

Current Liabilities: Current Assets:

Creditors xxx Cash in hand & at bank xxx
Bills payable xxx Debtors xxx
Short term loans xxx Bills receivable xxx
Bank overdraft xxx Stock xxx
Provisions for taxes xxx Prepaid expenses xxx
Outstanding expenses xxx

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xxxx xxxx

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TRADING AND PROFIT & LOSS A/C
Particulars Amount Particulars Amount
To Opening Stock xxx By Sales xxx
To Purchase xxx - Sales return xx xxx
- Purchase return xx xxx By Closing Stock xxx
To Wages xxx By all other direct incomes xxx
To Carriage Inwards xxx By Gross Loss c/d xxx
To Power(factory) xxx (transferred to P&L A/c)
To all other direct expenses xxx
To Gross Profit c/d xxx
(transferred to P&L A/c)

xxxx xxxx

To Gross Loss xxx By Gross Profit xxx

(transferred from Trading A/c) (transferred from Trading A/c)
To Salaries xxx By Rent Rec. xxx
To Rent xxx By Discount Rec. xxx
To all other indirect expenses xxx By all other indirect incomes xxx
To Net Profit c/d xxx To Net Loss c/d xxx
(transferred to Balance sheet) (transferred to Balance sheet)

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xxxx xxxx

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 RATIO
 The term 'ratio' refers to the mathematical
relationship between any two inter-related variables.
In other words, it establishes relationship between
two items expressed in quantitative form.

 It can be expressed as a pure ratio, percentage, or as a

rate

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RATIO ANALYSIS
 It is a method or process by which the relationship
of items or groups of items in the financial
statements are computed, and presented.

 It is used to interpret the financial statements so

that the strengths and weaknesses of a firm, its
historical performance and current financial
condition can be determined.

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ANALYSIS OR INTERPRETATIONS OF
RATIOS
 For the same enterprise over a number of years

 For two enterprises in the same industry

 For one enterprise against the industry as a whole

 For one enterprise against a pre-determined standard

 For inter-segment comparison within the same

organization
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 CLASSIFICATION OF RATIOS
 Accounting Ratios are classified on the basis of the
different parties interested in making use of the ratios.
A very large number of accounting ratios are used for
the purpose of determining the financial position of a
concern for different purposes.

 Ratios may be broadly classified in to:

 Classification of Ratios on the basis of Balance Sheet.

 Classification of Ratios on the basis of Profit and Loss

Account.
 Classification of Ratios on the basis of Mixed Statement
(or) Balance Sheet and Profit and Loss Account.
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CLASSIFICATION OF RATIOS
Ratios can be broadly classified into four groups
namely:
 Liquidity Ratios
 Capital Structure/Leverage Ratios
 Profitability Ratios
 Activity/Turnover Ratios

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LIQUIDITY RATIOS
 Liquidity Ratios are also termed as Short-Term
Solvency Ratios.

 The term liquidity means the extent of quick

convertibility of assets into money for paying
obligation of short-term nature.

 These ratios analyse the short-term financial

position of a firm and indicate the ability of the
firm to meet its short-term commitments
(current liabilities) out of its short-term resources
(current assets).
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 To measure the liquidity of a firm, the following
ratios are commonly used:

1. Current ratio
2. Liquid ratio or Quick ratio or Acid test ratio

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 CURRENT RATIO
 Current Ratio establishes the relationship between current
Assets and current Liabilities. It attempts to measure the
ability of a firm to meet its current obligations.

 In order to compute this ratio, the following formula is used:

 Current ratio = Current assets

Current liabilities

 Current asset normally means assets which can be easily

converted into cash within a year's time.

 On the other hand, current liabilities represent those

liabilities which are payable within a year. 12

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Current Assets Include –

 Cash in hand and at bank

 Debtors
 Bills Receivables
 Stock (Raw materials, Work-in-progress, Finished
Goods)
 Short term deposits/Government and other marketable
securities
 Prepaid expenses/Advance Payments

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Current Liabilities Include –

 Creditors
 Bills Payable
 Short term loans
 Bank overdraft and Cash credit
 Provision for taxation
 Outstanding expenses
 Unclaimed dividend/Proposed dividend

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INTERPRETATION OF CURRENT
RATIO
 The ideal current ratio is 2:1
 It indicates that current assets double the current
liabilities is considered to be satisfactory.
 Higher value of current ratio indicates more liquid
the firm's ability to pay its current obligations in
time.
 On the other hand, a low value of current ratio means
that the firm may find it difficult to pay its current
liabilities.
 Current ratio as one which is generally recognized as
the patriarch among ratios. 15

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 Q.1. Calculate current ratio from following
information:
Liabilities Amount Assets Amount

Share Capital 150,000 Inventories 120,000

Debentures 200,000 Sundry Debtors 140,000
Sundry Creditors 40,000 Cash at bank 40,000
Bills payable 30,000 Bills Receivable 60,000
Dividend Payable 36,000 Prepaid Expenses 20,000
Accrued Expenses 14,000 Machinery 100,000
Short Term Advances 50,000 Patents 40,000

520,000 520,000

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QUICK RATIO
 Quick Ratio also termed as Acid Test or Liquid Ratio.
It is supplementary to the current ratio.

 The acid test ratio is a more severe and stringent test

of a firm's ability to pay its short-term obligations as
and when they become due.

 Quick ratio = Quick Assets

Current Liabilities

 Quick Assets are Current Assets less prepaid

expenses and inventories. 17

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INTERPRETATION OF QUICK RATIO
 The ideal Quick Ratio of 1:1 is considered to be
satisfactory.

 High Acid Test Ratio is an indication that the

firm has relatively better position to meet its
current obligation in time.

 On the other hand, a low value of quick ratio

exhibiting that the firm's liquidity position is not
good.
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 Q.2. Calculate Quick Ratio from following information
given below:
 Current Assets 400,000
 Current Liabilities 200,000
 Inventories 25,000
 Prepaid Expenses 25,000
 Land and Building 400,000
 Share Capital 300,000
 Good Will 200,000

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 Q.3. Following information is given below; you are
required to calculate Current Ratio and Liquid Ratio:
 Cash in Hand 10,000
 Cash at Bank 15,000
 Sundry Debtors 75,000
 Stock 60,000
 Bills Payable 25,000
 Bills Receivable 30,000
 Sundry Creditors 40,000
 Outstanding Expenses 20,000
 Prepaid Expenses 10,000
 Dividend Payable 15,000
 Land and Building 200,000
 Goodwill 100,000
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 Q.4. Calculate: Current Assets; Current
Liabilities; Stock; Quick Assets.
 Current Ratio =2.6
 Quick Ratio = 1.4
 Working Capital =110,000

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CAPITAL STRUCTURE / LEVERAGE / SOLVENCY
RATIOS
 The term 'Solvency' generally refers to the capacity of the
business to meet its short-term and long term obligations.

 Solvency Ratio indicates the sound financial position of a

concern to carry on its business smoothly and meet its all
obligations.

 These ratios indicate the long term solvency of a firm and

indicate the ability of the firm to meet its long-term
commitment with respect to:

 Repayment of principal on maturity or in predetermined

instalments at due dates and
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 Periodic payment of interest during the period of the loan.

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CAPITAL STRUCTURE/
LEVERAGE/SOLVENCY RATIOS

The different ratios are:

 Debt equity ratio

 Proprietary ratio

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DEBT EQUITY RATIO
 This ratio also termed as External - Internal Equity Ratio.

 This ratio is calculated to ascertain the firm's obligations

to creditors in relation to funds invested by the owners.

 This ratio also indicates all external liabilities to owner

recorded claims. It is calculated as:
 (a) Debt-Equity Ratio = External Equities
Internal Equities

 The term External Equities refers to total outside

liabilities. The term Internal Equities refers to all claims
of preference shareholders, equity shareholders, reserve &
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surpluses and profits
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 (b) Debt-Equity Ratio = Total Long-Term Debt
Shareholders' Funds

 The term Total Long-Term Debt refers to outside debt

including debenture and long-term loans raised from
banks.

 Shareholder’s Funds are equity share capital plus

preference share capital plus reserves and surplus and
profits.

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INTERPRETATION OF DEBT EQUITY
RATIO
 The ideal Debt Equity Ratio is 1:1.

 This ratio indicates the proportion of owner's

stake in the business. Excessive liabilities tend to
cause insolvency.

 This ratio also indicate the extent to which the

firm depends upon outsiders for its existence.

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PROPRIETARY RATIO
 This is one of the variant of Debt-Equity Ratio. Proprietary Ratio is
also known as Capital Ratio or Net Worth to Total Asset Ratio.

 This ratio shows the relationship between shareholders' fund and

total assets. It is calculated as :
 Proprietary ratio = Proprietors’ Fund
Total funds
OR
 Proprietary ratio = Shareholders’ fund
Total Assets

 Shareholders' Fund = Preference Share Capital + Equity Share

Capital + All Reserves and Surplus + Profits

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 Total Assets =Net Fixed Assets + Current Assets
 Net Fixed Assets = Fixed Assets - Depreciation Alaknanda Lonare
INTERPRETATION OF PROPRIETARY
RATIO
 Proprietary Ratio indicates the share of owners in the total
assets of the company.

 It serves as an indicator to the creditors who can find out

the proportion of shareholders' funds in the total assets
employed in the business.

 A higher proprietary ratio indicates secure position of the

creditors in the event of insolvency of a concern. A lower
ratio indicates greater risk to the creditors.

 A ratio below 0.5 is alarming for the creditors.

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Q.5. From the following figures calculate Debt Equity
Ratio:
 Preference Share Capital 1,50,000
 Equity Share Capital 5,50,000
 Capital Reserve 2,00,000
 Profit and Loss Account 1,00,000
 6 % Debenture 2,50,000
 Sundry Creditors 1,20,000
 Bills Payable 60,000
 Provision for taxation 90,000
 Outstanding Creditors 80,000

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Q.6. From the following information calculate the
Proprietary Ratio:
 Preference Share Capital 2,00,000
 Equity Share Capital 4,00,000
 Capital Reserve 50,000
 Profit and Loss Account 50,000
 9% Debenture 2,00,000
 Sundry Creditors 50,000
 Bills Payable 50,000
 Land and Building 2,00,000
 Plant and Machinery 2,00,000
 Goodwill 1,00,000
 Investments 3,00,000
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PROFITABILITY RATIOS
These ratios measure the operating efficiency of the
firm and its ability to ensure adequate returns to its
shareholders.

The profitability of a firm can be measured by its

profitability ratios.

Further the profitability ratios can be determined

 (i) In Relation to Sales and

(ii) In Relation to Investments

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PROFITABILITY RATIOS IN RELATION
TO SALES:

 Gross profit Ratio

 Operating Ratio

 Operating Profit Ratio

 Net profit Ratio

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GROSS PROFIT RATIO
 Gross Profit Ratio established the relationship
between gross profit and net sales. This ratio is
calculated by dividing the Gross Profit by Sales.

 It is usually indicated as percentage.

Gross Profit Ratio = Gross profit x 100

Net sales

 Higher Gross Profit Ratio is an indication that the firm

has higher profitability. It also reflects the effective
standard of performance of firm's business
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 A firm should have a reasonable gross profit
margin to ensure coverage of its operating
expenses and ensure adequate return to the
owners of the business.

 To judge whether the ratio is satisfactory or not,

it should be compared with the firm’s past ratios
or with the ratio of similar firms in the same
industry.

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OPERATING RATIO
 Operating Ratio is calculated to measure the
relationship between total operating expenses and
sales.

 The total operating expenses is the sum total of cost

of Goods sold, office and administrative expenses and
selling and distribution expenses.

 In other words, this ratio indicates a firm's ability to

cover total operating expenses.
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 In order to compute this ratio, the following formula
is used:

 Operating Ratio = Operating Cost x100

Net Sales

 Operating Cost = Cost of Goods sold +

Administrative Expenses+ Selling and Distribution
Expenses

 Net Sales = Sales - Sales Return (or) Return

Inwards 36

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OPERATING PROFIT RATIO
 Operating Profit Ratio indicates the operational
efficiency of the firm and is a measure of the firm's
ability to cover the total operating expenses.

 Operating Profit Ratio can be calculated as:

 Operating Profit Ratio = Operating Profit x 100

Net Sales
 Operating Profit =Net Sales - Operating Cost

(or)
Net Sales - (Cost of Goods sold + Office and
Administrative Expenses + Selling and Distribution37
Expenses)
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NET PROFIT RATIO
 This ratio is calculated by dividing Net Profit by Sales.

 This ratio is indicative of the firm’s ability to leave a

margin of reasonable compensation to the owners for
providing capital, after meeting the cost of production,
operating charges and the cost of borrowed funds.

 Net Profit Ratio=

Net profit after interest and taxes x 100
Net sales

 Higher the ratio, greater is the capacity of the firm to

withstand adverse economic conditions and vice versa38

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Q.7. Calculate Gross Profit Ratio from the following
figures:
 Sales 5,00,000
 Sales Return 50,000
 Closing Stock 35,000
 Opening Stock 70,000
 Purchases 3,50,000

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Q.8. Find out Operating Ratio and Operating Profit Ratio:
 Cost of goods sold 4,00,000
 Office and Administrative Expenses 30,000

 Selling and Distribution Expenses 20,000

 Sales 6,00,000
 Sales Return 20,000

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Q.9.From the following information given below, you are
required to calculate Operating Profit Ratio:
 Gross Sales 6,50,000
 Sales Return 50,000
 Opening Stock 25,000
 Closing Stock 30,000
 Purchases 4,10,000
 Office and Administrative Expenses 50,000
 Selling and Distribution Expenses 40,000

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 Q.10. From the following Trading and Profit and Loss
Account of Ramesh & Co. for the year 31st March 2017:

Particulars Amount Particulars Amount

To Opening Stock 60,000 By Sales 4,00,000
To Purchase 2,75,000 By Closing Stock 75,000
To Wages 25,000
To Gross Profit c/d 1,15,000
4,75,000 4,75,000
To Administrative Expenses 45,000 By Gross Profit b/d 1,15,000
To Selling and Distribution By Interest on Investment 10,000
Expenses 10,000
To Office Expenses 5,000
To Non Operating Expenses 15,000
To Net Profit 50,000

1,25,000 1,25,000

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PROFITABILITY RATIOS IN RELATION
TO INVESTMENTS
Profitability ratios in relation to investments
 Return on Assets (ROA)
 Return on Equity (ROE)
 Return on Capital Employed (ROCE)

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RETURN ON ASSETS(ROA)
 Profitability can be measured in terms of relationship
between Net profit and Assets.

 This ratio is known as profit to assets ratio.

 Return on Assets=
Net Profit after Interest and Taxes x 100
Total Assets

 It indicates Net Income per rupee of average Total

Assets.
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RETURN ON EQUITY(ROE) OR
RETURN ON NET WORTH(RONW)

 As this ratio measures a return on the owner's equity

or shareholder’s investment so it is also called as
Return on Shareholders Equity.

 This ratio establishes the relationship between net

profit after interest and taxes and the owner's
investment.

 Return on Equity Ratio =

Net Profit after Interest and Tax x100
Shareholders' Fund 45

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RETURN ON CAPITAL EMPLOYED
(ROCE)
 Return on Capital Employed Ratio measures a relationship
between profit and capital employed. This ratio is also called
as Return on Investment Ratio.

 It indicates how efficiently the long-term funds of owners and

creditors are being used.

 Return on Capital Employed=

Net Profit Before Interest and Taxes x 100
Capital employed

Net Capital employed=

Fixed Assets + (Current Asset-Current Liabilities)46

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 Q.11. Following is the balance sheet of M/s Sharma Ltd for the year ending
Dec 31st 2021:
Liabilities Amount Assets Amount
Equity Share Capital 4,00,000 Fixed Assets 10,00,000
(Face value of the share is Current Assets 2,00,000
10 per share and Market
value is 30 per share)
8% Preference Share 2,00,000
Capital Reserves and
Surplus 2,00,000
Debentures 2,00,000
Secured Loans 50,000
Current Liabilities 1,50,000
12,00,000 12,00,000
 Operating profit at the end of the year is Rs.2,60,000. Interest amount due
at the end of the year is 50,000. Provision for taxes during the year is
80,000. Proposed Dividend is Rs.1.50/share.
 You are required to calculate: (a) Return on Assets Ratio (b) Return on
Equity Ratio (c) Return on Capital Employed ratio (d) Earnings per Share47
(e) Dividend Payout Ratio (f) Price Earnings Ratio (g) Dividend Yield Ratio
(h) Interest Coverage Ratio
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VALUATION RATIOS
 Earnings Per Share (EPS)
 Dividend Payout Ratio (D/P)
 Dividend Yield Ratio
 Price Earning Ratio (P/E)

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 EARNINGS PER SHARE (EPS)
 Earning Per Share Ratio (EPS) measures the earning
capacity of the concern from the owner's point of view and it
is helpful in determining the price of the equity share in the
market place.

 This ratio measures the profit available to the equity

shareholders on a per share basis.

 This ratio is calculated by dividing net profit available to

equity shareholders by the number of equity shares.

Earnings per share =

Net Profit After Interest, Tax & Preference Dividend 49
Number of equity shares Alaknanda Lonare
 DIVIDEND PAYOUT RATIO
 This ratio highlights the relationship between payment of
dividend on equity share capital and the profits available
after meeting tax and preference dividend.

 This ratio shows the dividend paid to the shareholder on a per

share basis.

Dividend payout ratio=Dividend Paid To Ordinary Shareholders x100

Net Profit After Tax & Preference Dividend
OR
Dividend pay out ratio=Dividend per Equity share x 100
Earnings per Equity share

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DIVIDEND YIELD RATIO
 Dividend Yield Ratio indicates the relationship between
dividend per share and market value per share.

 This ratio is a major factor that determines the dividend

income from the investors’ point of view.

 It can be calculated by the following formula:

 Dividend Yield Ratio= Dividend per Share x100

Market value per Share

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 PRICE EARNING RATIO (P/E)
 This ratio highlights the earning per share reflected by
market share. Price Earning Ratio reflects the price currently
being paid by the market for each rupee of currently reported
EPS.

 In other words, the P/E ratio measures the expectations and

the market appraisal of the performance of a firm.

 This ratio is computed by dividing the market price of the

shares by the earnings per share.

Price earning ratio = Market price per share

Earnings per share
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Q.12. Calculate Return on Equity Ratio from the
following information:

 1000 Equity shares @ Rs.l0 each Rs. 10,000

 2000, 5% preference share @ Rs. 10 each Rs. 20,000
 Reserves Rs. 5,000
 Net profit before interest and Tax Rs. 10,000
 Interest Rs. 2,000
 Taxes Rs. 3,000

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Q.13. Following details have been given to you for M/s
Pandey Ltd.

 10 % Preference Shares of Rs. 10 each Rs.5,00,000

 60,000 Equity Shares of Rs. 10 each Rs. 6,00,000
 Profit after tax Rs.1,50,000
 Dividend Payout Ratio 100%
 Market Price of Equity Share Rs. 30

Find out: (a) Dividend Yield Ratio (b) Earnings Per Share
Ratio.

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Q.14. Compute Dividend Payout Ratio from the
following data:

 Net Profit 60,000

 Provision for tax 15,000
 Preference dividend 15,000
 No. of Equity Shares 6,000
 Dividend per Equity Share Rs. 3/share

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COVERAGE RATIOS
 Interest Coverage Ratio
 Fixed charges Coverage Ratio

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INTEREST COVERAGE RATIO
 This ratio is very important from the lenders’ point of view.

 It indicates whether the business would earn sufficient

profits to pay the interest charges periodically.

 It is calculated as:
 Interest Coverage Ratio=
Net Profit before Interest & Tax
Interest Charges

 The higher the number, the more secure the lender is in

respect of his periodical interest income.
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Q.15. The operating profit of “A” Ltd after charging
interest on debentures and tax is a sum of
Rs.10,000. The amount of interest charged is
Rs.2,000 and the provision for tax is has been made
for Rs. 4,000. Calculate interest Coverage Ratio.

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ACTIVITY RATIOS/TURNOVER RATIOS
 Turnover Ratios may be also termed as Efficiency
Ratios or Performance Ratios.

 Turnover Ratios highlight the different aspect of

financial statement to satisfy the requirements of
different parties interested in the business.

 It also indicates the effectiveness with which different

assets are utilized in a business.

 Turnover means the number of times assets are

converted or turned over into sales. 60

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ACTIVITY RATIOS/TURNOVER RATIOS
The different ratios are:

 Inventory/stock turnover ratio

 Debtors turnover ratio and Average collection
period
 Creditors turnover ratio and Average credit
period
 Fixed Assets Turnover Ratio

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 INVENTORY /STOCK TURNOVER RATIO
 This ratio is also called as Inventory Ratio or Stock
Velocity Ratio.
 Stock Turnover Ratio indicates the number of times the
stock has been turned over in business during a particular
period.
 It measures the relationship between cost of goods sold and
the inventory level.
 Inventory turnover ratio = Cost of goods sold

Average stock
 Cost of goodssold= Opening stock + Purchases + Direct Expenses - Closing stock
 Average stock= Opening stock + Closing stock
2
 Alternatively

 Inventory turnover ratio = Sales_______ 62

Closing inventory
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INTERPRETATION OF INVENTORY
TURNOVER RATIO

 A firm should have neither too high nor too low

inventory turnover ratio.

 Too high a ratio may indicate very low level of

inventory and a danger of being out of stock and
incurring high ‘stock out cost’.

 On the contrary too low a ratio is indicative of

excessive inventory entailing excessive carrying
cost.
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Q.16. From the following information calculate
stock turnover ratio:

 Gross Sales Rs. 5,00,000

 Sales Return Rs. 25,000
 Opening Stock Rs. 70,000
 Closing Stock at Cost Rs. 85,000
 Purchase Rs. 3,00,000
 Direct Expenses Rs. 1,00,000

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 DEBTORS TURNOVER RATIO AND
AVERAGE COLLECTION PERIOD
 Debtor's Turnover Ratio is also termed as Receivable
Turnover Ratio or Debtor's Velocity.

 Receivables and Debtors represent the uncollected portion

of credit sales. Debtor's Velocity indicates the number of
times the receivables are turned over in business during a
particular period.

 In other words, it represents how quickly the debtors are

converted into cash. It is used to measure the liquidity
position of a concern.

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 This ratio establishes the relationship between receivables
and sales. Alaknanda Lonare
Two kinds of ratios can be used to judge a firm's liquidity
position on the basis of efficiency of credit collection and credit
policy.

Debtor'sTurnover Ratio
Debt Collection Period / Average Collection Period

Debtors turnover ratio = Credit Sales

Average Debtors

Average collection period = Months/days in a year

Debtors turnover ratio

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INTERPRETATION OF DEBTORS
TURNOVER RATIO
 These ratios are indicative of the efficiency of the firm’s
trade credit management.

 A high turnover ratio and shorter collection period indicate

prompt payment by the debtor.

 On the contrary low turnover ratio and longer collection

period indicates delayed payments by the debtor.

 In general a high debtor turnover ratio and short collection

period is preferable.

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Q.17. From the following information calculate (a)
Debtor's Turnover Ratio (b) Debt Collection Period
Ratio
 Total Sales Rs. 1,00,000
 Cash Sales Rs. 25,000
 Sales Return Rs. 5,000
 Opening Accounts Receivable Rs. 10,000

 Closing Accounts Receivable Rs. 15,000

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Q.18. Calculate Debtor's Turnover Ratio, from the
following data:
 Sundry Debtors as on 1.1.2003 Rs.70,000
 Sundry Debtors as on 31.12.2003 Rs. 90,000
 Bills Receivable as on 1.1.2003 Rs. 20,000
 Bills Receivable as on 31.12.2003 Rs. 30,000
 Total Sales for the year 2003 Rs. 7,00,000
 Sales Return Rs. 20,000
 Cash sales for the year 2003 Rs. 1,00,000

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CREDITORS TURNOVER RATIO AND
AVERAGE CREDIT PERIOD
 Creditor's Turnover Ratio is also called as Payable
Turnover Ratio or Creditor's Velocity.

 The credit purchases are recorded in the accounts of the

buying companies as Creditors or Accounts Payable. The
Term Accounts Payable or Trade Creditors include sundry
creditors and bills payable.

 Creditor's velocity ratio indicates the number of times with

which the payment is made to the supplier in respect of
credit purchases.

 This ratio establishes the relationship between the net 70

credit purchases and the average trade creditors.
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 Two kinds of ratios can be used for measuring the efficiency
of payable of a business concern relating to credit purchases.

 Creditor's Turnover Ratio

 Creditor's Payment Period

Creditors turnover ratio = Credit Purchases

Average creditors

Average credit period = Months/days in a year

Creditors turnover ratio

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INTERPRETATION OF CREDITORS
TURNOVER RATIO

 Higher creditors turnover ratio and short credit

period signifies that the creditors are being paid
promptly and it enhances the creditworthiness of
the firm.

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Q.19. From the following information calculate (1)
Creditor's Turnover Ratio and (2) Average Payment
Period

 Total Purchase Rs.3,00,000

 Cash Purchases Rs.1,75,000
 Purchase Return Rs. 25,000
 Sundry Creditors 1.1.2003 Rs. 30,000
 Sundry Creditors 31.12.2003 Rs. 15,000
 Bills Payable 1.1.2003 Rs. 7,000
 Bills Payable 31.12.2003 Rs. 8,000

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 FIXED ASSETS TURNOVER RATIO
 Fixed Assets Turnover Ratio is used to measure the
utilization of fixed assets. This ratio indicates the efficiency of
assets management by the company.

 This ratio establishes the relationship between cost of goods

sold and total fixed assets.
 Fixed Assets Turnover Ratio = Cost of Goods Sold s
Average Net Fixed Assets

Alternatively this ratio can be calculated as:

 This ratio establishes the relationship between Sales and net
fixed assets.
 Fixed Assets Turnover Ratio = Sales s
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Net Fixed Assets
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INTERPRETATION OF FIXED ASSETS
TURNOVER RATIO

 Higher the ratio highlights a firm has

successfully utilized the fixed assets. If the ratio
is depressed, it indicates the under utilization of
fixed assets.

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Alaknanda Lonare
 Q.20. Find out Fixed Assets Turnover Ratio from
the following information:

 Sales Rs. 5,00,000

 Total Fixed Assets Rs. 6,25,000
 Depreciation Rs. 25,000
 Opening Stock Rs. 40,000
 Closing Stock Rs. 60,000
 Purchases Rs. 3,00,000

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Q.21. From the following compute purchases made
during the year and stock turnover ratio:

 Inventory at the beginning of the year Rs.14,000

 Inventory at the end of the year Rs. 21,000
 Sales Rs.1,20,000
 Sales Return Rs.6,000
 Gross Profit Rs.26,500

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Q.22. From the following details you are required to
calculate (a) Sales (b) Purchases (c) Opening Stock (d)
Closing Stock (e) Debtors (f) Creditors (g) Fixed Assets

 Stock Velocity = 6
 Capital Turnover Ratio = 2

 Fixed Asset Turnover Ratio = 4

 Gross Profit Ratio = 20%

 Debtors Velocity = 2 months

 Creditors Velocity = 73 days

 The gross profit was Rs.60,000. Reserve and Surplus

amounts to Rs.20,000. Closing stock was Rs.5,000 in
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Q.23. The following information is given about M/s Gouri Ltd. for the year
ending Dec. 31st 2021:
 (a) Share Capital Rs. 8,40,000
 (b) Bank Overdraft Rs. 50,000
 (c) Working Capital Rs. 2,52,000
 (d) Current Ratio 2.5 :1
 (e) Quick Ratio 1.5 : 1
 (f) Gross Profit Ratio 20 % on sales
 (g) Stock Turnover Ratio 5 times
 (h) Sales for 2017 Rs. 5,00,000
 (i) Trade Debtors Rs. 70,000
 (j) Opening Creditors Rs. 40,000
 (k) Closing Creditors Rs. 30,000
 (I) Closing Stock is Rs. 20,000 higher than the opening stock
Find Out:
 (a) Current Assets and Current Liabilities (b) Cost of goods sold, Average
stock and Purchases.
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 (c) Creditor's Turnover Ratio (d) Creditor's Payment Period.
 (e) Debtor's Turnover Period (f) Debtor's Collection Period. Alaknanda Lonare