1. ABC Ltd. Provides you the following financial statements for the year ended 31-12-2019.

Income Statement
To Opening Stock 99,500 By Sales
To Purchases 8,50,000 |
5,45,250 By Closing stock 1,49,000
To Incidental Expenses 14,250
To Gross Profit cld 3,40,000
9,99,000 9,99,000
Operating expenses:
To Selling & Distribution 30,000 By Gross Profit b/d 3,40,000
To Administration 1,50,000 By Non-operating income 9,000
To Interest
15,000
To Non-operating expense 4,000
To Net Profit 1,50,000
3,49,000 3,49,000

Balance sheet as on 31-12-2018

Liabilities Amount Assets Amount

2000 equity shares of? 100 each 2,00,000 Land & Building 1,50,000
Debentures 70,000 Plant & Machinery 80,000
Reserves 20,000 Stock in Trade 1,49,000
Creditors 40,000 Sundry Debtors 71,000
B/P 60,000 Cash & Bank balance 30,000
Overdraft 30,000
P&Lac 60,000
4,80,000 4,80,000

Calculate the following ratios for the purpose of analyzing the financial position of ABCLtd.
1. Current ratio; 9. Total assets turnover ratio;
2.Quick ratio; 10.0wned capital turnover ratio;
3. Debt equity ratio; 11.Interest coverageratio;
4. Fixed asset ratio; 12.Operating profit ratio;
5. Fixed asset to net worth ratio: 13. Return on investment ratio;
6. Proprietary ratio; 14. Return on total resources ratio
7. Stock turnover ratio; 15.N/P ratio;
8. Fixed asset turnover ratio; 16.G/P ratio.
17. Earnings per Share
Solution:

Analysis of Income Statement

Sales
Less: cost of goods sold: 8,50,000
Opening stock 99,500
(+) Purchase
5,45,250
6,44,750
(+) Incidental expenses 14,250
(-) closing stock 6,59,000,
1,49,000 5,10,000
Gross Profit
3,40,000
Less: Operating expenses:
Selling and Distribution 30,000
Administration 1,50,000 1,80,000
Operating Profit 1,60,000
Less: Interest
15,000
Profit After Interest(PAI) 1,45,000
Less: Non-operating expenses 4,000
1,41,000
Add: Non-operating incomes 9,000
Net Profit 1,50,000
Capital Employed -Equity+ Debt
a) Equity:
Equity Shares 2,00,000
(+) Reserves 20,000
(+) Profit & Loss 60,000 2,80,000
b) Debts
Debentures 70,000
Capital employed =Equity + Debt 3,50,000

Investment of capital employed

Fixed Assets
Land & Building 1,50,000
Plant & Machinery 80,000
Fixed Assets total 2,30,000 2,30,000
Working Capital(CA-CL)
Current Assets
Stock 1,49,000
Cash 30,000
Debtors 71,000
Current Assets Total 2,50,000 2,50,000

Current Liability
Bills payable 60,000
Creditors 40,000
Overdraft 30,000
Current Liability Total 1,30,000 1,30,000
Working Capital=CA-CL 1,20,000
1. Current Ratio= Current Assets 2,50,000
Current Liabilities 1,30,000
= 1.92: 1
Ideal /Standard Ratio - 2:1
Though it is satisfactory unfavourable for the
constitutes stock in trade. organization has major portion of the current assets

2. Quick Ratio Quick Current Assets QCA =CA- Stock & Prepaid Expenses
Quick Current Liabilities QCL = CL- OD & Cash Credit

1,01,000 QCA = 2,50,000-1,49,000 = 1,01,000

1,00,000 QCL = 1,30,000-30,000 = 1,00,000
=1.01:1

Ideal / Standard Ratio -1:1

Debt 70,000
3. Debt Equity = =Actual Ratio = 0.25: 1
Equity 2,80,000
Ideal / Standard 2:1

Has the actual ratio is below the standard, it indicates that the long term solvency of the concern
quiet satisfactory.(Lower the ratio stronger is thefinancial position)
Net Fixed Assets 2,30,000
4. Fixed Assets Ratio = 0.66: 1
Capital Employed 3,50,000

Ideal/Standard 0.67
Has the actual ratio is less than the standard, hence the financial position of the company is
satisfactory.
Net Fixed Assets 2,30,000
5. Fixed Assets to Net Worth Ratio = = 0.82:1
Net Worth 2,80,000

Ideal / Standard 0.5 or higher: 1

is
The financial structure of the company is not sound, has the major portion of the net worth
utilized for financing fixed assets.
Net worth 2,80,000
6. Proprietary Ratio = Total Assets =0.58 :1
4,80,000

Ideal / Standard 0.5:1

Higher the ratio better is the financial position.

 7. Stock Turnover Ratio = Cost of Goods Sold 5,10,000
Average Stock = 4.10 or 4 times in a
1,24,250 year

Openingstock+Closing stock
Average Stock =
2
99,500+1,49,000 2,48,500
2 2 F1,24,250
Averge Stock
Cost of goods sold x 365
1,24,250
x 365
5,10,000

=90 daysapproximately
Ideal /Standard8times
Actual ratio (4 times a year) is less than the
not affected, over stocking and standard, hence it would suggest that more sales are
inefficient inventory management. It would also affect the
liquidly position.
8. Fixed Asset Net Sales 8,50,000
Turnover Ratio
Net Fixed Assets 2,30,000
=3.7 times

Ideal / Standard 5 times

A low ratio indicated inefficiency in the utilization of fixed assets

Net Sales 8,50,000
9. Total Assets Turnover Ratio =
= 1.8 times
Total Assets 4,80,000
Ideal /Standard 5 times
Has the actual ratio less than the standard, conclusion is that the resources/ total
asssets of the
company have not been utilized efficiently and effectively.

Net Sales 8,50,000

10. Owned Capital Turnover Ratio = =3 times
Net Worth 2,80,000
Normal ratio indicates the better utilization of owner's fund.
11. Interest Coverage Ratio or Debt Service Ratioor Fixed Coverage Ratio =
Net Profitbefore interest and tax 1,60,000
Interest = | | times
15,000

Higher ratio indicates the regular and periodic payment of interest.

12.
Operating Profit Ratio =Operating Profit
Net Sales X 100
1,60,000 X 100
8,50,000
Ideal / Standard 10% =
18.82% or 19
Company is more profitable approximately
13. Return on
Investment ratio= Net Profit before interest &tax
Capital employed x100 = 1,60,000
3,50,000 X 100
Ideal / Standard 15% = 45.7% or 46
(approximately)
Company is highly profitable
14. Return on
total resources ratio = NP after tax X 100 1,50,000
Total Assets X 100
4,80,000

Ideal /Standard is 10 to
=31.25% or 31% (approximately)
12%
High ratio indicate the
productivity of the resources and also profitability.
15. Net Profit ratio = NP
X 100 1,50,000
Net Sales X 100
8,50,000

= 17.64% or 18%
(approximately)
High net profit indicates the profitability of the
concern.
16. Gross Profit ratio= G/P 3,40,000
X 100 X 100 = 40%
Net Sales 8,50,000
High gross profit indicates the profitability of the concern.

17. Earnings per Share (EPS) = Net profit available for Equity share holders
No.of Equity Shares
1,50,000
2,000
= Rs.75 per share