Illustration 1.

From the following Balance Sheet of Light Ltd. as at 31st March, 2022, calculate Current Ratio:
Particulars Note No. `
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 7,50,000
(b) Reserves and Surplus 2,50,000
2. Non-Current Liabilities
Long-term Borrowings 6,00,000
3. Current Liabilities
(a) Short-term Borrowings 3,50,000
(b) Trade Payables 50,000
(c) Short-term Provisions 50,000
Total 20,50,000
II. ASSETS
1. Non-Current Assets
Property, Plant and Equipment and Intangible Assets:
Property, Plant and Equipment 10,00,000
2. Current Assets
(a) Inventories 4,00,000
(b) Trade Receivables 3,00,000
(c) Cash and Cash Equivalents 2,75,000
(d) Other Current Assets 75,000
Total 20,50,000

Additional Information:
Inventories include Loose Tools of ` 1,50,000.
Other Current Assets: Prepaid Expenses ` 25,000; and Advance Tax ` 50,000.
Solution:
Current Assets ` 9,00,000
Current Ratio = = = 2 : 1. = 2 : 1.
Current Liabilities ` 4,50,000
Current Assets = Inventories (Except Loose Tools) + Trade Receivables
+ Cash and Cash Equivalents + Other Current Assets
= ` 4,00,000 – ` 1,50,000 + ` 3,00,000 + ` 2,75,000 + ` 75,000 = ` 9,00,000.
Current Liabilities = Short-term Borrowings + Trade Payables + Short-term Provisions
= ` 3,50,000 + ` 50,000 + ` 50,000 = ` 4,50,000.
Illustration 2.
Ratio of Current Assets (` 10,00,000) to Current Liabilities (` 4,00,000) is 2.5 : 1. The accountant
of the firm is interested in maintaining a Current Ratio of 2 : 1, by acquiring some current assets
on credit. You are required to suggest him the amount of current assets that should be acquired.
Solution:
Let the amount of Current Assets acquired on credit be x
After the acquisition of Current Assets on credit, Current Assets and Current Liabilities
both will increase by x. Thus,
Current Assets ` 10,00,000 + x
Current Ratio = = =2
Current Liabilities ` 4,00,000 + x
` 8,00,000 + 2x = ` 10,00,000 + x
2x – x = ` 10,00,000 – ` 8,00,000
x = ` 2,00,000.
1
Illustration 3.
X Ltd. has Liquid (Acid Test) Ratio 2 : 1. If its Inventories (Stock) are ` 20,000 and its
total Current Liabilities are ` 50,000, find its Current Ratio. (Foreign 2002)

Solution:
Current Assets ` 1,20,000
Current Ratio = = = 2.4 : 1.
Current Liabilities ` 50,000
Liquid Ratio = Liquid Assets : Current Liabilities
= 2 : 1 (Given)
If Current Liabilities are ` 50,000, then Liquid Assets would be ` 1,00,000.
And Current Assets = Liquid Assets + Inventories
= ` 1,00,000 + ` 20,000 = ` 1,20,000.

Illustration 4.
From the following Statement of Profit & Loss of Reynold Ltd., calculate Inventory Turnover
Ratio:
STATEMENT OF PROFIT & LOSS for the year ended 31st March, 2022
Particulars Note No. `

I. Revenue from Operations 15,00,000

II. Other Income 15,000
III. Total Revenue (I + II) 15,15,000
IV. Expenses:
Cost of Materials Consumed 1 5,25,000
Changes in Inventories of Finished Goods and Work-in-Progress 2 (25,000)
Employees Benefit Expenses 2,50,000
Depreciation and Amortisation 15,000
Other Expenses 2,10,000
Total Expenses 9,75,000
V. Profit before Tax (III – IV) 5,40,000

Notes to Accounts
Particulars `

1. Cost of Materials Consumed

Opening Inventory of Materials 2,00,000
Add: Purchases of Materials 4,25,000
6,25,000
Less: Closing Inventory of Materials 1,00,000
5,25,000
2. Changes in Inventories of Finished Goods and WIP
Work-in-Progress:
Opening Inventory 50,000
Less: Closing Inventory 75,000
(25,000)

2
Solution:
Cost of Revenue from Operations ` 5,00,000
Inventory Turnover Ratio = = = 2.35 Times.
Average Inventory ` 2,12,500
Cost of Revenue from Operations (Cost of Goods Sold)
= Cost of Materials Consumed + Changes in
Inventories of Finished Goods and WIP
= ` 5,25,000 – ` 25,000 = ` 5,00,000.
Average Inventory = Opening Inventory (Materials, Finished Goods and WIP)
Closing Inventory (Materials, Finished Goods and WIP)
2
` 2,00,000 + ` 50,000 + ` 1,00,000 + ` 75,000
= = ` 2,12,500.
2
Notes: 1. Direct Expenses are not given. Hence, they are assumed to be nil.
2. Inventories are included in Cost of Materials Consumed and Changes in Inventories of Finished Goods and WIP.

Illustration 5.
Following is the Statement of Profit & Loss of Uniball Ltd. for the year ended 31st March,
2022, calculate Operating Ratio:

STATEMENT OF PROFIT & LOSS

for the year ended 31st March, 2022
Particulars Note No. `

I. Revenue from Operations (Net Sales) 4,00,000

II. Other Income 10,000
III. Total Revenue (I + II) 4,10,000
IV. Expenses:
Purchases of Stock-in-Trade 2,25,000
Change in Inventories of Stock-in-Trade (15,000)
Employees Benefit Expenses 6,000
Other Expenses 1 34,000
Total Expenses 2,50,000

V. Profit (III – IV) 1,60,000

Note to Accounts
Particulars `

1. Other Expenses
Administrative Expenses 10,000
Selling and Distribution Expenses 14,000
Loss on Sale of Fixed Asset 10,000
34,000

3
 Cost of Revenue from Operations + Operating Expenses
Solution: Operating Ratio = × 100
Revenue from Operations

` 2,16,000 + ` 24,000
= × 100 = 60%
` 4,00,000
Notes:

1. Cost of Revenue from Operations

= Purchases of Stock-in-Trade + Change in Inventories + Employees Benefit Expenses
= ` 2,25,000 – ` 15,000 + ` 6,000 = ` 2,16,000.
2. Operating Expenses = Administrative Expenses + Selling and Distribution Expenses
= ` 10,000 + ` 14,000 = ` 24,000.
3. Loss on sale of fixed asset is not an operating expense.

Illustration 6.

Calculate Operating Profit Ratio from the following information:

` `
Opening Inventory 50,000 Selling Expenses 60,000
Purchases 5,00,000 Dividend on Shares 15,000
Sales (Gross) 7,50,000 Loss by Theft 10,000
Closing Inventory 75,000 Sales Return 15,000
Administrative Expenses 25,000

Solution:
Operating Profit ` 1,75,000
Operating Profit Ratio = × 100 = × 100 = 23.81%
Revenue from Operations ` 7,35,000

Notes: 1. Revenue from Operations (Net Sales) = Sales (Gross) – Sales Return = ` 7,50,000 – ` 15,000 = ` 7,35,000.
2. Operating Profit = Revenue from Operations (Net Sales) – (Purchases + Change in Inventories
of Stock-in-Trade + Other Expenses, i.e., Administrative Expenses and
Selling Expenses)
= ` 7,35,000 – (` 5,00,000 – ` 25,000 + ` 25,000 + ` 60,000) = ` 1,75,000.
3. Closing Inventory is more than the Opening Inventory. Hence, it is deducted to calculate Operating Cost.

Illustration 7.
Calculate Total Assets to Debt Ratio from the following information:
Long-term Debts ` 16,00,000; Total Assets ` 24,00,000.
Total Assets ` 24,00,000
Solution: Total Assets to Debt Ratio =   1.5 : 1.
Long-term Debts ` 16,00,00

4
Illustration 8.
From the following information, calculate Inventory Turnover Ratio:
Net Sales ` 4,00,000; Average Inventory ` 55,000; Gross Loss on Sales is 10%.

Solution:
Cost of Revenue from Operations ` 4,40,000
Inventory Turnover Ratio = = = 8 Times.
Average Inventory ` 55,000
Working Note:
Net Sales = ` 4,00,000
Gross Loss = 10% of ` 4,00,000 = ` 40,000.
Cost of Revenue from Operations = Net Sales + Gross Loss
= ` 4,00,000 + ` 40,000 = ` 4,40,000.

Illustration 9.
From the following Balance Sheet of Maharaja Ltd. as at 31st March, 2022 and additional
information, calculate Trade Receivables Turnover Ratio and Debt Collection Period (in months):

BALANCE SHEET as at 31st March, 2022

Particulars Note No. `

I. EQUITY AND LIABILITIES

1. Shareholders’ Funds
(a) Share Capital 5,00,000
(b) Reserves and Surplus 2,00,000
2. Non-Current Liabilities
Long-term Borrowings 2,50,000
3. Current Liabilities
(a) Trade Payables 2,00,000
(b) Short-term Provisions 10,000
Total
11,60,000

II. ASSETS
1. Non-Current Assets
Property, Plant and Equipment and Intangible Assets:
Property, Plant and Equipment 7,00,000
2. Current Assets
(a) Inventories 1,00,000
(b) Trade Receivables 3,50,000
(c) Cash and Cash Equivalents 10,000
Total
11,60,000

Additional Information:
1. Revenue from Operations, i.e., Net Sales being Credit Sales ` 15,00,000 and Cash Sales
` 2,50,000.
2. Trade Receivables in the beginning of the year were ` 4,50,000.

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Solution:
(i) Trade Receivables Turnover Ratio
Credit Revenue from Operations (Net Credit Sales)
=
Average Trade Receivables

` 15,00,000
= = 3.75 Times.
` 4,00,000 *

` 3,50,000  ` 4,50,000
*Average Trade Receivables = = ` 4,00,000.
2
12 12
(ii) Average Collection Period = = = 3.2 Months.
Trade Receivables Turnover Ratio 3.75

Illustration 10.
Current Assets ` 12,00,000; Current Liabilities ` 2,40,000; Sales: Credit ` 24,00,000 and
Cash ` 5,20,000; Sales Return ` 40,000; calculate Working Capital Turnover Ratio from
the above information.
Solution:
Revenue from Operations, i.e., Net Sales
Working Capital Turnover Ratio =
Working Capital

` 28,80,000
= = 3 Times.
` 9,60,000
Revenue from Operations, i.e., Net Sales
= Cash Sales + Credit Sales – Sales Return
= ` 5,20,000 + ` 24,00,000 – ` 40,000 = ` 28,80,000.
. Working Capital = Current Assets – Current Liabilities
= ` 12,00,000 – ` 2,40,000 = ` 9,60,000.
Illustration 11.
From the information given below, calculate (i) Current Ratio and (ii) Debt to Equity Ratio:
Information: Net profit of the year ` 80,000; Fixed Assets ` 2,00,000; Closing Inventory
` 10,000; Other Current Assets ` 1,00,000; Current Liabilities ` 30,000; Equity Share Capital
` 1,00,000; 10% Preference Share Capital ` 70,000; 12% Debentures ` 60,000 and Revenue
from Operations, i.e., Net Sales during the year ` 5,00,000.
Solution:
Current Assets ` 1,10,000
(i) Current Ratio = = = 11 : 3 or 3.67 : 1.
Current Liabilities ` 30,000
Current Assets = Closing Inventory + Other Current Assets
= ` 10,000 + ` 1,00,000 = ` 1,10,000.
Debt ` 60,000
(ii) Debt to Equity Ratio = = = 0.24 : 1.
Equity (Shareholders’ Funds) ` 2,50,000
Note: Equity = Equity Share Capital + Preference Share Capital + Reserves and Surplus
= ` 1,00,000 + ` 70,000 + ` 80,000 = ` 2,50,000.

6
Illustration 12.
A firm has Current Ratio of 4 : 1 and Quick Ratio of 2.5 : 1. If Inventories are
` 22,500, find total Current Assets and total Current Liabilities.

Solution: Calculation of Current Assets and Current Liabilities:

Let Current Liabilities (CL) be x
Current Ratio is 4 : 1, hence Current Assets = 4x
Quick Ratio is 2.5 : 1, hence Liquid Assets or Quick Assets = 2.5x
Quick Assets + Inventories = Current Assets
or 2.5x + ` 22,500 = 4x
or 1.5x = ` 22,500

` 22,500
x= = ` 15,000
1.5
Thus, Current Liabilities = ` 15,000;
Current Assets = ` 15,000 × 4 = ` 60,000.
Illustration 13.
Current Liabilities of A Ltd. are ` 5,00,000 and Acid Test Ratio (Quick/Liquid Ratio) is
3 : 1. Inventories are ` 2,50,000. Find Current Assets and Current Ratio.
Current Assets ` 17,50,000
Solution: Current Ratio = = = 3.5 : 1.
Current Liabilities ` 5,00,000
Current Liabilities = ` 5,00,000
Quick/Liquid Assets are 3 times the Current Liabilities = 3 × ` 5,00,000 = ` 15,00,000.
Current Assets = Quick Assets + Inventories
= ` 15,00,000 + ` 2,50,000 = ` 17,50,000.

Illustration 14.
From the following information, compute Debt to Equity Ratio:
` `
Shareholders’ Funds: Long-term Borrowings:
Equity Share Capital 2,00,000 10% Debentures 3,50,000
Surplus, i.e., Balance in Statement of Profit & Loss 1,50,000 Current Liabilities 1,00,000

Solution:
Debt (Long-term Debts) ` 3,50,000
Debt to Equity Ratio = = = 1 : 1.
Equity (Shareholders’ Funds) ` 3,50,000

Debt (Long-term Debts) = 10% Debentures = ` 3,50,000.

Equity = Equity Share Capital + Surplus, i.e., Balance in Statement of
Profit and Loss
= ` 2,00,000 + ` 1,50,000 = ` 3,50,000.

7
Illustration 15.
From the following information, compute Debt to Equity Ratio:
` `
Long-term Borrowings 5,00,000 Equity Share Capital 2,00,000
Long-term Provisions 1,00,000 General Reserve 2,00,000
Surplus, i.e., Balance in Statement of
Profit & Loss (Dr.) 1,00,000
Solution:
Debt (Long-term Debts) ` 6,00,000
Debt to Equity Ratio = = = 2 : 1.
Equity (Shareholders’ Funds) ` 3,00,000
Debt (Long-term Debts) = Long-term Borrowings + Long-term Provisions
= ` 5,00,000 + ` 1,00,000 = ` 6,00,000.
Equity = Equity Share Capital + General Reserve – Debit Balance in Surplus,
i.e., Balance in Statement of Profit & Loss
= ` 2,00,000 + ` 2,00,000 – ` 1,00,000* = ` 3,00,000.
*Surplus, i.e., Balance in Statement of Profit & Loss (Dr.) means negative balance, i.e., loss
carried forward.

Illustration 16.
From the following, calculate Proprietary Ratio:
Shareholders’ Funds ` Non-Current Assets `
Equity Share Capital 1,00,000 Fixed Assets (Tangible) 1,25,000
Preference Share Capital 50,000 Current Assets
Reserves and Surplus 25,000 Current Investments 75,000
Non-Current Liabilities Cash and Cash Equivalents 40,000
Debentures 60,000 Other Current Assets 10,000
Current Liabilities (Prepaid Expenses)
Trade Payables 15,000
2,50,000 2,50,000

Shareholders’ Funds ` 1,75,000 (Note)

Solution: Proprietary Ratio = = = 0.7 : 1.
Total Assets ` 2,50,000
Note: Calculation of Shareholders’ Funds or Proprietors’ Funds or Equity:

Liabilities Side Approach ` Assets Side Approach `

Equity Share Capital 1,00,000 Fixed Assets 1,25,000
Add: Reserves and Surplus 25,000 Add: Working Capital* 1,10,000
Equity Shareholders’ Funds 1,25,000 2,35,000
Add: Preference Share Capital 50,000 Less: Long-term Borrowings (Debentures) 60,000
Shareholders’ Funds 1,75,000 Shareholders’ Funds 1,75,000

*Working Capital = Current Assets (Current Investments + Cash and Cash Equivalents
+ Other Current Assets) – Current Liabilities (Trade Payables)
= ` 75,000 + ` 40,000 + ` 10,000 – ` 15,000 = ` 1,10,000.

8
Illustration 17.
From the following information, calculate:
(i) Proprietary Ratio;
(ii) Total Assets to Debt Ratio;
(iii) Debt to Equity Ratio.
` `
Total Debts 12,00,000 Capital Employed 10,00,000
Current Assets 5,00,000 Working Capital 1,00,000
Solution:
Proprietors’ Funds ` 2,00,000
(i) Proprietary Ratio =  100 =  100 = 14.29% .
Total Assets ` 14,00,000

Total Assets ` 14,00,000

(ii) Total Assets to Debt Ratio = = = 1.75 : 1.
Debt ` 8,00,000

Debt (Long-term Debts) ` 8,00,000

(iii) Debt to Equity Ratio = = = 4 : 1.
Equity ` 2,00,000
Working Notes:
1. Current Liabilities = Current Assets – Working Capital
= ` 5,00,000 – ` 1,00,000 = ` 4,00,000.
2. Debt (Long-term Debts) = Total Debts – Current Liabilities
= ` 12,00,000 – ` 4,00,000 (WN 1) = ` 8,00,000.
3. Total Assets = Capital Employed + Current Liabilities
= ` 10,00,000 + ` 4,00,000 (WN 1) = ` 14,00,000.
4. Proprietors’ Funds or Equity = Total Liabilities – Total Debts
= ` 14,00,000 – ` 12,00,000 = ` 2,00,000.
Illustration 18.
Following is the Statement of Profit & Loss of Exe Ltd., calculate Inventory Turnover Ratio:

STATEMENT OF PROFIT & LOSS

for the year ended 31st March, 2022
Particulars Note No. `

I. Revenue from Operations 2,00,000

II. Expenses:
Purchases of Stock-in-Trade 1,20,000
Change in Inventory of Stock-in-Trade 1 20,000
Other Expenses 2 30,000
Total Expenses 1,70,000
III. Profit before Tax (I – II) 30,000
IV. Less: Tax 5,000
V. Profit after Tax (III – IV) 25,000

9
Notes to Accounts
Particulars `

1. Change in Inventory of Stock-in-Trade

Opening Inventory 40,000
Less: Closing Inventory 20,000
20,000
2. Other Expenses
Carriage Inwards 10,000
Carriage Outwards 12,500
Miscellaneous Expenses 7,500
30,000

Solution:
Inventory Turnover Ratio

Cost of Revenue from Operations (Cost of Goods Sold) ` 1,50,000

= = = 5 Times.
Average Inventory ` 30,000

Cost of Revenue from Operations (Cost of Goods Sold)

= Purchases of Stock-in-Trade + Change in Inventory of
Stock-in-Trade + Direct Expenses
= ` 1,20,000 + ` 20,000 + ` 10,000* = ` 1,50,000.
*Direct Expenses are Carriage Inwards taken from Note to Accounts on Other Expenses.

Opening Inventory + Closing Inventory

Average Inventory =
2

` 40,000 + ` 20,000
=  ` 30,000
2
Illustration 19.
From the following details, calculate Trade Receivables Turnover Ratio: `

Total Sales for the year (Net) 1,75,000

Cash Sales (Net) 20% of Total Net Sales
Sales Return—Out of Credit Sales 10,000

Sundry Debtors:
Opening balance 8,000
Closing balance 12,000

Solution:
Trade Receivables Turnover Ratio
Credit Revenue from Operations (Net Credit Sales) ` 1,40,000
= = = 14 Times.
Average Debtors ` 10,000

10
Note: Credit Revenue from Operations, i.e., Net Credit Sales
= Total Net Sales – Net Cash Sales
= ` 1,75,000 – ` 35,000 (i.e., 20% of ` 1,75,000) = ` 1,40,000.
Average Debtors = (Opening Debtors + Closing Debtors)/2

= (` 8,000 + ` 12,000)/2 = ` 10,000.

Illustration 20.
Calculate amount of Opening Trade Receivables and Closing Trade Receivables from the
following information:
Trade Receivables Turnover Ratio 4 times
Cost of Revenue from Operations (Cost of Goods Sold) ` 6,40,000
Gross Profit Ratio 20%
Closing Trade Receivables were ` 20,000 more than in the beginning.
1
Cash Sales being 33 % of Credit Sales.
3
Solution:
Sales = Cost of Revenue from Operations (Cost of Goods Sold) + Gross Profit
Let Sales or Revenue from Operations = ` 100; Gross Profit = ` 20
Cost of Revenue from Operations (Cost of Goods Sold) = ` 100 – ` 20 = ` 80
If Cost of Revenue from Operations (Cost of Goods Sold) is ` 80, Sales = ` 100
If Cost of Revenue from Operations (Cost of Goods Sold) is ` 6,40,000,
` 6,40,000  100
Sales or Revenue from Operations = = ` 8,00,000.
80
Total Sales = Cash Sales + Credit Sales
Let the Credit Sales be x; Cash Sales = x/3
x
` 8,00,000 = + x or 3x + x = ` 24,00,000
3
x = ` 6,00,000 (Credit Sales).
Credit Revenue from Operations, i.e., Net Credit Sales
Trade Receivables Turnover Ratio =
Average Trade Receivables
Average Trade Receivables = (Opening Trade Receivables + Closing Trade Receivables)/2
Let Opening Trade Receivables be y, Closing Trade Receivables = y + ` 20,000
` 6,00,000
4 (Given) =
y  y  ` 20,000
2
4y + 4y + ` 80,000 = ` 12,00,000
8y = ` 11,20,000
y = ` 1,40,000 (Opening Trade Receivables).
Closing Trade Receivables = Opening Trade Receivables + ` 20,000
= ` 1,40,000 + ` 20,000 = ` 1,60,000.

11
Illustration 21.
From the following information, calculate Gross Profit Ratio:
31st March, 2021 (`) 31st March, 2022 (`)
Revenue from Operations (Net Sales) 1,60,000 2,00,000
Gross Profit 40,000 60,000

Solution:
Gross Profit
Gross Profit Ratio =  100
Revenue from Operations (Net Sales)
` 40,000
For 31st March, 2021: Gross Profit Ratio =  100 
25%.
` 1,60,000
` 60,000
For 31st March, 2022: Gross Profit Ratio =  100 
30%.
` 2,00,000
Illustration 22 (Calculation of Return on Investment When Closing Balance Sheet is given).
Following is the Balance Sheet of Paliwal Exports Ltd. as at 31st March, 2022:
Particulars Note No. `
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 5,00,000
(b) Reserves and Surplus:
Surplus, i.e., Balance in Statement of Profit & Loss:
Opening Balance 6,08,400
Add: Transfer from Statement of Profit & Loss 7,83,600 13,92,000
2. Non-Current Liabilities
15% Long-term Borrowings 16,00,000
3. Current Liabilities 8,00,000
Total 42,92,000
II. ASSETS
1. Non-Current Assets
(a) Property Plant and Equipment and Intangible Assets:
—Property Plant and Equipment 18,00,000
(b) Non-current Investments:
(i) 10% Investments 2,00,000
(ii) 10% Non-trade Investments 1,20,000
2. Current Assets 21,72,000
Total 42,92,000

You are required to calculate Return on Investment for the year ended 31st March, 2022
with reference to Capital Employed.
Solution:
Net Profit before Interest and Tax
Return on Investment or Capital Employed =  100
Capital Employed
` 10,11,600
= × 100 = 30%.
` 33,72,000

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Calculation of Net Profit before Interest and Tax: `

Net Profit 7,83,600

Add: Interest on Long-term Borrowings (15% on ` 16,00,000) 2,40,000
10,23,600
Less: Interest on Non-trade Investments (10% on ` 1,20,000) 12,000

Net Profit before Interest and Tax 10,11,600

Capital Employed (Liabilities Side Approach)

Capital Employed = Share Capital + Reserves and Surplus + Non-Current Liabilities
– Non-trade Investments
= ` 5,00,000 + ` 13,92,000 + ` 16,00,000 – ` 1,20,000 = ` 33,72,000.

Capital Employed (Assets Side Approach)

Capital Employed = Non-current Assets (excluding Non-trade Investments) + Current Assets
– Current Liabilities
= ` 18,00,000 + ` 2,00,000 + ` 21,72,000 – ` 8,00,000 = ` 33,72,000.

Note: 10% Investments are Trade Investments.

Illustration 23.
Current Ratio of a company is 3 : 1. State, giving reasons, which of the following would
improve, reduce or not change the ratio:

(i) Declaration of a final dividend;

(ii) Issue of bonus shares out of profits;

(iii) Bills receivable endorsed in favour of a creditor;

(iv) Endorsed bill dishonoured;

(v) Bills receivable dishonoured at maturity;

(vi) Bills payable accepted for 3 months;

(vii) Bills payable paid at maturity;

(viii) Redemption of Preference Shares out of proceeds from fresh issue of shares of
equal amount; and

(ix) Debentures converted into Equity Shares.

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Solution: Statement Showing the Effect of Different Items on Current Ratio
Transactions Effect on Current Ratio Reason
(i ) Reduce Current assets are more than current liabilities and declaration of
a final dividend will increase current liabilities but current assets
will remain same. Therefore, Current Ratio will decline.
(ii ) No change Issue of bonus shares will not change current assets or current
liabilities. Therefore, Current Ratio will not change.
(iii ) Improve Endorsement of bills receivable in favour of creditors will reduce
current assets and current liabilities by the same amount. Therefore,
Current Ratio will improve.
(iv) Reduce Endorsed bill dishonoured will increase trade receivables (debtors)
and trade payables (creditors) by same amount. Therefore, Current
Ratio will reduce.
(v ) No change Bills receivable dishonoured will not change current assets
because one current asset will be replaced by another, i.e., debtors.
Therefore, Current Ratio will remain same.
(vi ) No change Bills payable accepted will not change current liabilities because
one current liability will be replaced by another, i.e., creditors.
Therefore, Current Ratio will remain same.
(vii) Improve Bills payable paid at maturity will reduce current assets and current
liabilities by the same amount. Therefore, Current Ratio will improve.
(viii ) No change Redemption of Preference Shares by issuing new shares will not
change current assets. Therefore, Current Ratio will not change.
(ix) Improve Conversion of debentures into shares will decrease current liabilities
(As per Schedule III). Therefore, Current Ratio will improve.

Illustration 24.

From the following information, calculate:

(i) Operating Ratio, (ii) Quick Ratio,
(iii) Current Ratio and (iv) Working Capital Turnover Ratio.
Information: Equity Share Capital ` 1,00,000; 12% Preference Share Capital ` 80,000;
12% Debentures ` 60,000; General Reserve ` 40,000; Revenue from Operations ` 3,00,000;
Opening Inventory ` 10,000; Purchases ` 1,20,000; Wages ` 30,000; Closing Inventory
` 30,000; Selling and Distribution Expenses ` 10,000; Quick Assets ` 2,00,000 and Current
Liabilities ` 1,20,000.

Solution:
(i) Operating Ratio

Cost of Revenue from Operations (Cost of Goods Sold) + Operating Expenses

=  100
Revenue from Operations (Net Sales)

` 1, 30,000  ` 10,000 ` 1,40,000

=  100 = × 100 = 46.67%.
` 3,00,000 ` 3,00,000

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 Cost of Revenue from Operations (Cost of Goods Sold)
= Opening Inventory + Purchases + Wages – Closing Inventory
= ` 10,000 + ` 1,20,000 + ` 30,000 – ` 30,000 = ` 1,30,000.

Operating Expenses = Selling and Distribution Expenses = ` 10,000.

Quick Assets ` 2,00,000

(ii) Quick Ratio =  = 1.67 : 1.
Current Liabilities ` 1,20,000

Current Assets ` 2, 30,000

(iii) Current Ratio =  = 1.92 : 1.
Current Liabilities ` 1, 20,000

Note: Current Assets = Quick Assets + Inventories.
= ` 2,00,000 + ` 30,000 = ` 2,30,000.

Revenue from Operations

(iv) Working Capital Turnover Ratio = Working Capital

` 3,00,000
= = 2.73 Times.
` 1,10,000

Working Capital = Current Assets – Current Liabilities

= ` 2,30,000 – ` 1,20,000 = ` 1,10,000.

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