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Ratios
Ratios
RAJAGOPAL
Ratio analysis
Learning objective 1:
Balance Sheet Vertical Format
II Application of Funds
A. Fixed assets [Cost-Depn]
Tangible Fixed assets XXX
Intangible Fixed assets XXX
Capital Work in Progress XXX
TOTAL XXX
B. Long term Investments XXX
C. Working capital
Current Assets XXX
- Current Liabilities (XXX)
TOTAL XXX
C. Capital Employed [A+B+C] XXX
Notes:
1. Share capital = Equity share capital + Preference share capital
2. Reserve and surplus = Free reserves + Capital reserves + Statutory reserves
3. Share holders funds also called as Equity, Net worth, Owners fund or Proprietor’s funds.
4. Misc expenses = Preliminary expenses, discount on issue, P&L account [Dr]
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Learning Objective 2:
Note:
1. Sales = Sales – Sales return [Net sales]
2. Cost of production is the manufacturing cost of production seen in cost sheet.
3. Operating income = Discount received, royalty, commission received.
4. Non-operating income = rent received, profit on sale of assets, interest/dividend income
etc.
5. Non-operating expense = loss on sales of assets, write offs etc
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Learning Objective 3:
Types of Ratios
Learning Objective 4:
Ratios Formula
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Solution to Problem 1:
Balance Sheet Vertical Format
II Application of Funds
A. Fixed assets [Cost-Depn]
Tangible Fixed assets
Building 300000
Machinery 260000 560000
Intangible Fixed assets
Goodwill 30000 30000
Capital Work in Progress -
TOTAL 590000
B. Long term Investments -
C. Working capital
Current Assets [Incl loans and advances]
Stock 389000
Debtors 400000
Prepaid expenses 5000
Bank 1000 795000
- Current Liabilities [Incl provisions]
Bank OD 114000
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Creditors 78000
Provision for tax 30000
Proposed dividend 60000 (282000)
TOTAL 513000
C. Capital Employed [A+B+C] 1103000
Ratios
1. Current ratio = Current Assets / Current Liabilities = 795000/282000 = 2.82:1
2. Liquid ratio = Quick Assets / Quick Liability = [795000-389000-5000]/[282000-114000]
= 401000/168000 = 2.39:1
3. Capital gearing ratio = [Debt + Preference capital]/Equity = 500000/603000 = 0.83:1.
4. Proprietary ratio = Equity / Total assets = 803000/[590000+795000] = 0.58:1
5. Debt equity ratio= Debt/Equity = 300000/803000 = 0.37:1
6. Stock to working capital ratio = Stock / Working capital = 389000/[795000-282000] =
0.76:1.
Solution to Problem 2:
Depreciation 8000
Total (175000)
F. Operating Profit [EBIT] [C+D-E] 225000
G. Non-operating income
Dividend on shares 15000
Profit on sale of shares 25000
Total 40000
H. Non-Operating expenses
Loss on sale of assets (45000)
I. Interest -
J. Profit before tax [PBT] [F+G-H-I] 220000
K. Provision for tax (100000)
L. Profit after tax [PAT] [J-K] 120000
Ratios:
1. Gross profit ratio = Gross profit / Sales = 400000/1000000 = 40%
2. operating ratio = Total operating cost / Sales = CGS+ Adm exp + Sell exp/Sales =
600000 + 175000/1000000 = 77.5%
3. Operating profit ratio = EBIT/Sales = 225000/1000000 = 22.5%
4. Selling and distribution exp ratio = 55000/1000000 = 5.5%