[Computation of Ratios Problem 5-1 AA Firm has a sales of Rs, 6 crores, variable cost Rs. 3.5 crores and fixed cost of Rs. 0.65 crores. The firm has debtand equity resources worthof Rs 7 crores and lOcrores respectively. Withthedatagiven show. (@) The firm's ROL (i®) EBIT f ssles decline to Rs. 4-crores, (iy Ifthe industry's assets turnover is 4 times, dos the firm has high or low asset turnover? The cost © af debt is 10%, ignore taxation. (CA Final Nov. 2006) Solution Working Notes Calculation of EBT (Rs. crores) Sales 600 Less: Variable cost (68.33% on sales) 350 Contribution 250 Less: Fixed cost - 065, BRIT \ 185 Less: Interest 070 EBT Lis ‘Total investment = Capital + Debt = 10+7 = Re 17 Fores () Calculation of Firm's ROL EBT gg, = REL 8S crores Total investment Rs, 1 crores xO = 10.88% a8: fe ts) 00 50 30. 8) 00 ‘Chapter Break-even and Cost-Volume: Pofit Analysis a7 {(b) Calculation of sales price per unit to bring BEP down to 1,20,000 units At Break-even point, Sales = Variable cost + Fixed cost Let selling price be ‘x 1,20,000% = (1,20,000 x 15) + 630,000 1,20,000 -= 1800000 + 630,000 * = 2430000/120,000 = 2025 ‘The selling price required is Rs. 2025 per unit. {c) Calculation of margin of safety sales iE profit is Rs. 60,000 Sales = Varlable cost + Fixed cost + Profit Let selling price be ‘x 20x = 155+ 630,000 + 60,000 Wx. 15x = 690,000 690,000/5 = 1,38,000 Sales required to earn profit of Rs. 60,000 fs Rs, 1.38000 units. Beeak-even sales : | Fixed cost Rs. 630,000 ie 5 i Contribution pu. Rs5 { § Marein of sofery (in units) = {38,000 units 1.26.00 units = 12,000 unite 2 Margin of safety (ina = 12,000 nna x Rs, 20 = Rs. 240.000 2 FE prabteme22 ? i A company has fixed cost of Re. 90,000, Sales Rs, 3,00,000 and Profit of Rx 60,000, » | Required: E :3 (Sales volume if in the next period, the company suffered a loss of Rs. 30,000, a (i) What isthe margin of safety for a profit of Rs. 90,0002 (CA. PCE May 2008) E F sation , $C Fined cost + Profit { Rs, 90,000 + Rs.60.000__= Rs. Ls.onn 2 PV.Ratio = \ & Calculation of sales volume if in the next period, the company suffered alos of Rs, 30,000 ‘Contribution = Fixed cost - Loss Rs. 90,000 - Rs. 30,000 Rs. 60,000 Sales = Rs. 60,000/050 Rs. 1,20,000 (i) Calculation of Margin of safery for-a profit of Rs. 50,000 Margin of safety = —Frofit_ _ Rs. 90,000 PY. Ratio ~~ 950 * Rs 1.#0.000i apa mi abet Chapter 5 Fatla Analysis Compurtstionand Comparison offatios 49. (i) Calculation of EBIT i sales dectine to Rs. 4 crores ARs. erarés) Sales Less: Variable cost (4 58.33%) Contribution Lesa: Fined cost EBIT (ii) Assets Turnover Sales Rs. 6 crores re BE ag: Total assets Rs. 17 crores a The industry's asset turnover is$ times, where as the company's assets turnover is only 0.3529, shows ‘avery poor utilization of assets in business, Problem 5-2 The average period af credit allowed by a company to is customers last year was on month and the svernge amount of debtors was Rs. 10lakhs, To increase ‘sale and profitability ‘the company doubled the period of credit during the current year. As a result the. ‘average amount of debtors increased to Rs. 25 Jokhs If the company has a contribution: sales ratio of 40% what additional cntribution bee been carned by the company during the current year? (UCWA Inter June 2000} Solution 5 a : ces brs collection pectid = Debio 12 months Debtors collection: Credit sales = Current year sales means _ Rs.25001 2 months = ee oc 12 months Credit sales 2 months = Rs, 25,00.000 X12 months 2 Credit sales 3,00,00,000 Credit sales 3,00,00,000/2 = Re Ho lakhs Last year sales = 12 months X Rs. 10 lakhs pm, Increase in sales over last year Rs 150- Rs. 120 Increase in contribution over increased sales = Rs. 30 lakhs X 40/100 Problem 5-3 andy Company's equity shares are being traded in the market at Rs. $4. per share with a price-earning rao of 9: The company’s diidend payout is 72%. I has 1,00,000 equity shares of Rs. 10 each and ne rence shares. Book value per share is Rs. 42. Caleulate:() Earnings per share, Gi) Net income, (ii) Dividend yield, and (Ww) Return on equity, (C5. Final June 2000) Solution () Earnings Per Share Price/Earnings Ratio (given) = 9 __ Market price EPS gf: Se ’ EPS OXEPS = Rs 5d EPS = Rs.54/9 = 6 PiEratioPo 2 rs: 50 Part One: Principles of Financial Management (i) Net Income EPS % No. of shares: | Rs. 6X 100,000 Equity shares == Rs. 6,00,000 i Dividend per’ share : ii) Dividend Yield = Market price per share Net income * Dividend payout No, of equity shares 000% 0.72 | Dividend per share= = R432 Rs. 432 Dividend S08 100 =i ae Rs 5a) tiv) Return on Equity = Neineome Ye Baulny . Rs. 600000 7 ~ ge BOK Ton onO Rquiy akares 102, THUS (bese matt pris) Rs, 690000 Se —__ x 100 = 14.285 (bas i Re 42% 1,00,000 Equity shares a sbares a Eo valle) Problem 5-4 A.company has a profit margin of 20% and asset turnover of 3 times. What is the company's return on Investment? How will this return on investment vary if: (}) Profit rangin is increased by 5% 7 : i) Asset turnover is decreased to 2 times ? rE (iil) Profit margin is decreased by 58% and asset turmover is increased to 4 times, (CS. Final Dec, 1995) Solution * Calculation of Impact of Change in Profi Margin and Change in Asset Turnover on| Return on investment. ‘Return on Investment = Profit margin X Asset turnover = 20% 3times = 60m (1) Te profit margin increased by 5% ROL = 256K3 = 75% (@) If asset turnover is decreased to 2 times ROL = 206X2 = 40 (iii) IE profit margin decreased by Sth and asset turnover is increased to 4 times ROI = 134x4 = ope | protien 55 ‘The capital of Growfast Co. Ltd. is as follows: 10% Preference shares of Rs. 10 each Equity shares of Rs. 100 eachChapter 5 Ritio Analysis Computation and Comparison of Ratiok 51 ‘Additional information: Profit after tax at 50% Rs. 15,00,000 Equity dividend paid 10% Depreciation Rs. 6,00,000 Market price per equity share Rs. 200 Calculate the following - (i) Earnings per share, (it) Price earnings ratio, (i) Net Funds flow. (CS. Final June 1997 & June 1999) Solution () Earning Per Share Net profitafter preference dividend __Rs, 15,00,000- Res. 5,00,000 ~Nuwnberefequity shares Sg R29 (ii) Price Earnings Ratio __ Market price per share — Rs.200 =i Earning pershare Rs, 14.29 (is) Net Funds Flow Rs) Profit afier tax 15.00,000 Add: Depreciation 6,09,000 21,00,000. Problem 5-6 ‘ABC Lid, has made plans for the next year. It is estimated that the company will employ total assets of Rs 800,000, 50% of the assets being financed by borrowed capital at an interest rate of 16% per year. Thedirect costs or the year are estimated at Rs. 480,000and all other operating expenses areestimated as. 80,000, The goods will be sold tocustomersat 150% af the direct costs, Income-tax rates assumed ta be 50%. You are required to calculate: (i) Net profit margin (ji) Return on assets (ii) Assets turnover, and Gv) Return on owner's equity (CS. Final June 1996) Salutis - re (Rs) Sales {150% of Direct cost Le. Rs, €80,000) Less: Direct costs ‘Gross profit ‘Less: Operating expenses Earnings before interest and tax Less: Interest on borrowed capital (164 on Rs_4,00,000) Earnings after tax Less: Tax @ 50% Profit after tax @ Net Profit Margin Profit after tax Sale * 100 x 190 = 8% 552. Partne Principles of Financial Managernent ~ (Return on Assets Earnings before interest and tax (1-Tax) Rs. 1,60,000 (1-05) = 100 = “Total assets ik. Bs. §,00,000 um (ii) Assets Turnover ales 1,20 Sit = B72 = 09 times Total assets Rs. 800,000 (iv) Return on Owner's Equity Profit afer tax 4g = FR 8.000_ 6p = ike Equity share capital Rs. 4,00,000 Problem 5-7 ‘A company is capitalised as Follows: (Rs) ‘7m Preference shares, Re, | each 6,009,000, Ordinary shares, Re. 1 each 16,00,000 72,00,000, ‘The following information is relevant as to its financial year just ended: Profit afier taxation at 50% "Re 5,42,000 Capital commitments "Rs, 2.40,000 Market price of ordinary shares Red Ordinary dividend paid 204 Depreciation Rs. 1,20,000 You are required to statc the Following showing the necessary Workings -(a) Dividend yield on ordinary shares (b) Earnings yield (¢) Price-earnings (P/E) ratio (d) Priority percentages (e) Net cash flow. (EWA. Final Dec. 1996) Solution (a) Dividend Yield on Ordinary Shares vacant a0 Se ee ‘Market price per share 4 (b) Earnings Yield __ Profit after tax Preferencedividend 49, Nothinal share value ‘Ordinary share capital Market price (c) P/E Ratio ag: Mashst prtee pf hares, ~ EPS _ Profitaftertax- Preference dividend = SST No. of ordinary shares P/ERatio = 4/03125 = 128 - . EPS.Chapter 3 Ratio Analysis Computation and Comparison of Ratios 53 (a) Priority Percentage Priority payment Re. # = : Preference dividend 43,000 0-775 Ordinary dividend 420,000 175 - 66.79 Retained profit 180,00 66.79 3.42,000 100% (e) Net Cash Flow PET Less: Tax @ 50% PAT. ‘Add: Depreciation ) ) Less: Preference dividend ’ Ordinary dividend , ‘Net Cash Flow 4 Problem 5-8 ‘i Calculate the P/E ratio [rom the following: (Rs) Equity share capital (Rs. 20 cach) 50,00,000 Reserves and surplus 5,00,000 Secured loans at 15% 25,00,000 Unsecured loans at 12.58 410,00,000 . Fixed assets. 30,00,000 Investments: ae 5,00,000 Operating profit ia 25,00,000 : i. Income-tax Rate $0%, Market price/Share Rs. 50, (CA. Final May 1995) 7 Solution (Rs) i ‘Operating profit 5,00,000 + ‘Less: Interest on secured loans @ 15% 3,75,000, Unsecured loans @ 12.5% Profit before tax (PBI) \ ‘Less: Income-tax @ 50% a Profit after tax (PAT) No, of equity shares Profit after tax EPS = ——— . : No.of Equityshares Rs, 2.50.000 bi 7 Market price per share Rs. 30 : P/E ratio Market price pershare/EPS = Rs. 50/Rs,4 = 1250 | x54 Part One: Principles of Financial hlanagement Problem 5-9 Following information are available from the books of Smart Project Lt Debtors velocity 3 months Stock velocity 6 months Creditors velocity 2 months Gross profit ratio 20% Gross profit for the year ended 31s1 March, 2010, was Rs, 5,00,000. Stock on 31st March, 2010 was Rs, 20,000 more than what it was at the beginning of the year, Bills receivable and bills payable were Rs, 60,000 and Rs. 36,667 respectively ‘You are required to calculate the value of (1) sales, (2) sundry debtors, (3) sundry creditors, and (4) closing stick, and alse prepare a note for the finance director on the overall impact of the results. (CS. Inter June 2000 & Dec. 2002} Solution (1) Sales Gross profit = Rs. $,00,000 Rate of gross profit _ Rs. $,00,000% 100 ~ 20 20% Sales = Rs.25,00,000 (2) Sundry Debtors Sales = Rs.25,00,000 Debtors! velocity. = 3.momths eereaeen (Rs) | Year end sales outstanding Rs. 25,00,000 3 3/12 6,25,000 | Less: Bills Receivable 60.000 | Sundry debtors 565,000 (3) Sundry Creditors Purchases = Sales - Gross profit + Increase in Stock or = Cost of goods sold + Increase in Stock (Re) ‘Cost of goods sold (Rs. 25,00,000 - Rs. 5,00,000) 20,00,000, ‘Increasein stock 20,000 Purchases 20,20.000 ‘Year end outstanding for purchases . Rs. 20.20,000 x 2/12 Less: Bills payable Sundry creditors (a) Closing Stock 7 Cost of goods sald (Stock velocity - 6 months) Average stack Rss 20,00,000 X 6/12 10,00,000 Let Opening stock be 'x 1 Closing stock = x+ 20,000 Twice Average stock = 2x + 20000 20,00,000 = 2x + 20,000 ata catChapter $ Ratio Analysis Computation and Compares of Ratios 55 ax = 19,80,900 9,990,000 ‘Thus, the opening stock = Rs. 9,90,000 “Hence, clasiag stock Ra. 9,90,000-+ Rs. 20,000 = Rs, 10,10) Froblem 5-10 For the year 2009-10, a company has sales of R¢, 60,000. Its variable costs were Rs. 30,000 and its fixed costs were Rs. 24,000, The capital employed was Rs. 50,000, ‘The President of the company wishes to frame a strategy to increase return of capital employed by 304, What changes would be required to achieve this objective in case af following alternatives: @) In sales volume, with no change in variable cost and capital employed, (i) In costs, with no change in sales oF capital employed Tn capital employed, with no change in-casts or sales volume: WCWA. Final June 1999) Solution (Rs) Sales 60,000, Less: Cost. Variable cost 30,000 Fixed cost 24000 Profit Before Tax Return on Capital Employed = PET © Capital employed Desired Return on Capital Employed = 12% (existing) + 3% (additional required) ‘Altemative!- Changes in Sales Volume with no change in variable cost and capital employed 1000 = Desired profit. = Rs. 50,000 x 15/100 = Rs.7500 Desired sales = Variable cost + Fined cost + Desired profit = Rs. 30,000-+ Rs, 24,000 + Rs, 7.500 = Rs. 61.500 Jncreste insales-volume required = Rs 61,500-Rs. 60,000 = Res, 1500 AbermativeIl- Change in Costs, with no change in sales or capital eraployed (ee) Sales z 60,000 Less: Variable cost \ 30,000 Geatribution 30,000 Expected profit before tax 7.500 Expected Fixed Cost 22,500 Decrease in Fixed Cost = Rs 24,000-Rs. 22,500 = Rs. 1,500 ‘Aernative ll - Change in Capital Employed, with no change in costs of sales volume: Required capital employed If PBT Rs. 6.000, the Rate of Retura is 154. » Capital employed = Rs. 6.000 x 100/15 Decrease in Capital Employed Desired = Rs, 50,000. Rs. 40,000 = Rs, 10,000 Rs. 40,000See 56 Part One: Principles of Financial Management Problem $11 Following information arc available from recent accounts of M Ltd, Sales for the year Rs, 10,00,000 Gross profit rate 30% Stock turnover ratio == 5 Collection period for debts 3adays Ibis proposed to enter an entirely new market with a product which has nat bees handled before, This ‘will lead to an additional annual sales of Rs, 200,000 having a gross profit rate of 20%, Customers will expect 60 days a credit and additional stock of raw materials equal to three months’ usage will be needed. Raw material costs, on existing products as with the new product, account for 756i of cost of sales 1f the proposal is implemented, how will it affect company’s key ratios (stock tumaver ratio and debe collection period)? (UCWA, Final June 1899) Solution Profitability Statement if Proposal is Implemented (Rs) Particulars Current “Aidittonai Projected Sales 200,000 12,00,000 Less: Cost of sales 1,60,000 Gross profit “90,000 ; Gross profit ratio 208% Calculation of Projected Stock (Bs) Existing stock (Rs. 7.00.00 X 75/100 1/5) 1,05,000, ‘Add: Additions (Rs. 1 60,000 X 75/100 x 1/4) 30000 © Projected stock 135,000 Projected Stock Turnover Ratio . _ Rs.8.60.000 x 0.75 Rs 645,000 Leg - Rs 135000 Rs. 1.35,000 Calculation of Projected Debtors (Bs Existing debtors (Rs. 10,00,000/12 months) 83,333 Add: Additions 7 (Rs. 2,00,000/12 months) 33.333 | Projected debtors 1,16.666 Debt Collection Period = ojeuet Deo KMSdays = Parotid = 3$days Problem 5-12 Ld You are required tomake a quick financial projection (Le, Prajected Income Statement and Projected Balance Sheet) for the year 2010-11 an the basis of the following limited information: 2009-10 Sales Expected growth rate Net profit margin Dividend payout ratio ‘Tax rate (assumed)_ (Chapter § Ratio Analysis :Camputation and Comparison of Ratios 57 t | Balance Sheet as on 313.2010 res Ra lakhs Assets Ra lakhs | Share capital TIS Fixed assets 300 Retained earning 150. Current assets 470 Loans and liabilities 345 0 ‘a0 ‘What will be the dividend rate om the basis of above dividend payout ratio ? You may make necessary + assumptions, (.C.W.A. Final Dec. 1995) “} Solution - Working Notes (Rs. lakhs) hoa Sales 1,000 Add: 408% Growth 400 41,400 (2) Caleulation of Profit Before Tax i Profit after tax @ 20% on sales (Rs 1400 lakhs * 20/100) 280 Add: Tax @ 50% on Profit before tax 20 0 | Profit Before Tax 560 1 (2) Calculation of Dividend payout (40% of profit after tax) 1 = Rs 280 lakhs 40/100 = Rs. 112 lakhs | (4) Computation of Cash and Bank balances : f Profit before tax 00 | Add: Increase in creditors (40% increase) 218 3 f 778 4 Less: 40% increase in current assets 189 t Advance payment of Tax 280 468 | Increase in cash and bank balances 30 | Projected ncome Statereit forthe year 2000-11 (Bs. lakhs) | Sales (40% growth rate) = 1.400 | Profit before tax W400 x 40/100) “360 | Less: Tax @ 50% 280 - Profit after tax 280 | bess: Dividend Bir) i Retained earnings 168 1 Projected Balance Sheet as at 313.2011 (®s. lakhay t ‘Sources of Funds: ‘Shareholders Funds: f Share capital , 175 ' Retained earning 318 ‘493 4 ,o. 858 Part One: Principles of Financial Management Application of Funds: Fixed Assets (cost fess depreciation) Current assets, Loans and Advances: Cash and bank balances 310 Other ciifrent assets: 458 Advance payment of tax 280 @ aa Current Liabilities and Provisions: Loans and liabilities 163 Proposed dividend uz Provision for tax 280 we i155 Net Working Capital @)- 0) 93 ry Comparison of Ratios | Problem 5-13 ‘The projected cash operating expenditure of a company for the next year 2010-11 is Rs. #,82.500.It has quick currentassetsamounting ta Rs, 40,000, You are required to determine the defensive terval ratio | and comment, (CS. Final Dec. 2001) Solution Projected daily cash requirement = Rs. 1,82500/385 days, = Rs. 500 Defensive-Interval Ratio = Gis cores = = fOdays Daily hh requirement 500 Analysis -A higher ratio indicates the better liquidity position to meet the daily operational expenses. In this ease, the quick current assets are sufficient to meet operating expenses for 80-days. + Probtenrs-14 Following ratios have been exttacted From the audited: records at a large siaed industrial company: Pariulars 3008 2007 0s 785 2010 (Current ratio ls 19 2 2 29 Acid test ratio Ws 12 09 or 06 Interpret the trend of these interrelated ratios for justging the short-term liquidity and solvency of the company, (C.5.Inter Dec. 1996) Solution From the data available, itis observed that the current ratio has increased from L.8 to 2.9 in aspan of 5 years. The ideal ratio is 2: 1. This improvement in current ratio must reflect in the improvernent of short-term solvency. But when we analyze the acid test ratio, tis fallen down from 1.7 in 2006 to 06 in 2010, This must mean that most of the current assets are locked up in stacks over a period of timc. ‘The ideal standard acid rest ratio is 1: 1. It means that the company fs not in a position to meet its immediate current linbilities, it may lead totechnical insolvency. Hence, steps should be taken toreduce ‘the investment in inventory and see that the ratio is above the level of 1: 1.Chapter 5 Retio Analysis: Computation and Comparison a Ratios 59 Problem 5-15 Given below are cash position ratios of MRD Lid, and the Industry Average. Industry Average is arrived at by taking average position of 25 companies of the similar trade: = Absolute cash ratio Cash position to (Cash interval total assets ‘ratios Map Led 036 12.50% 25 days Industry average 030 15% 33 days How do you feel about the cash position of MRD Ltd, ? (CA. inter Nov. 1998) Solu Absolute cash ratio indicates the position of the ready cash for meeting the current liabilities: The cath position to total assets ratio is a measure of liquid layer af the assets deployed by business. Interval measure gives an idea about the time length that can be covered by the available cash for mecting ‘operating expenses. On analysis of the data given in the question, Following points can be suinmarizedh, (2) Absolute cash ratio of MRD Lu, fs better than theindustry average. (b) Cash position to total assets ratio of MRD Lid. is lower than that of industry. ‘These ratios indicate that either current liabilitics of MRD Ltd. are relatively lower than that of the industry or its total assets are relatively higher than those of the industry (©) Cash interval of MRD Lid. is also lower than that of the industry, Therefore, by overall assessment, itean be concluded that MRIP Ltd. is maintaining low cash position ag compared to the industry. Problem 5-16 ‘From the Following information comment on the cash position of Candid Limited: Particulars ‘Absolute Cash position to Cash cash ratio total assets ratio interval Candid Limited 05 1s 30 days Industry Average 6 12% 25 days (CA.Final Nov. 2001) Solution Comment on Cash Position (a) ‘The absolute cash ratio islower than the Industry average - Itindicates that there may be lower evel of current assets than the industry or current liabilities are more than the Industry. (b) Thetash position to total assets of Candid Ltd, is higher than the Industry average - It represents better Wquidity of Candid Ltd than the Industry, (c) The cash interval of Candid Ltd.is higher than the industry -1t would meanthathigh cash position ismaintained over the Industry. Problem 5-17 There are three companies in the country manufacturing particular chemical, Following data are available for the year 2009-10 (Rs. ahs} ‘Company Net sales Operating cost Operating assets iad, 300 3S 125 Bled, 1.500 4,200 750 C Led. 1,400 1,050) L250 7 Which is the best performer as per your assessment and why? (CWA, Final Dee. 1994)60 Part One: Principles of Financia! Management - x‘ Solution Comparative Statement of Performance (Rs, lakhs) Particulars ata Bhi __Chid, e 300 | 1,500 Less: Operating cost 255 1.200 Operating profit (ay 45 “300 “330 Operating assets (o) Bs “750 1,250 Retueh on capital employed (ate) X 100 36% 40% 28% Analysis Basing on the return on capital employed. B Ltd. is the best performer as compared ta A Lid, and € Led. Problem 5-18 ‘The actual rati¢s of a company compared to the industry standard are given below. Comment on each ratio and indicate in one or two sentences the nature of action to be taken by the company, Ratio Tadustry ‘Actual for standard _the company Current ratio 22 a Debtors’ turnover ratio 8 4 ‘ Stock tumover ratio 10 3 Net profit ratio * 24% Total debt to total assets 75% 40% (LEWA Inter Dec. 1999) Solution d Ratio Comments ~ fa) Current Ratio Ideal ratio is 2, The company’s pasition is above the normal value and the industry standard, This may alco be due to excessive stack. a {b) Debtors’ Turnover Ratio ‘The industry standard indicates an average collection period af nits while for the company it i only 1 months, The company's __ position is better, (@) Stock Turnover Ratio _—-The stock is moving very slowly. Obviously thereis excessive stock in the company. Perhaps this has boosted wp the exrrent ratio, The salet line sto be considerably erased md sock evel brought (a) Net Profit Ratio Here thecompany’s performances very unsatisfactory compared t0 the overall position in the industry, This ealls for steps to get better sales realization and reduction of the cost of production. (e) Total Debt to Total Assets ‘The percentage is disproportionately high in the company indicating a larger proportion of debt in the capital structure. Too high a debt component means too high a risk for equity shareholders. Problem 5-19 Given below are some information regarding X Ltd. You are also provided with some key ratios For the particular industry to which X Ltd, belongs. Youare required to calculate the relevant raties for X Ltd. Compare them with the industry norms and give vour comments on the performance of the company.ible Chapter 5 Ratio Analysis: Computation and Comparisan of Ratios. 61 Bolance Sheet of X Ltd. as at 31-3-2010 Liabilities Re Assets Re Equity share capital 2500000 Net fixed assets 15,00;000 104 Debentures 6,00,000 Cash so0.000 Sundry creditors 4,00,000 Sundry debtors 750,000 Bills payable 3,50,000 Stocks 12,5000 Other current liabilities 150,000 2 40,00,000 #0,00,000 The sales for the company for the yearending 31-3-2010amounted to Rs. 60,00,000 and the gross profit ‘was Rs. 17,00,000. Industry Norms Ratios considered Curcent ratio. 23 Sales/Debtors 15 Sales/Stock 80 Ssles/'Total asscts 25 Gross Profit ratio 35% (LCA, Final June 2001) Solution Calesilatfon of Ratios ein __Current Assets ‘6 is ae ~ Current Liabilities Se Sales/Debt =e (2)Sales/Debtars me Sales I 4 (3)Sales/Stock = 80 Sales 498 1 Ass a =15 (#)Sales/Total Assets reat 1 (S)Gross Profit Ratio s Men X 100 = 29338 Comparison of X Ltd's Ratios with Industry Norms Ratio Xid,—_ndustry Comment z (1) Curent Ratio 278 250‘ Thecurrentratioof the company Indicatesbetter short-term solvency position as compared tothe industry, Butcomposition ofcurreat assets have tobeanalyzed toascertainanyexcessinvestments in current assets (2) Sales Debtors B00 75 Thecompany'saverage debtorscolleclon period iy marginally less: than the industry, and il A indicates bereer management of receivables (3) Sales/Stoek 48 80 It indicates excess carrying of invenioly as compared to industry. The tow turnover ratio may also be due to lower sales volume.62 Part One: Principles of Firancial Management (4) Sales/Total assets 15 28 The company has cither excess investments in fixed assets or lower sales performance. (3) Gross profit Ratio 35% ‘The gross profit margin is much lesser than the i industry average, it may be due high cast. of production, lower selling price etc. Problem 5-20 ‘The summarized Halance Shect of RLK. Enterprises ason 31-3-2010 is given below with ather relevant details: Balance Sheet as on 31-3-2010 Cables Ra, Assets ccs Equity capital -40,00,000 Fixed assets (net) 280,000, Reserves and surplus 6,00,000 Cash 2,40,000 Sundry creditors 1400000 Debtors 13,60,000 Inventories 11,00,000 &po000 0,00,000, Other information: (Rs) Sales 33,00,000 Less: Cost of production of goods sold 36,00,000 16,00,000 Less: Selling and administration 12,50,000 Net profit 350000 ‘The current industry average of important ratiosis given below: — , Industry Average Current ratio zi | Liquid ratio 14 Debtors tumover 80 ssventore TumovertSaiestfereerrt t Net profit/Sales % Sales/‘Tatal assets 2 Calculate the above ratios for RK. Enterprises, compare the same with the industry average and comment briefly, (CWA. Inter June 2002)\, ation Caleulation of Ratios 7 __Chrrent assets _ 32,00,000_ _ ih Sisreet ase Current tsbilties 14,00,000 ae iD __ Current assets - Stack _ 21,00,000 _ Current liabilities 14,00,000 Sales" 52,00,000 (©) Debtors Turnover = ees 3am = 280 , es 00 (@) lnventory Turnover | = = = 473 Inventory 11,00,000* (318 888)") 1818 sig gh id a as a Chapter 5 (e) Net Profit Margin = Meee 100 = sane <0 = 678 (f) Sales/Toatassets = = SHS — = pew = ai ‘Comparison of R.K. Enterprises Ratios with Industry Norms Ratio RE Industry, Comment Enterprises “{a) Current Ratio 229 21 ‘The current ratio of the campany is better than the industry. The composition of currentassetsisto be analyzed 10 ascertain excessive investments in ‘current assets (&) Liquid Ratio 15 14 The company’s liquidity is marginally better than the industry average. But triajor portion of liquid assets are in the form of receivables, Liberal debt collection policy and inefficiency in receivables ‘management may be the cause for locking.-up of ‘current assets in receivables, (@) Debtors Turnover 2.80 80 ‘The company's debtors collection period is substantially higher as compared to the industry average thc low turnover ratio may be due to neffieiency in collection of debtors. @) Inventory Turnover 473 102 It indicates excess carrying of inventory as compared to industry the low turnover ratio may also be dus ta lower sales volume or excessive investments in inyentory and inefficiency in inventory management 7 673% 5% The net profit margin is-lower as compared to Industry. It may be due to high cost of production and selling and administration cost. (f) Sales/Total Assets 0.87 2 The cornpany has either excessive investment in aasiets ar lower sales performance. 4e) Net Profit Mai Problem 5-21 AKL Limited has the following Balance Sheets as on March 31, 2010and March 31, 2009; Balance Sheet (Rs lakhs) Particulars March 31, 2010 March 31, 2009 Sources of Funds: Shareholders Funds 2377 Loen Funds 1472 Application of Funds Fixed Assets. Cash and Bank Debtors Stack Other current assets Less: Current liabilities64 Part One; Principle of Financial Management | “The Income Statement of the KL Lid. for the year ended is as follows: (Re. lakhs Particulars, - March 31,2010 March 31, 2009, ‘Sales Rds 13,882 Less: Cost of Goods sold 20.860 1aste - Gross profit 1,305 138 Less: Selling, General and Administrative expenses 135, _152 ‘Earnings before Interest and Tax (EBIT) 170 586 ‘Interest expense 13 105 Profit before tax 57 ag Tax 23 192 Profit after tax (PAT) 34 289 Required: (i) Calculate for the year 2009.10: {a Inventory turnover ratio (b) Financial leverage (6) Return on Investment (ROD (d) Return on Equity (ROB) (e) Average Collection Period. (i) Give a brief comment on the Financial position of JKL Lin Solution (0) Computation of Ratios Particulars = Mareh 31, 2010 (CA. PE-t| May 2606) (a) Inventory Turnover Ratio Cost of goods sold 20,860 ine = Closing stock 2567 : = (ay FIRES Leverage EBIT 170 386 2, ~290 88 Lae EBT 7 ae ae : (©) Return on Investment (ROD i EBIT 170 586 SIT __ x 100 FE x00 = 286 8 x 100= 120% Capital employed 5007 Te Gass (d) Return on Equity FAT 5100 S100 = 34 2 x 100= 19.03% Net work aT = SS ae (6) Average Collection Period Debtors ites x = = Credit sales “°65 6 pag OF (i) Brief Comment om the Financial Position of FKL Lid, ‘= The inventory turnover ratio is increased from 521 times to 7.28 times. This indicates the reduction in investment of stock and increase in sales turnover with reduced stocks,‘Ehapter 5 Ret Analysis: Cormputaion and Coniparison of Ration 65 = The financial leverage of the company is increased from 1.22 tinies to 2.98 times, which indicates the lower the cushion for paying interest on| ‘borrowings. The increasé in ratio warns the increase in-tisk as to over gearing, which constitutes a strain on profits, There isa steep fallin ROI from 12.86% 10 2.86% this may be due to increase in finances from fresh issue of shares and loan funds for expansion, modernization or new investment proposals, and increase in sales has not resulted in increase of company's profitability. = The return on equity has also fallen from 19.63% to 1.43%, The current year PAT may not be sufficient for declaration of dividends to shareholders + The inerease in sales and reduction in investment in debtors balances has resulted in reduction ‘uf average collection period from 30:7 days to 24.6 days Problom 5-22 Summarized Balance sheet and Profit and following ratios and comment on the healt averages are given below: loss account of a company is given below. Determine the Hh of the company basing your arguments on the industry Inventory turnover 10 Investment turnover 15 Sales margin 3.5% Profit/Assets employed 4.0% Profit/Net worth Ne Average realization time aS digs Debt/Equity 32 Balance Sheet Liabilities Rs crores Assets Ri crores . Equity 968. Net block a : Secured loans 176 Stocks 660 Creditors 13.2 Debtors 220 : Overdraft 176 Bank batance 176 Income-tax due _88 jail 1540 1540 Profit and Loss Account Particulars Rserores Particulars Re crores isis 28 Sales yaaa Manpower 528 Energy 80 Factory expenses 132 Depreciation 48 Selling and distribution 20 Administration 180. Interest 16 Profi 160 2200 12200 Astume Income-tax 91 50, {CWA Final June 1995)© 66. Part One: Pincines of Financial Management Solution 4 (Hearne, Sea Pes = a7 : Average inventory aie Qk n Rati sis a 143 wvestment Turnover Ratio |= —— == = hs ‘Total Investment 154 EBT 16 3) Sales Margin = SP 100 mall = @ 8 = 7a1% FAT 8 = BL x10 sails = Sales Fg RES \ (4) Net Profit to Assets Ratio = Feared x 100 = < 100 Tneame from sales and service 178 1.368 200840 = SSX 100 = 7.48 2008.09 = yg 100 = 786% () Material Consumption to Sales 15,179 10,996 2008410 = 39g 100 = 677% 2008.08 = ggg % 100 = 61.61% () Personnel Expenses to Sales 2000.10 = 258 e109 = 085% 2008-09 = 2222 5199 = 124s 23436 17.849 (S) Other Expenses to Sales 2002-10 ANS x10 = 15.13% 2008-09 = 283x169 = 15:77 2ike 17849 (6) Depreciation ro Sales 2008.10 = 2x 100 = 1760 2008.09 = 277 190 = 21 Base 17389 (b)Computation and. Analysis of Average Inventory Holding period and Average Collection period (1) Inventory Turnaver Ratio Material consumed ‘Closing inventory 2009.19 = 13178 = 38 2008-09 = rrr) “3 7 = 43370 Part One: Principles of Financial Management (2) Average Inventory Turnover period 360)days Inventory turnover ratio 360 2009-10 = — = 64 day is Ws (3) Receivables Tumover Ratio Income from sales and service Closing sundry debtors 23436 2009.19 = 2S = 248 9.468 (8) Average Collection Period 300 days Receivables turnover ratio 300 2009-19 = 22 45 day | 248 et 0 a3 fl 2008-09 360 09 = 2008.09 = 5 53 days 1.88 190 days (©) Computation and Analysis of Return on equity (ROE) by showing the impact of Financial leverage (1) Return on Equity 2008-09 = 13.61% ( } @) Returnon Assets | ROCE(i-1) 2 t 2009-10 = 22.07% (1-035) = 14.35% rs 2008-09 = 18,63% (1-035) = 12.11% j 3) Tax to PBT | aaa wa 2000-10 = AS, = 2322 09 = 2 = 10 = FX 100 = 2.228 2008-08 = FX 100 = 23.39% \ (@) Lean Funds to Total Funds 2009-10 = 28199 = 2378 2o0e.09 = 24 100 = 402% 10316 9308 (5) Shoreholders Funds to Total Funds f | 197 8.930 : 9.10 = eT = oY 2 = 93! 20 jong * 100 = 97.63% 1008-09 = SE x 100 95.98% i Analysis - Return on equity is slightly higher than Return on Assets due to negligible amount of debt | | involved in total capital employed, |areata Chapter 5 Ratio Analysis: Computation’ and Comparison of Ration 71 problem 5-24 “The following details are extracted from the accounts of Super Chemiesls Ltd, which manufactures ‘nly ene product in a single location: (Rs lakhs) Particulacs 3320103132009 343.2008 ‘Gross fixed assets 13,845 12,636 11,535 Cumulative depreciation 3.936 3,789 3.672 Value of trade marks included under Fixed assets (net of depreciation) 240 360 480 Capital work-in-process a9 675 951 tnvestinents in shares é debentures 272 2.136 2079 lnventories Lars 1740 1333 Sundry debtors 1.002 331 876 ‘Advances for purchase of capital equipment R 183 141 ther loans & advances 195 74 158 Other current assets 95 ar 7 Sundry creditors oa 561 522 Term loans due for repayment within 12 months 100 120 80 Provition for expenses a 102 84 Net sales utr 936 8,793 Interest 1.842 1491 1.248 162 Ml 132 eas 435 531 Compute the Following ratios as required in para 24 of the Annexure to the Cost Audit Report for the year 2009-10 anid 2008-09 (@) Profit as a percentage of Capital employed. (i) Profit as a percentage of Sales. (LEW. Final Bec. 2008) Solution ‘omputation of Capital Employed (Rs lakhs) Particulars 3132010 3432009 3132008 Grass Foced assets (assumed to be exclusive of capital WLP.) 13,845 12,636 11585 Less: Intangible assets (Trade marks} - (Net block) 260 380 430 Cumulative depreciation 3.936 3,789 3872 Adjusted Net Fined Assets fe) 9669 5487 7383 Inventory 1873 74a 1533 Sundry debiors 1,902 951 876 Loans and advances 195 4 159 Other current assets 96 87 38 Grote Dinrite Ant Se ine Saas72 Part One: Principles of Financiat Management = Less: Sundry creditors 6a Sét ETy Term loans due within 12 months seemed as Current liabilities 100 20 80 __Prowision for expenses a7 102 86 Adjusted Net Current Assets 3339 2168 1360 Capital Employed fateh) 12,008 10.656 9343 ‘Average Capital Employed 313.2010 = (12,008 + 10,656)/2 = Rs, 11,332 fakhs 313.2009 = (10,656 +9,343)/2 = Rs, 10,000 lakhs (2) Computation of Profit and Ratios (Re takhs) Particulars Hand 3132009 313.2008 Profit before tax 696 AS 531 Add: Interest ha. 1491 1248 Profit 2538 ipz6 er) (3) Ratios Profit.as'%® of Capital employed (%) 22.4% 19.26% Net Sales {assumed tobe net of returns and ED) 11,772 9.636 8,793 (ii)_ Profit as of Sales 21.56% 1999% 20.91% Problem 5-25 Delhi Led. a large professionally managed consumer durable manufacturer, is sceking « medium term loan of Rs. 500 lakh essentially to finance partof its working capital requirements, Follawing its decision to significantly improve credit terms to its customers, with a view ta ‘substantially increasing the demand for its products, The following are the company's summarized Financial data, compited from published scoaunts: (Rs. lakhs) Farticul 2010 2009 Gross fixed assets at cost 2200 2.000 Accumulated depres (1.600) (1.500) ‘Teade Investments 100 100 Inventories 480 30 Hy Receivables. 590) 400 Trade creditors (170) (90) Tax and other provisions 4300) (400) Net assets employed 1200900 Financed by: Equity capital 300 300 Reserves 280 200 Long-term loans 490 200 Overdraft and short-term Facilities 250 200 i200, 9008] (Chapters ata Anaya: Computalan and Comparison of fatios 73 Sales income apr ie Profit before interest and tax ah ae Interest io 3 ae 100 120 Dividends 0 30 Retentions 30 70 ‘The company’sFully paid-up equity shares having face value of Rs.) pershare are quoted at Re. 15 per share in the stock market. Itis known that the plant utilization of the company’s facilities is around 60% ofits capacity, and there are adequate technical and marketing skills in the company to handle a much higher volume of business, Making such other assumptions, as you consider necessary, prepare a brief note on key indicators having bearing on the company’s Financial position and its credit and liquidity status from prospective lenders’ view point for use at an exploratory meeting scheduled with the company, (C5. Final June 2003) Solution Working Notes Calculation of Capital Employed (Rs Iakhs) Particulars 20102008 Grose fixed assets 2,200 2,000 Less: Accumulated Depreciation yoo L500 [Net Fixed Assets (a) 00500 ‘Trading Investments © Too 100 Gurreat Assets Inventories + Receivables tom 799 Less Current liabilities a0 690 (Trade creditors, provisions und overheads) : @ Bo 00 Capital Employed f)-+()+ic) 950 700 Calculation of Ratios 2010 2009 (2) Return on Capital Employed PBIT 280 230 x 2 100 = 28. 222 190 = Geulenper seq 100= 294% 2x 109 = 40m (0) Sales Margin PBT 280 pats 2 5 100 = ee X10 ae 1550) (6) Sales to-Capital Employed Sales 1,800 Leoo ae _ 2 ng Ee Capital Employed 950 om 700 oe @) Debt Equity ratio Long-term Debt 400 200 \ Shareholders Equity 550° a} 74. Part One: Prndiplas of Financial Marwgement j i (©) Current Ratio i 14 Is i 39) _ Current Asset LO yy 0 = ke : (Current Liabilities 320 oo 1 (f) Quick Ratio t ‘Current Assets - Stock 590 400 = 104 = = 082 ‘Current Liabitities - O.D. S70 400, (8) Toventory Turnover sie 120 Lye MO aay | inventories 480 390 | (h) Receivables Turnover i Sales 1,800 1.800 | = = 305 a = 400 ' : Receivables 380 00 I (Interest Cover i Perr 230 280 ee =2 =n =a | inverest 100 a a oF | (i) Dividend Cover i PAT 80 too = 267 @ = 333 | Dividends 30 30 | (k) Dividend Yield Dividend 30 30 ——— 100 = 647% = =x 100 = 667% | Market value of Equity °° 459% '™ a0 * E ()) Return on Equity 3 PAT 80 100 is Skuse «= xm = 4 =x 100 = 21 . ‘Shareholders’ Funds <'™ 550 ee ee Analysis employed iereckaced froma ar29e#7¥ ame Sates TENT FEUECO GT — 1754 to 15.56%. (b) There is an increase in capital employed from Re, 700 lakhs to Rs. 950 lakhs. It has resulted in decrease of investment turnover fro 2.29 to 1.89 times, (6) The long-term debt component is doubled in one year and the debt-cfujty ratio shows a sharp increase from 0.40 to 0.73. The ideal debt-equity ratio is 2: 1. The current\debi position is within. the manageable level with least financial risk, (d) The working capital position and short-term liquidity position have improved during the last Financial year Le. 2009.10. (e} The inventory turnaver and receivables turnover shows excessive investment in stock and recelvables over the requirement of inereased sales, (6) The interest service coverage ratio has fallen fromn4.67 times to2 80 times and the dividend cover thas shown decline from 3.33 times ta 2.67 times, (a) The return on equity has fallen fram 20% to 14.55%. However, the dividend yield remains unchanged. The overall financial position is deteriorating and the Financing of working capital s not warranted as er present financial position unless there is definite growth in sales is proved. ‘Chapter 3 Ratio Analysis: Computation ad Comparison of Ratios 75 Problem 5-26 ‘Summarized Balance Sheet and Income Statement of AG Ltd, forthe year ended 41st March, 2010 ae asunder: Income Statement for the year ended 31st March, 2010 (Rs. "000) Sales 1,600 Less: Cast of goods sold 1,310 Gross margin 290 Less: Selling and administrative expenses 40 EBIT 230 Less Interest expenses 6 Earnings before tax 205 Less; Tax a2 Net profic 1 Balance Sheet as on 31st March, 2010 (Rs. 000) Liabilities Paid-up capital (40,000 equity shares of Rs, 10 each, fully paid-up) 400 Retained earnings 120 Debentures : 700 Creditors 130 Bills payable 20 ‘Other eurrent liabilities i 1,500 ‘Assets . Net fixed assets i 800 jlnventory 400 Debtors 115 Marketable securities 8 Cash 50 1500 Price per share: Rs 15. Industry's average ratios are: . Current ratio 24 Debt equity ratio ea Quick ratio L3 Times interest earned 6 Sales to inventory S0times Net profit margin Th Average collection period 3Gdays Price to carnings ratio 15 Debt to-assets 40% Return to total assets 1 From the above facts and figures, you are required to -()) Calculate the relevant ratios and interpret them to identify the problems areas. i) Based on the ratio analysis, as a Company Secretary, prepare a Feport for consideration of your Board of Directors clearly bringing out the reasons in respect of ‘identified problem areas and giving suggestions tg solve them. (CS. inter Dee. 2000)"76. Part One Principles of Financial Managernent Salution t (Rs00) ‘Curent Assets i Inventory 400 Debtors 15 Markelable securities 5 Cash ae Te | Current Liailities Creditors 180 ills payable 20 Other current liabilities 80 280 | “ee __Current assets _ 700 bate f yp Curren Batis © Current liabilities ~ 280 = i __Liquid assets _ 300 = | OP SSE IRS ~ Gurrentliabiliies =~ 380 SANE ; | : _ Sales _ 1600 asa eet (3) Sales taInventory Spe -= = 4 times | Debtors 15 (4) Average Collection Period = — = 40da Average daily sales 44 pi (5) Debis 0 Asset = PS 100 ype * ~ Total assets Debes = 46.7% (6) Debt-Equity Ratio = Shareholders funds ~ 520 eae EBT zr Times Ini Earned. = _—— = 55 i ecto Ba Tnverest charges 45 oe : = Net patie = (8) Net Profit Margi = SES 100 17% _ Brion thane ip (9) Rilce to Barings Ratio = SP = 488 Net profit 10) Retum teTotal Assen = Net Prof = (00) Return to Tota sets = NEPFEFA 5 tog 22% . Date : 15-06-2009 To ‘The Managing Director, AG, Limited, New Delhi. ‘ | peur six Thave made a thorough analysis of the performance of the company by computing various important ratios and it is compared with the industry average ratios. Detalls of which are given in the following table with suitable suggestions for improvement.Chapters Ratio Analysis: Computation and Compaiidan of Ration 77 Interpretation of A.G. Ld. ratios with Industry average ratios and suggestions for improvement Ratio Industry Company average ratios ratios Interpretation of compony ratios with industry average ratigs (0) Current Ratio (2) Quick Ratio (8) Soles to Inventory (dimes) (8) Average Collection Period (days) (5) Debts to Assets (6) Debt-Equity Ratio (7) Times Interest Earned (8) Net Profit Margin (9) Price to Earnings Ratio (10) Return to Total Assets 24 25 15 Loz 8 4 36 40 40% 46.7% a 1351 6 556 1 17% 15 488 Ue 82m Slightly higher than the industry dverage and itis satisfactory. It can be further improved either by having more currentassets or by reducing current liabilities. It is much lower than the industry average. I indicates funds are focked-up in inventories, [tis suggested to reduce the inventory levels. and use the techniques of JIT and supply chain management, It indicates very poor performance in sales as well as inefficient management of inventory. Improve the efficiency of marketing function and stores function and reduce the levels of stocks, It indicates liberal collection policy and more funds are locked-up in debtors balances. It is suggested to reduce theeredit period and improve timely collection of debts, Company's assets are more financed with debt funds as compared with industry average, It is suggested toreduce this ratio to give more control to equity fund holders, ‘The ratios satisfactory, The company istessgeared and more relying on equity Funds as compared ta industry, Ieisslightly less than the industry average. But still itis satistactory For debt providers, tis slightly higher than the industry average. It can be further improved by increasing sales and reducing the operating cosis and finance charges, Itindicates the company’s sharesare under valued by the market. It may be due to lack of poor information to investors about the company’s per formance. The company may launch publicity campaign to inform the public about company’s, Progress. It indicates under utilization of company’s assets. 1tis suggested ta reduce unused assets and assets which does not earn. The management should ‘The management is suggested to take appropriate actions, kecpin note that cach rupce invested must earn profit, view of the above analysis and Suggestions, for the growth, prasperity and profitability of the corepany, Thanking you, ‘Yours faithfully (KRISHNA ¢. SHAH) Financial Consultant7B Part One: Principles of Financial Management Problem 5-27 The Balance Sheet of & Ltd. and Led. as on 3ist March, 2010 are as follows: Particulars: _ ALtd, _B Lid. Labities Share capital 40.00.00 © -40,00,000 Reserves and surplas 3230.00 25,00,000 Secured loans 2525.00. 32,50,000 Current liabilities and provisions: Sundry creditors 15,0000 14.00.00 Outstanding expenses 2,00,000 5,00,000 Provision for taxation 3,00,000 300,000 Proposed dividend 6,00,000 - Unclaimed dividend 15,000 12570000 1,17,50,000 Assets Fixed assets less Depreciation 80,00.000 50,00,000 Investments 15,00,000 : Inventory at cost 73,00,000—_45,00,000 Sundry debtors - Cash and bank 5,70,000 1,23,70,000 —_1,17,30,000 Additional informe available: (2) 75% of the Inventory in A Ltd. are readily saleable at cost plees 20%, (8) Sof Sundry debtors of BLU. arc duc from€ Lid. which isnotin aposition to repay theamount, B Lid. agreed to accept 154 Debentures of C Led. Gil) B Ltd. had also proposed 15% dividend but that was nat shown fn the aécounts, (iv) At the year end, B Lid. sold investments amounting to Rs. 120,000 and repaid Sundry credito On the basis.of the given Bala the liability of the companics. All workings should form part of the answer. (C,A,Final Nov. 1995) Solution (1) Computation of Current Ratio and Quick Ratio (Rs) Particulars, ALi Bud Inventory 23,00,000 Sundry debtors less Proposed investment in debentures, iS Cosh and bank 5,70,000 Current Assets 78,70,000 Less: Inventory other than readily saleable 3,75,000 ‘Add: Profit on readily saleable inventory 3,45,000 Quick Assets 6,40,000: {4,00,000Chapter 5 Ratio Analysis : Computation and Comparison ef Ratios 29) Current Liabilities and Quick Liabilities (Rs) Parteulars = Uae. Bid Sundry creditors 15,00,000—14,00,000 Outstanding expenses 2,00,000 3,00,000 Provision for taxation 3,00,000 3,00,000 Proposed dividend 6,00,000 ; Unclaimed dividend 15,000 2 Current Liabilities 26,15,000 —20,00,000 ‘Adil: Proposed dividend : 600,000 Sundry creditors repaid at year end 5 120,000 26,15,000 F000 | Current Ratio Current Asscts Rs.28,70.000 Rs. $9,00,000 Current Liabilities RS,26,15000 Rs, 20,00,000 = M10 = 295 Quick Ratio ‘Quick assets 5.264000 Rs. 14,00,000 Ouick Lia Rs 2615000 Rs. 27.20:000 = Lor = 051 The current ratio of B Ltd. is quite satisfactory and is better as compared to A Ltd. But the quick ratio of B Lid. is alarming. tt is only 0.51 as compared to A Ltd. tt may be due to holding large amount of inventories in B Led. Calculation of Composition of Cucremt Assets Particulars Aid, Bld. BS. ® Rs. % Stock 73,00,000 80.13 45,00.000 66.66 Sundry debtors - 1700000 25.19 Cash wt bank 70,000 1987 550.000 8s 2870000 joo &7.50,000 100 However, A Leds stock was readily saleable. It is necessary to exclude the readily saleable stock and take the profit in account beforesuch comparisan. Akoit isnecessary to provide or bad debts against debtors Of B Lid. AdjuSied current assets postion of these corupanies sas follows: Particulars Abid. Bid Re * Re ® Current assets Inventory 575.000 1788 = 45,00.000 7627 Sundry debtors 20,70,000 64.39 -§50.000 saat Cash and bank 1733550000 932 too 5908000100 Now it appears that B Ltd. held much higher stock than A Ltd. which has begn reflected in is Agid test Tato, Moreover, current liabilities of B Ltd. as shown in the Balance sheet were not reflecting the Proposed dividend. That apart year-end repayment of sundry creditors by saleof investments by BL4d. toimprave liquidity ratios should be adjusted to indicate average liquidity ratios matneained by the company during the year.Chapter = = Sayer eey RATIO ANALYSIS : PREPARATION PROJECTED FINANCIAL STATED 25% fone month Problem 6-1 ‘The following information relates to a company which has a working capital of Rs. 3,20,000. ‘Current ratio 18 Gross profit on sales | Liquidity eatio 12 Creditperiod \ Inventory turnover (on cost of sales) = 12 Calculate the Current abilities and Current assets, with break up. (LC.W.A. Inter Bec. 2001) | Solution Working Notes (1) Current ratio Current ratio = 1.8 (given) Current assets — IB ee Current assets = 18 Current liabilities Current assets- Current liabilities = ‘Working capital 1.8 Current liabilities ~ Current babilities = 320,000 \ 0.8 Current liabifities = 3,20,000 Current liabilities 6,000/0.8 = Rs. 400,000 ‘Current assets = 400,000 18 = Rs. 720,000 (2) Liquid Ratio = 122 (given) Current assets - Stock _ Current liabiliies 7,20,000 - Stack PANG SHER) yy 700,000 7.20.000-Stock = 480,000 Stock = 720,000 - 480,000 = Rs240000