NCERT Solutions Class 12 Accountancy Company Accounts and Analysis of Financial Statements Chapter 5

Q.1 What do you mean by Ratio Analysis?

Ans. Ratio analysis refers to a technique of analysing the financial statements by computing various types of ratios. In other words, it is a process of determining and interpreting relationship between the items of financial statements to provide a meaningful result of the performance and financial position of a business.

Q.2 What are various types of ratios?

Ans. Accounting ratios are classified as follows:

1. Profitability Ratios: They include Gross Profit Ratio, Net Profit Ratio, Operating Ratio, Operating Profit Ratio and Return on Investment Ratio.
2. Turnover or Performance or Activity Ratios: These ratios comprise Inventory Turnover Ratio, Trade Receivables Turnover Ratio, Trade Payables Turnover Ratio and Working Capital Turnover Ratio.
3. Solvency Ratios: They include Debt Equity Ratio, Total Assets to Debt Ratio, Proprietary Ratio and Interest Coverage Ratio.
4. Liquidity Ratios: These ratios consist of Current Ratio and Liquid Ratio.

Q.3 What relationships will be established to study?

1. Inventory turnover
2. Trade receivables turnover
3. Trade payables turnover
4. Working capital turnover.

Ans.

1. Inventory turnover ratio establishes relationship between Cost of Revenue from Operations and Average Inventory.
2. Trade receivables turnover ratio establishes relationship between Net Credit Revenue from Operations and Average Trade Receivables.
3. Trade payable turnover ratio indicates the relationship between credit purchases and average trade payables.
4. Working capital turnover ratio establishes relationship between Revenue from Operations and Working Capital.

Q.4 The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. What are the ratios used for this purpose?

Ans. Yes, it is true that the liquidity of a business firm is measured by its ability to pay its long term obligations as they become due. Here the long term obligation means payments of principal amount on the due date and payment of interest on the regular basis. For measuring the long term solvency of any business we calculate the following ratios:

1. Debt-equity ratio
2. Total assets to debt ratio
3. Proprietary ratio and
4. Interest coverage ratio

Q.5 The average age of inventory is viewed as the average length of time inventory is held by the firm for which explain with reasons.

Ans. Inventory Turnover Ratio: It determines the number of times inventory is converted into revenue from operations during the accounting period. The formula for its calculation is as follows:

\text{Inventory Turnover Ratio =}\frac{\text{Cost of revenue from operations}}{\text{Average inventory}}

It studies the frequency of conversion of inventory of finished goods into revenue from operations. It is also a measure of liquidity. It determines how many times inventory is purchased or replaced during a year.

Q.6 What are liquidity ratios? Discuss the importance of current and liquid ratio.

Ans. To meet its commitments, business needs liquid funds. The ability of the business to pay the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure it are known as ‘Liquidity Ratios’. These ratios are calculated to measure the short-term solvency of the business, i.e. the firm’s ability to meet its current obligations. Liquidity ratios include current ratio and liquid ratio.

Current Ratio: It indicates the amount of current assets available for repayment of current liabilities. Higher the ratio, the greater is the short term solvency of a firm and vice a versa. However, a very high ratio or very low ratio is a matter of concern. If the ratio is very high it means the current assets are lying idle. Very low ratio means the short term solvency of the firm is not good. Thus, the ideal current ratio of a company is 2:1 i.e. to repay current liabilities; there should be twice current assets.

Liquid ratio: This ratio establishes a relationship between liquid assets and current liabilities. Liquid ratio is a measure of the instant debt paying capacity of the business enterprise. It is a measure of the extent to which liquid resources are immediately available to meet current obligations. A quick ratio of 1:1 is considered good/favourable for a company. For the purpose of calculating this ratio, inventory and prepaid expenses are not taken into account as these may not be converted into cash in a very short period.

Q.7 How would you study the Solvency position of the firm?

Ans. The persons who have advanced money to the business on long-term basis are interested in safety of their periodic payment of interest as well as the repayment of principal amount at the end of the loan period. Solvency ratios are calculated to determine the ability of the business to service its debts in the long run. The following ratios are normally computed for evaluating solvency of the business.

1) Debt Equity Ratio: It is computed as follows:

\begin{array}{l}\text{Debt equity Ratio =}\frac{\text{Debt (Long term debts)}}{\text{Equity (Shareholders funds)}}\\ \end{array}

From the security point of view, capital structure with less debt and more equity is considered favourable as it reduces the chances of bankruptcy.

2) Total Assets to Debt Ratio: It is computed as follows:

\begin{array}{l}\text{Debt equity Ratio =}\frac{\text{Total}\text{Assets}}{\text{Debt (Long term debts)}}\\ \end{array}

This ratio measures the extent of the coverage of long-term debts by assets which indicates the margin of safety available to providers of long-term loans.

3) Proprietary Ratio: It is computed as follows:

\text{Proprietary Ratio =}\frac{\text{Shareholders’ Funds}}{\text{Total Assets}}

Higher proportion of shareholders funds in financing the assets is a positive feature as it provides security to the long-term loan providers.

4) Interest Coverage Ratio: It is computed as follows:

\begin{array}{l}\text{Interest Coverage Ratio =}\\ \frac{\text{Profit before charging Interest and Income Tax}}{\text{Fixed Interest Charges}}\end{array}

It reveals the number of times interest on long-term debts is covered by profits available for interest. The higher the ratio, more secure the lender is in respect of payment of interest regularly.

Q.8 The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity. Explain.

Ans. Current ratio is the proportion of current assets to current liabilities. It is expressed as follows:

\text{Current Ratio =}\frac{\text{Current Assets}}{\text{Current Liabilities}}

Current assets are those assets which can be easily converted into cash within a short period of time and include current investments, inventories, trade receivables, cash and cash equivalents, short term loans and advances and other current assets. Current liabilities include short term borrowings, trade payables, other current liabilities and short term provisions.

Liquid ratio is the proportion of liquid assets to current liabilities. It is expressed as follows:

\text{Liquid Ratio =}\frac{\text{Liquid Assets}}{\text{Current Liabilities}}

The liquid assets are defined as those assets which are more quickly convertible into cash. Liquid asset exclude inventories and prepaid expenses.

The main difference between the current ratio and the quick ratio is that the latter offers a more conservative view of the company’s ability to meets its short-term liabilities with its short-term assets because it does not include inventory and other current assets that are more difficult to liquidate (i.e., turn into cash). By excluding inventory (and other less liquid assets) the quick ratio focuses on the company’s more liquid assets.

Generally current ratio is preferable for such type of business where the inventories cannot be easily converted into cash like heavy machinery manufacturing companies. This is because heavy inventories cannot be easily sold. But on the other hand, businesses where the inventory is easily realised regard liquid ratio to be more suitable for revealing the liquidity of the business. Therefore, service companies, prefer liquid ratio as a measure of short term financial solvency.

Q.9 Following is the Balance Sheet of Raj Oil Mills Limited as at March 31, 2017.

Calculate current ratio.

Ans.

Current Assets = Inventories + Trade receivables + Cash and cash equivalents

= ₹55,800 + ₹28,800 + ₹59,400 = ₹1,44,000

Current liabilities = Trade Payables = ₹72,000

\begin{array}{l}\text{Current Ratio =}\frac{\text{Current Assets}}{\text{Current Liabilities}}\\ \text{=}\frac{\text{₹1,44,000}}{\text{₹72,000}}\text{=}\frac{\text{2}}{\text{1}}\text{=}\text{2:1}\end{array}

Q.10 What are various profitability ratios? How are these worked out?

Ans. It refers to the analysis of profits in relation to revenue from operations or funds employed in the business and the ratios calculated to meet this objective are known as ‘Profitability Ratios’. They include Gross Profit Ratio, Net Profit Ratio, Operating Ratio, Operating Profit Ratio and Return on Investment Ratio.

Gross profit ratio: This ratio establishes the relationship between gross profit and revenue from operations. This ratio is computed and expressed as a percentage. Following is the formula for calculating the ratio:

\begin{array}{l}\text{Gross Profit Ratio =}\frac{\text{Gross}\text{Profit}}{\text{Net revenue from operations}}\text{x}\text{100}\\ \text{Gross}\text{profit}\text{=}\text{Rev}\text{. from oper}\text{.}\text{–}\text{Cost}\text{of}\text{rev}\text{. from oper}\text{.}\end{array}

Net Profit Ratio: This ratio establishes the relationship between net profit and revenue from operations. This ratio is computed and expressed as a percentage. Following is the formula for calculating the ratio:

\begin{array}{l}\text{Net Profit Ratio =}\frac{\text{Net}\text{Profit}}{\text{Revenue from operations}}\text{x}\text{100}\\ \text{Net Profit =}\\ \text{Gross Profit – Indirect expenses \& losses + Other Incomes}\end{array}

Operating Ratio: This ratio measures the proportion of an enterprise’s cost of revenue from operations and operating expenses in comparison to its revenue from operations. Following is the formula for calculating the ratio:

\begin{array}{l}\text{Operating Ratio =}\frac{\text{Operating}\text{cost}}{\text{Net revenue from operations}}\text{x}\text{100}\\ \text{Oper}\text{.}\text{cost}\text{=}\text{Cost}\text{of}\text{rev}\text{. from oper}\text{.}\text{+}\text{oper}\text{.}\text{}\text{}\text{}\text{}\text{}\text{exp}\text{.}\end{array}

Operating Profit Ratio: This ratio shows the relationship between operating profit and revenue from operations. Following is the formula for calculating the ratio:

\begin{array}{l}\text{Operating Profit Ratio =}\frac{\text{Operating}\text{profit}}{\text{Net revenue from operations}}\text{x}\text{100}\\ \text{Operating}\text{profit}\text{=}\\ \text{Gross}\text{Profit}\text{– Other}\text{oper}\text{.}\text{}\text{}\text{}\text{}\text{}\text{expenses +}\text{Other}\text{oper}\text{.}\text{}\text{}\text{}\text{}\text{}\text{}\text{incomes}\end{array}

Return on Investment Ratio: It is calculated by comparing the profit earned and capital employed to earn it. Following is the formula for calculating the ratio:

\begin{array}{l}\text{Return on Investment =}\\ \frac{\text{Profit before interest, tax and dividend}}{\text{Capital employed}}\text{x}\text{100}\\ \text{Capital employed}\text{= Shareholders funds + Long term loans}\end{array}

Q.11 Following is the Balance Sheet of Title Machine Ltd. as at March 31, 2017.

Calculate Current Ratio and Liquid Ratio.

Ans.

Current Assets = Inventories + Trade receivables + Cash and cash equivalents + Short term loans and advances

= ₹12,00,000 + ₹9,00,000 + ₹2,28,000 + ₹72,000

= ₹24, 00,000

Liquid Assets = Current Assets – (Inventories)

= ₹24,00,000 – ₹12,00,000 = ₹12,00,000.

Current liabilities = Short-term borrowings + Trade Payables + Short-term provisions

= ₹6,00,000 + ₹23,40,000 + ₹60,000 = ₹30,00,000.

\begin{array}{l}\text{Current Ratio =}\frac{\text{Current Assets}}{\text{Current Liabilities}}\\ \text{=}\frac{\text{₹24,00,000}}{\text{₹30,00,000}}\text{=}\frac{\text{4}}{\text{5}}\text{=}\text{8:1}\\ \text{Liquid Ratio =}\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\\ \text{=}\frac{\text{₹12,00,000}}{\text{₹30,00,000}}\text{=}\frac{\text{2}}{\text{5}}\text{=}\text{4:1}\end{array}

Q.12 Current Ratio is 3.5:1. Working Capital is ₹90,000. Calculate the amount of Current Assets and Current Liabilities.

Ans.

\text{Current Ratio =}\frac{\text{Current Assets}}{\text{Current Liabilities}}=\frac{3.5}{1}

Let the current liabilities = X

Then current assets = 3.5X

Working capital = 3.5X– X= 2.5X

2.5X = 90,000

X = Current liabilities = ₹36,000

Current assets = 3.5 x 36,000 = ₹1,26,000.

Q.13 Shine Limited has a current ratio 4.5:1 and quick ratio 3:1; if the inventory is ₹36,000. Calculate Current Liabilities and Current Assets.

Ans.

Current ratio = 4.5:1

Quick ratio = 3:1

Let current liabilities = X

Then current assets = 4.5X

Current liabilities = 3X

Inventory = 4.5X – 3X = 1.5X

1.5X = ₹36,000

X = Current liabilities = ₹24,000

Current assets = ₹24,000 x 4.5 = ₹1,08,000

Q.14 Current Liabilities of a company are ₹75,000. If Current ratio is 4:1 and Liquid Ratio is 1:1, Calculate value of current assets, liquid assets and inventory.

Ans.

Current ratio = 4:1

Liquid ratio = 1:1

Current liabilities = ₹75,000

Then liquid assets = ₹75,000

Current assets = ₹75,000 x 4 = ₹3,00,000

Inventory = Current assets – Liquid assets

= ₹3,00,000 – ₹75,000 = ₹2,25,000

Q.15 Handa Ltd. has inventory of ₹20,000, Total liquid assets are ₹1,00,000 and quick ratio is 2:1. Calculate current ratio.

Ans.

\begin{array}{l}\text{Quick ratio = 2:1}\\ \text{Liquid/Quick assets =}\text{}\text{₹1, 00,000}\\ \text{Quick Ratio =}\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\text{=}\frac{\text{2}}{\text{1}}\\ \frac{\text{1,00,000}}{\text{Current Liabilities}}\text{=}\frac{\text{2}}{\text{1}}\\ \text{Current Liabilities =}\frac{\text{1,00,000}}{\text{2}}\text{=}\text{₹50,000}\\ \text{Current}\text{Assets = 1,00,000}\text{+}\text{20,000}\text{=}\text{}\text{}\text{₹1,20,000}\\ \text{Quick Ratio =}\frac{\text{1,20,000}}{\text{50,000}}\text{=}\frac{\text{2}\text{.4}}{\text{1}}\text{=}\text{2}\text{.4:1}\end{array}

Q.16 Calculate debt-equity ratio from the following information:

Total Assets: ₹15,00,000

Current Liabilities: ₹6,00,000

Total Debts: ₹12,00,000

Ans.

Equity = Total assets – Total debts

= ₹15,00,000 – ₹12,00,000 = ₹3,00,000

Debt = Total debts – Current liabilities

= ₹12,00,000 – ₹6,00,000 = ₹6,00,000

\text{Debt equity Ratio =}\frac{\text{₹6,00,000}}{\text{₹3,00,000}}\text{=}\frac{\text{2}}{\text{1}}\text{=}\text{2:1}

Q.17 Calculate Current Ratio if: Inventory is ₹6,00,000; Liquid Assets ₹24,00,000; Quick Ratio 2:1.

Ans.

Current assets = Liquid assets + Inventory

= ₹24,00,000 + ₹6,00,000 = ₹30,00,000

Quick ratio = 2:1,

Let current liability = x

Then current assets = 2x

\begin{array}{l}\text{x =}\frac{\text{₹24,00,000}}{\text{2}}\text{=}\text{₹12,00,000}\\ \text{Current Liabilities}\text{=}\text{₹12,00,000}\\ \text{Current Ratio =}\frac{\text{₹30,00,000}}{\text{₹12,00,000}}\text{=}\text{2}\text{.5}\text{:1}\text{times}\end{array}

Q.18 Compute Inventory Turnover Ratio from the following information:

Net Revenue from Operations: ₹2,00,000

Gross Profit: ₹50,000

Inventory at the end: ₹60,000

Excess of inventory at the end over inventory in the beginning: ₹20,000

Ans.

\begin{array}{l}\text{Inventory Turnover Ratio =}\frac{\text{Cost of revenue from operations}}{\text{Average inventory}}\\ \text{Cost of revenue from operations =₹2,00,000 –₹50,000}\\ \text{= ₹1,50,000}\\ \text{Opening inventory =₹60,000 –₹20,000 =₹40,000}\\ \text{Average Inventory =}\frac{\text{₹60,000 + ₹40,000}}{\text{2}}\text{=}\text{₹50,000}\\ \text{Inventory Turnover Ratio =}\frac{\text{₹1,50,000}}{\text{₹50,000}}\text{=}\text{3}\text{times}\end{array}

Q.19 Calculate following ratios from the following information:

(i) Current Ratio

(ii) Liquid Ratio

(iii) Operating Ratio

(iv) Gross Profit Ratio

Current Assets: ₹35,000

Current Liabilities: ₹17,500

Inventory: ₹15,000

Operating Expenses: ₹20,000

Revenue from Operations: ₹60,000

Cost of Revenue from operation: ₹30,000

Ans.

\begin{array}{l}\text{Current Ratio =}\frac{\text{Current Assets}}{\text{Current Liabilities}}\\ \text{=}\frac{\text{₹35,000}}{\text{₹17,500}}\text{=}\text{2:1}\\ \text{Liquid Ratio =}\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\\ \text{Liquid}\text{Assets =₹35,000}\text{–}\text{₹15,000}\text{=}\text{₹20,000}\\ \text{Liquid}\text{Ratio =}\frac{\text{₹20,000}}{\text{₹17,500}}\text{=}\text{1}\text{.14}\text{:}\text{1}\\ \text{Operating Ratio =}\frac{\text{Operating}\text{cost}}{\text{Net revenue from operations}}\text{x}\text{100}\\ \text{Oper}\text{.}\text{cost}\text{=}\text{Cost}\text{of}\text{rev}\text{. from oper}\text{.}\text{+}\text{oper}\text{.}\text{}\text{}\text{}\text{}\text{}\text{exp}\text{.}\\ \text{=}\frac{\text{₹50,000}}{\text{₹60,000}}\text{x}\text{100}\text{=}\text{83}\text{.3\%}\\ \text{Gross Profit Ratio =}\frac{\text{Gross}\text{Profit}}{\text{Net revenue from operations}}\text{x}\text{100}\\ \text{Gross}\text{profit}\text{=}\text{Rev}\text{. from oper}\text{.}\text{–}\text{Cost}\text{of}\text{rev}\text{. from oper}\text{.}\\ \text{=}\frac{\text{₹30,000}}{\text{₹60,000}}\text{x}\text{100}\text{=}\text{50\%}\end{array}

Q.20 From the following information calculate:
(i) Gross Profit Ratio
(ii) Inventory Turnover Ratio
(iii) Current Ratio
(iv) Liquid Ratio
(v) Net Profit Ratio
(vi) Working Capital Ratio:

Revenue from Operations: ₹25,20,000
Net Profit: ₹3,60,000
Cost of Revenue from Operations: ₹19,20,000
Long-term Debts: ₹9,00,000
Trade Payables: ₹2,00,000
Average Inventory: ₹8,00,000
Liquid Assets: ₹7,60,000
Fixed Assets: ₹14,40,000
Current Liabilities: ₹6,00,000
Net Profit before interest and Tax: ₹8,00,000

Ans.

\begin{array}{l}\text{Gross Profit Ratio =}\frac{\text{Gross}\text{Profit}}{\text{Net revenue from operations}}\text{×}\text{100}\\ \text{Gross}\text{profit}\text{=}\text{Rev}\text{. from oper}\text{.}\text{–}\text{Cost}\text{of}\text{rev}\text{. from oper}\text{.}\\ \text{=}\frac{\text{6,00,000}}{\text{25,20,000}}\times \text{100}\text{=}\text{23}\text{.81\%}\\ \text{Inventory Turnover Ratio =}\frac{\text{Cost of revenue from operations}}{\text{Average inventory}}\\ \text{Inventory Turnover Ratio =}\frac{\text{19,20,000}}{\text{8,00,000}}\text{=}\text{2}\text{.4}\text{times}\\ \text{Current assets = Liquid assets + Inventory}\\ \text{Current Ratio =}\frac{\text{Current Assets}}{\text{Current Liabilities}}\\ \text{=}\frac{\text{7,60,000}\text{+}\text{8,00,000}}{\text{6,00,000}}\text{=}\frac{\text{15,60,000}}{\text{6,00,000}}\text{=}\text{2}\text{.6:1}\end{array}

\begin{array}{l}\text{Liquid Ratio =}\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\\ \text{=}\frac{\text{7,60,000}}{\text{6,00,000}}\text{=}\text{1}\text{.27:1}\\ \text{Net Profit Ratio =}\frac{\text{Net}\text{Profit}}{\text{Revenue from operations}}\text{×}\text{100}\\ \text{=}\frac{\text{3,60,000}}{\text{25,20,000}}\text{×}\text{100}\text{=}\text{14}\text{.28\%}\\ \text{Working}\text{Capital}\text{Turnover}\text{Ratio}\text{=}\frac{\text{Revenue}\text{from}\text{operations}}{\text{Working}\text{Capital}}\\ \text{Working}\text{Capital}\text{=}\text{15,60,000}\text{–}\text{6,00,000}\text{=}\text{₹}\text{9,60,00}\\ \text{=}\frac{\text{25,20,000}}{\text{9,60,000}}\text{=}\text{2}\text{.62}\text{times}\end{array}

Q.21 Compute Working Capital Ratio, Debt Equity Ratio and Proprietary Ratio from the following information:
Paid-up Share Capital: ₹5,00,000
Current Assets: ₹4,00,000
Revenue from Operations: ₹10,00,000
13% Debentures: ₹2,00,000
Current Liabilities: ₹2,80,000

Ans.

\begin{array}{l}\text{Working Capital Turnover Ratio =}\frac{\text{Revenue from operations}}{\text{Working Capital}}\\ \text{Working Capital}\text{=}\text{4,00,000}-\text{2,80,000}\text{=}\text{ram}\text{1,20,000}\\ \text{Working Capital Turnover Ratio}\text{=}\frac{\text{10,00,000}}{\text{1,20,000}}\text{=}\text{}\text{8}\text{.33}\text{times}\\ \text{Debt equity Ratio}\text{=}\frac{\text{Debt}}{\text{Equity}}\\ \text{=}\frac{\text{2,00,000}}{\text{5,00,000}}\text{=}\text{}\frac{\text{2}}{\text{5}}\text{}\text{=}\text{0}\text{.4:1}\\ \text{Proprietary Ratio}\text{=}\frac{\text{Shareholders’ Funds}}{\text{Total Assets}}\\ \text{Total Assets}\text{=}\text{Total Liabilities}\\ \text{=}\frac{\text{5,00,000}}{\text{9,80,000}}\text{=}\frac{\text{25}}{\text{49}}\text{=}\text{}\text{0}\text{.51:1}\end{array}

Q.22 Calculate Inventory Turnover Ratio if : Inventory in the beginning is ₹76,250. Inventory at the end is ₹98,500. Sales is ₹5,20,000. Sales Return is ₹20,000, Purchases is ₹3,22,250.

Ans.

\begin{array}{l}\text{Sales means Revenue from operations}\\ \text{Cost of goods sold means Cost of revenue from operations}\\ \text{Inventory Turnover Ratio =}\frac{\text{Cost of revenue from operations}}{\text{Average inventory}}\\ \text{Average Inventory}\text{=}\frac{\text{76,250 + 98,500}}{\text{2}}\text{=}\text{₹}\text{87,375}\\ \text{Cost of reve}\text{. from operations = 76,250 + 3,22,250}-\text{98,500}\\ \text{= ₹}\text{3,00,000}\\ \text{Inventory Turnover Ratio =}\frac{\text{3,00,000}}{\text{87,375}}\text{=}\text{3}\text{.43}\text{times}\end{array}

Q.23 Calculate Inventory Turnover ratio from the data given below:
Inventory in the beginning of the year: ₹10,000
Inventory at the end of the year: ₹5,000
Carriage: ₹2,500
Revenue from Operations: ₹50,000
Purchases: ₹25,000

Ans.

\begin{array}{l}\text{Inventory Turnover Ratio =}\frac{\text{Cost}\text{of}\text{revenue}\text{from}\text{operations}}{\text{Average}\text{inventory}}\\ \text{Average}\text{Inventory =}\frac{\text{₹10,000 + ₹5,000}}{\text{2}}\text{= ₹7,500}\\ \text{Cost of reve, from operations}\\ \text{= ₹10,000 + ₹25,000 + ₹2,500 – ₹5,000 = ₹32,500}\\ \text{Inventory}\text{Turnover}\text{Ratio}\text{=}\frac{\text{₹32,500}}{\text{₹7,500}}\text{= 4}\text{.33}\text{times}\end{array}

Q.24 A trading firm’s average inventory is ₹20,000 (cost). If the inventory turnover ratio is 8 times and the firm sells goods at a Gross profit of 20% on sales, ascertain the Gross profit of the firm.

Ans.

\begin{array}{l}\text{Inventory Turnover Ratio =}\frac{\text{Cost of revenue from operations}}{\text{Average inventory}}\\ \text{8 =}\frac{\text{Cost of revenue from operations}}{\text{20,000}}\\ \text{Cost of revenue from operations}\text{=}\text{20,000 × 8 =}\text{₹}\text{1,60,000}\\ \text{Profit =}\frac{\text{1}}{\text{4}}\times \text{1,60,000}\text{=}\text{₹}\text{40,000}\\ \text{If the rate of gross profit on sales is}\frac{\text{1}}{\text{5}}\text{,}\text{then rate of}\\ \text{gross profit on cost will be}\frac{\text{1}}{\text{4}}\end{array}

Q.25 You are able to collect the following information about a company for two years:

Calculate Inventory Turnover Ratio and Trade Receivables Turnover Ratio.

Ans.

\begin{array}{l}\text{Inventory Turnover Ratio =}\frac{\text{Cost of revenue from operations}}{\text{Average inventory}}\\ \text{Average Inventory =}\frac{\text{₹6,00,000 + ₹9,00,000}}{\text{2}}\text{=}\text{₹7,50,000}\\ \text{Gross profit =}\frac{\text{25}}{\text{100}}\text{x}\text{₹24,00,000}\text{=}\text{₹6,00,000}\\ \text{Cost of reve}\text{. from operations = ₹24,00,000 – ₹6,00,000}\text{= ₹18,00,000}\\ \text{Inventory Turnover Ratio =}\frac{\text{₹18,00,000}}{\text{₹7,50,000}}\text{=}\text{2}\text{.4}\text{times}\\ \text{Trade Receivables Turnover Ratio =}\frac{\text{Credit revenue from operations}}{\text{Average trade receivables}}\\ \text{Average Trade Receivable =}\frac{\text{₹5,00,000 + ₹5,60,000}}{\text{2}}\text{=}\text{₹5,30,000}\\ \text{Trade Receivables Turnover Ratio =}\frac{\text{₹24,00,000}}{\text{₹5,30,000}}\text{=}\text{4}\text{.53}\text{times}\end{array}

Q.26 From the following Balance Sheet and other Information, Calculate following ratios:

(i) Debt-Equity Ratio

(ii) Working Capital Turnover Ratio

(iii) Trade Receivables Turnover Ratio

Additional Information:
Revenue from Operations: ₹18,00,000

Ans.

\begin{array}{l}\text{Debt equity Ratio =}\frac{\text{Debt}}{\text{Equity}}\\ \text{=}\frac{\text{12,00,000}}{\text{19,00,000}}\text{=}\text{12:19}\\ \text{Debt = Long term borrowings =}\text{₹}\text{12, 00,000}\\ \text{Equity = Share capital + Reserves and surplus + Money}\\ \text{received against share warrants}\\ \text{= 10, 00,000 + 7,00,000 +2,00,000 =}\text{₹}\text{19, 00,000}\\ \text{Working Capital Turnover Ratio =}\frac{\text{Revenue from operations}}{\text{Working Capital}}\\ \text{Working Capital}\text{=}\text{18,00,000}\text{–}\text{5,00,000}\text{=}\text{₹}\text{13,00,000}\\ \text{Working Capital Turnover Ratio}\text{=}\frac{\text{18,00,000}}{\text{13,00,000}}\text{=}\text{1}\text{.4}\text{times}\\ \text{Trade Receivables Turnover Ratio =}\frac{\text{Credit revenue from operations}}{\text{Average trade receivables}}\\ \text{Trade Receivables Turnover Ratio =}\frac{\text{18,00,000}}{\text{9,00,000}}\text{=}\text{2}\text{times}\end{array}

Q.27 From the following information, calculate the following ratios:
(i) Liquid Ratio
(ii) Inventory turnover ratio
(iii) Return on investment

Inventory in the beginning: ₹50,000
Inventory at the end: ₹60,000
Net profit = ₹2,17,900
10% Debentures = ₹2,50,000
Revenue from operations: ₹4,00,000
Gross Profit: ₹1,94,000
Cash & Cash Equivalents: ₹40,000
Money received against share warrants = ₹20,000
Trade Receivables: ₹1,00,000
Trade Payables: ₹1,90,000
Other Current Liabilities: ₹70,000
Share Capital: ₹2,00,000
Reserves and Surplus: ₹1,20,000
(Balance in the Statement of Profit & Loss)

Ans.

\begin{array}{l}\text{Liquid Ratio =}\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\\ \text{=}\frac{\text{40,000}\text{+}\text{1,00,000}}{\text{1,90,000}\text{+}\text{70,000}}\text{=}\frac{\text{1,40,000}}{\text{2,60,000}}\text{=}\text{7:13}\text{}\text{=}\text{0}\text{.54:1}\\ \text{Inventory Turnover Ratio =}\frac{\text{Cost of revenue from operations}}{\text{Average inventory}}\\ \text{Average Inventory =}\frac{\text{50,000 + 60,000}}{\text{2}}\text{=}\text{₹}\text{55,000}\\ \text{Cost of reve}\text{. from operations = 4,00,000}-\text{1,94,000}\text{= ₹}\text{2,06,000}\\ \text{Inventory Turnover Ratio =}\frac{\text{2,06,000}}{\text{55,000}}\text{=}\text{3}\text{.74}\text{times}\\ \text{Return on Investment =}\\ \text{Profit before interest and tax/ Capital employed}\times \text{100}\\ \text{Profit before interest and tax = Rs}\text{. 2,17,900 + 25,000 =}\\ \text{Rs}\text{. 2,42,900}\text{.}\\ \text{Capital employed = 2,50,000 + 20,000 + 2,00,000 +}\\ \text{1,20,000 = Rs}\text{. 5,90,000}\\ \text{Return on Investment =}\\ \text{2,42,900/ 5,90,000}\times \text{100 =41}\text{.17\%}\end{array}

Q.28 From the following, calculate (a) Debt-equity Ratio (b) Total Assets to Debt Ratio (c) Proprietary Ratio.
Equity Share Capital: ₹75,000
Share application money pending allotment ₹25,000
General Reserve: ₹45,000
Balance in the Statement of Profit & Loss: ₹30,000
Debentures: ₹75,000
Trade Payables: ₹40,000
Outstanding Expenses: ₹10,000

Ans.

\begin{array}{l}\text{Debt equity Ratio =}\frac{\text{Debt}}{\text{Equity}}\\ \text{=}\frac{\text{75,000}}{\text{1,75,000}}\text{=}\frac{\text{3}}{\text{7}}\text{=}\text{0}\text{.43:1}\\ \text{Debt = Debentures =}\text{₹}\text{75,000}\\ \text{Equity = Equity share capital + Share application money}\\ \text{pending allotment + general reserve + balance in}\\ \text{statement of profit and loss = 75,000}\text{+}\text{25,000}\text{+}\text{45,000}\\ \text{+30,000 =}\text{₹}\text{1,75,000}\\ \text{Total assets to debts ratio =}\frac{\text{Total Assets}}{\text{Debt}}\\ \text{=}\frac{\text{3,00,000}}{\text{75,000}}\text{=}\text{4:1}\\ \text{Total assets = Total liabilities}\\ \text{Total liabilities = Equity + Debt + current liabilities =}\\ \text{1,75,000 + 75,000 + 50,000 =}\text{}\text{₹}\text{3,00,000}\\ \text{Proprietary ratio =}\frac{\text{Proprietors’ Funds}}{\text{Total Assets}}\\ \text{=}\frac{\text{1,75,000}}{\text{3,00,000}}\text{=}\frac{\text{7}}{\text{12}}\text{=}\text{0}\text{.58:1}\end{array}

Q.29 Cost of Revenue from Operations is ₹1,50,000. Operating expenses are ₹60,000. Revenue from Operations is ₹2,50,000. Calculate Operating Ratio.

Ans.

\begin{array}{l}\text{Operating Ratio =}\frac{\text{Operating}\text{cost}}{\text{Net revenue from operations}}\text{x}\text{100}\\ \text{Oper}\text{.}\text{cost}\text{=}\text{Cost}\text{of}\text{rev}\text{. from oper}\text{.}\text{+}\text{oper}\text{.}\text{}\text{}\text{}\text{}\text{}\text{exp}\text{.}\\ \text{=}\frac{\text{₹2,10,000}}{\text{₹2,50,000}}\text{x}\text{100}\text{=}\text{84\%}\end{array}

Q.30 Calculate the following ratio on the basis of following information:

(i) Gross Profit Ratio

(ii) Current Ratio

(iii) Acid Test Ratio

(iv) Inventory Turnover Ratio

(v) Fixed Assets Turnover Ratio

Gross profit: ₹50,000

Revenue from Operations: ₹1,00,000

Inventory: ₹15,000

Trade Receivables: ₹27,500

Cash & Cash Equivalents: ₹17,500

Current Liabilities: ₹40,000

Land & Building: ₹50,000

Plant & Machinery: ₹30,000

Furniture: ₹20,000

Ans.

\begin{array}{l}\text{Gross Profit Ratio =}\frac{\text{Gross}\text{Profit}}{\text{Net revenue from operations}}\text{x}\text{100}\\ \text{Gross Profit Ratio ==}\frac{\text{₹50,000}}{\text{₹1,00,000}}\text{x}\text{100}\text{=}\text{50\%}\\ \text{Current Ratio =}\frac{\text{Current Assets}}{\text{Current Liabilities}}\\ \text{Current Assets}\text{=}\text{₹15,000}\text{+}\text{₹27,500 + ₹17,500}\text{=}\text{₹60,000}\\ \text{=}\frac{\text{₹60,000}}{\text{₹40,000}}\text{=}\frac{\text{3}}{\text{2}}\text{=}\text{1}\text{.5:1}\\ \text{Liquid Ratio =}\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\\ \text{Liquid Assets}\text{=}\text{₹27,500 + ₹17,500}\text{=}\text{₹45,000}\\ \text{=}\frac{\text{₹45,000}}{\text{₹40,000}}\text{=}\frac{\text{9}}{\text{8}}\text{=}\text{1}\text{.12:1}\\ \text{Inventory Turnover Ratio =}\frac{\text{Cost of revenue from operations}}{\text{Average inventory}}\\ \text{Cost of reve}\text{. from operations = ₹1,00,000 – ₹50,000}\text{= ₹50,000}\\ \text{Inventory Turnover Ratio =}\frac{\text{₹50,000}}{\text{₹15,000}}\text{=}\text{3}\text{.33}\text{times}\\ \text{Fixed Assets Turnover Ratio =}\frac{\text{Revenue from operations}}{\text{Net fixed assets}}\\ \text{Net fixed assets = 50,000}\text{+}\text{30,000}\text{+}\text{20,000}\text{= ₹1,00,000}\\ \text{Inventory Turnover Ratio =}\frac{\text{₹1,00,000}}{\text{₹1,00,000}}\text{=}\text{1:1}\end{array}

Q.31 From the following information, Calculate Gross profit ratio, Inventory Turnover Ratio and Trade Receivables Ratio.

Revenue from Operations: ₹3,00,000

Cost of Revenue from Operations: ₹2,40,000

Inventory at the end: ₹62,000

Gross Profit: ₹60,000

Inventory in the beginning: ₹58,000

Trade Receivables: ₹32,000

Ans.

\begin{array}{l}\text{Gross Profit Ratio =}\frac{\text{Gross}\text{Profit}}{\text{Net revenue from operations}}\text{x}\text{100}\\ \text{Gross Profit = ₹3,00,000 – ₹2,40,000 = ₹60,000}\\ \text{Gross Profit Ratio ==}\frac{\text{₹60,000}}{\text{₹3,00,000}}\text{x}\text{100}\text{=}\text{20\%}\\ \text{Inventory Turnover Ratio =}\frac{\text{Cost of revenue from operations}}{\text{Average inventory}}\\ \text{Average Inventory =}\frac{\text{₹58,000 + ₹62,000}}{\text{2}}\text{=}\text{₹60,000}\\ \text{Inventory Turnover Ratio =}\frac{\text{₹2,40,000}}{\text{₹60,000}}\text{=}\text{4}\text{times}\\ \text{Trade Receivables Turnover Ratio =}\frac{\text{Credit revenue from operations}}{\text{Average trade receivables}}\\ \text{Trade Receivables Turnover Ratio =}\frac{\text{₹3,00,000}}{\text{₹32,000}}\text{=}\text{9}\text{.4}\text{times}\end{array}