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12 RATIO ANALYSES

Format of Income Statement

Format of Income and Financial Statement I Sources of Funds Equity Share Capital Reserve Fund/(Loss)
Format of Income and Financial Statement
I
Sources of Funds
Equity Share Capital
Reserve Fund/(Loss)
XXX
Add
XXX
a
Equity / Equity Share Holders Funds
XXX
b
Add
Preference Share Capital
XXX
Shareholders’ funds (a+b)
XXX
c
Add
Long term debt (a+b+c)
Capital employed / Investment
XXX
XXX
II
Applications of Funds
Fixed Assets
XXX
III
Net Working Capital
Current Assets
d
Liquid Assets
XXX
e
Add
Stock in Trade (d+e)
XXX
XXX
Current Liabilities
f
Liquid Liabilities
XXX
g
Add
Bank OD
XXX
XXX
IV
Net Working Capital (e-g)
XXX
V
II+IV
XXX

Format of Income Statement

Format of Income and Financial Statement I Add Sources of Funds Equity Share Capital Reserve
Format of Income and Financial Statement
I
Add
Sources of Funds
Equity Share Capital
Reserve Fund/(Loss)
XXX
XXX
A
Equity / Equity Share Holders Funds
XXX
B
Add
Preference Share Capital
Shareholders’ funds (a + b)
XXX
XXX
C
Add
Long term debt (a + b + c)
Capital employed / Investment
XXX
XXX
II
Applications of Funds
Fixed Assets
XXX
III
Net Working Capital
Current Assets
D
Liquid Assets
XXX
E
Add
Stock in Trade (d + e)
XXX
XXX
Current Liabilities
F Liquid Liabilities XXX G Add Bank OD XXX XXX IV Net Working Capital (e
F
Liquid Liabilities
XXX
G
Add
Bank OD
XXX
XXX
IV
Net Working Capital (e - g)
XXX
V
II+IV
XXX
Format of Financial Statement Sales XXX Add Cost of good sold XXX Gross Profit XXX
Format of Financial Statement
Sales
XXX
Add
Cost of good sold
XXX
Gross Profit
XXX
Add
Operating Income
XXX
Less
Operating Expense
XXX
XXX
Add
Non-Operating Income
XXX
Less
Non-Operating Expense
Earning Before Int. Tax (EBIT)
XXX
XXX
Less
Interest
Earning Before Tax (EBT)
Tax
XXX
XXX
Less
XXX
Earning After Tax (EAT)
Pref. Dividend
XXX
Less
XXX
Equity/Equity Shareholder
Dividend
XXX
Less
XXX
Retain Earnings
XXX

1. Ratio Analysis: Ratio Analysis is based on the fact that a single accounting figure by itself may not communicate any meaningful information but when expressed as a relative to some other figure, it may definitely provide some significant information. Ratio analysis is comparison of different numbers from the balance sheet, income statement and cash flow statement against the figures of previous year, other companies, the industry, or even the economy in general for the purpose of financial analysis.

2. Types of Ratios: The ratios can be classified into following four broad categories:

a) Liquidity Ratios: Liquidity or short term solvency means ability of the business to pay its short-term liabilities.

Current Ratios: The current ratio is one of the best known measures of financial strength.

Quick Ratios: The Quick Ratio is sometimes called the “acid-test” ratio and is one of the best measures of liquidity. It is a more conservative measures than current ratio.

Cash Ratio / Absolute Liquidity Ratio: The cash ratio measures the absolute liquidity of the business. This ratio considers only the absolute liquidity available with the firm.

Basic Defense Interval: This ratio helps in determining the number of days the company can coverers cash expenses without the aid of additional financing.

Net Working Capital Ratio: It helps to determine a company’s ability to weather financial crises over time. Net Working Capital Ratio = Current Assets Current Liabilities (excluding short-term bank borrowing )

b)

Capital Structure / Leverage Ratios: The capital structure / leverage ratios may be defined as those financial ratios which measure the long term stability and structure of the firm.

Capital Structure: These ratios provide an insight into the following technique used by a business and focus, as a consequence, on the long-term solvency position.

Equity Ratio: The ratio indicates proportion of owners fund to total fund invested in the business.

 

Debt Ratio: This ratio is used to analyse the long-term solvency of a firm

 

Debt to Equity Ratio: Debt equity ratio is the indicator of leverage

Coverage Ratio: The coverage ratios measure the firm’s ability to service the fixed liabilities.

 

Debt Service Coverage Ratio: Lenders are interested in debt service coverage to judge the firm’s ability to pay off current interest and installments.

Interest Coverage Ratio: Also known as “times interest earned ratio” indicates the firm’s ability to meet interest (and other fixed-charges) obligations.

Preference Dividend Coverage Ratio: This ratio measures the ability of a firm to pay dividend on preference shares which carry a stated rate of return.

Capital Gearing Ratio: In addition to debt-equity ratio, sometimes capital gearing ratio is also calculated to show the proportion of fixed interest (dividend) bearing capital to funds belonging to equity shareholders.

c)

Activity Ratios: These ratios are employed to evaluate the efficiency with which the firm manages and utilities its assets.

Capital Turnover Ratio: This ratio indicates the firm’s ability of generating sales per rupee of long term investment.

Fixed Assets Turnover Ratio: A high fixed assets turnover ratio indicates efficient utilisation of fixed assets in generating sales.

Working Capital Turnover

Working Capital Turnover is segregated into Inventory Turnover, Debtors Turnover, Creditors Turnover.

Inventory Turnover Ratio: This ratio also known as stock turnover ratio establishes the relationship between the cost of goods sold during the year and average inventory held during the year.

Debtors Turnover Ratio: The debtor’s turnover ratio deals on the collection and credit policies of the firm.

Creditors Turnover Ratio: This ratio shows the velocity of debt payment by the firm. It is calculated as follows:

d)

Profitability Ratios: The profitability ratios measure the profitability or the operational efficiency of the firm. These ratios reflect the final results of business operations.

Return of Equity (ROE): Return on Equity measures the profitability of equity shares invested in the firm. This ratio reveals how profitability of the owners funds have been utilized by the firm.

Earnings per Share: The profitability of a firm from the point of view of ordinary shareholders can be measured in terms of number of equity shares. This is known as Earnings per share.

Dividend per Share: Dividend per share ratio indicates the amount of profit distributed to shareholders per share.

Price Earnings Ratio: The price earning ratio indicates the expectation of equity investors about the earnings of the firm. It relates earnings to market price and is generally taken as a summary measure of growth potential of an investment, risk characteristics, shareholders orientation, corporate image and degree of liquidity.

Return of Capital Employed/Return on Investment: It is the percentage of return of funds invested in the business by its owners.

Return on Assets (ROA): This ratio measures the profitability of the firm in terms of assets employed in the firm.

Gross Profit Ratio: This ratio is used to compare departmental profitability or product profitability.

Operating Profit Ratio:

Net Profit Ratio: It measures overall profitability of the business.

Yield: This ratio indicates return on investment; this may be on average investment or closing investment. Dividend (%) indicates return on paid up value of shares. But yield (%) is the indicates of true return in which share capital is taken at its market value.

(Or)

Market Value/Book Value per Share: This ratio indicates market response of the shareholders investment.

Question 1:

Or

response of the shareholders investment. Question 1: Or : [CA-CWA-CS] M: Trichy: 93451 22645/Chennai: 93453 96855
response of the shareholders investment. Question 1: Or : [CA-CWA-CS] M: Trichy: 93451 22645/Chennai: 93453 96855

: [CA-CWA-CS]

M: Trichy: 93451 22645/Chennai: 93453 96855

12.5

Particulars Rs.10 Equity share capital Rs.10.10% Preference share capital Rs.100.12% Debentures Reserve fund Profit
Particulars
Rs.10 Equity share capital
Rs.10.10% Preference share capital
Rs.100.12% Debentures
Reserve fund
Profit & loss[Opening Balance]
Stock
Debtors / Creditors
Bills receivable/ Bills payable
Cash / Bank
Purchases / sales
Direct Wages
Administration Expenses
Selling & Distribution
Income from let out
Expenses for let out
Interest
Fixed assets
Debit
Credit
10,000
5,000
5,000
2,000
3,000
1,000
500
300
500
200
5,560
15,000
25,000
1,000
500
500
1000
500
600
25,840
51,500
51,500

1. Closing Stock Rs.2,000

2. Tax rate is 40%

3. Market price per share is Rs.40

4. proposed dividend Rs.1 per share

5. the above adjustments were made

6. Redeem Debenture Rs.500

Calculate all ratios SOLUTION:

Trading A/C & Profit and Loss A/C To Opening Stock 1,000 By Sales 25,000 Purchases
Trading A/C & Profit and Loss A/C
To
Opening Stock
1,000
By
Sales
25,000
Purchases
15,000
Closing Stock
2,000
Direct Wages
1,000
Gross Profit
10,000
27,000
27,000
Administration expenses
Selling & Distribution expenses
Expenses for let out
TO Interest on Debentures
TO Net Profit
500
10,000
500
Gross Profit b/d
Income from let out
1,000
500
600
8,900
11,000
11,000
Profit and Loss Appropriation A/c
Provision for Tax
Proposed Dividend
3,560
Opening Bal
3,000
500
NP b/d
8,900
Proposed Equity dividend Closing Balance 1,000 6,840 11,900 11,900
Proposed Equity dividend
Closing Balance
1,000
6,840
11,900
11,900
Balance sheet Equity Share Capital Preference Share Capital Debentures Reserve Fund Profit & loss Creditors
Balance sheet
Equity Share Capital
Preference Share Capital
Debentures
Reserve Fund
Profit & loss
Creditors
Bills Payable
10,000
Fixed Assets
25,840
5,000
Stock
2,000
5,000
Debtors
500
2,000
Bills Receivable
500
6,840
Bank
500
300
200
29,340
29,340
Income statement 25,000 Less 1,000 Add 15,000 Less 2,000 14,000 Add Sales Cost of Goods
Income statement
25,000
Less
1,000
Add
15,000
Less
2,000
14,000
Add
Sales
Cost of Goods Sold
Opening Stock
Purchases
Closing Stock
Material consumption
Direct wages
1,000
15,000
Gross Profit
10,000
Add
Other Operating Income
Other operating expenses
Administration expenses
Selling & Distribution expenses
Operating profit
Non Operating income
--
Less
500
500
1,000
9,000
Add
1,000
10,000
Less
Non Operating exp
EBIT
Interest
NP / P / EBT
Tax
EAT
Preference Dividend
Earnings avail to ESH
No of Shares
Earning Per Share [EPS]
500
9,500
Less
600
8900
Less
3560
5340
Less
500
4840
1,000
4.84
FINANCIAL STATEMENT Sources of Funds Equity / ESH fund Equity Share Capital 10,000 Reserve Fund
FINANCIAL STATEMENT
Sources of Funds
Equity / ESH fund
Equity Share Capital
10,000
Reserve Fund
2,000
Profit and Loss
6,840
Net worth
18,840
10% Redeemable Preference Share Capital
5,000
Share holder’s Fund
23,840
12% Debenture
5,000
A Investment / Capital employed
28,840
Applications of funds
B Fixed Assets
25,840
Working capital
Current Assets
Debtors
500
Bills Receivable
500
Receivable
1000
Cash and Bank balance
500
Liquid asset
1500
Stock
2000
I Current Asset
3500
Current Liabilities
Creditors
300
Bills Payable
200
Payable
500
Other Current Liabilities
--
Liquid Liabilities
500
Bank Overdraft
--
II
Current Liabilities
500
C
Net Working Capital I – II
3000
A = B + C
28,840

RATIOS

No Ratio Formulae Workings 4840 / 18840 × 100 Answer 1 Return on Equity EAT
No
Ratio
Formulae
Workings
4840 / 18840 × 100
Answer
1
Return on Equity
EAT – P. Div/Equity×100
25.69%
2
on
holders fund
Return
Share
EAT / Share Holder’s fund
5340 / 23840 × 100
22.39%
×
100
3
ROI / ROCE
(EAT + Int) /( Inv/CEMP )
(or)
EBIT – TAX / INV / Cap
emp x 100
(5340+600) / 28840 × 100
(or)
(9500-3560) / 28840 × 100
20.59%
×
100
× 100 (or) (9500-3560) / 28840 × 100 20.59% × 100 : [CA-CWA-CS] M: Trichy: 93451
× 100 (or) (9500-3560) / 28840 × 100 20.59% × 100 : [CA-CWA-CS] M: Trichy: 93451

: [CA-CWA-CS]

M: Trichy: 93451 22645/Chennai: 93453 96855

12.8

4 GP Ratio GP / sales × 100 10,000 / 25,000 × 100 40% 5
4 GP Ratio
GP / sales × 100
10,000 / 25,000 × 100
40%
5 Operating Profit Ratio
OP / Sales × 100
9000 / 25000 × 100
36%
6 Operating Ratio
Oper. Exp / sales × 100
(15000+1000)/25000×100 64%
Nt:
Oper.exp
=
cogs
+
other op exp
7 NP Ratio
NP / S x 100
5340 / 25000 ×100
21.36%
8 Exp Ratio
Admn. OH Ratio
2%
Sell
and Dist
OH
Admin O/H / Sales×100
Sell O/H / Sales×100
500 / 2500×100
500 / 2500×100
2%
Ratio
9 EPS
Earn avail to ESH / No.of
Shares
4840 / 1000
4.84
10 Payout Ratio
Dividend per share / EPS x
100 (or)
Total Dividend / Earnings
for ESH x 100
1/4.84 x 100
20.66%
(or)
1000 / 4840 x 100
11 Earning
Retained
Retained Earnings Per
share / EPS x 100
(or)
Total Retained Earnings/
Earnings available to ESH
3.84 / 4.84 x 100 (or)
79.33%
Ratio
3840 / 4840 x 100
12 Earning
Price
Ratio
Market
price per share /
40 / 4.84
8.26
[PE Ratio]
EPS
13 Dividend yield Ratio
D / Mkt price × 100
1/40 × 100
2.5%
14 Earnings yield Ratio
EPS / Mkt Price × 100
4.84 / 40 × 100
12.1%
Turnover Ratio / Activity Ratio
15 Turnover
Inventory
TO / Inv
Nt: COGS / S / Avg.Stk
15,000 / (1000+2000)/2
10 times
Ratio
16 Stock velocity ratio
Days (or) months in a year /
Inv. Turnover ratio
(or)
Days (or)months in a year /
COGS × Avg Stock
360
/ 10
36 days
(or)
360
/ 15000 x 1500
17 Receivable Turnover
TO / Avg. Drs
25000 / 1000
25 times
Ratio/
Drs
Turnover
Nt:
Cr.
Sales
/
(Drs
+
ratio
BR)/2
18 Drs Velocity ratio
Days / months in
DTR
a year
/
360
/ 25
14.4 days
19 Crs Turnover ratio
To / Crs
Nt: Cr. Purchases / (Crs +
15000 / 500
30 times
BP)/2
20 Crs velocity ratio
Days / months in
CTR
a year
/
360
/ 30
12 days
21 FA Turnover ratio
To/FA
Nt: Sales / FA
25000
/ 25840
0.97 times
22 Interest coverage ratio
EBIT / Interest
COVERAGE RATIOS
9500 / 600
16 times
23 Coverage
Dividend
EAT / P.D
5340
/ 500
3.6 times
Ratio
(or)
EAT / [PD + ED]
(or)
5340
/ 1500
: [CA-CWA-CS]
M: Trichy: 93451 22645/Chennai: 93453 96855
12.9
24 Loan Coverage Ratio EBIT / I + (Loan instat / (1- T)) = 9500
24 Loan Coverage Ratio
EBIT / I + (Loan instat / (1-
T))
= 9500 / 600 + (500 / (1 – 0.4))
(or)
6.6
(or)
5340
+ 600 (1 – 0.4) / 600 (1 –
EBIT + Int (1 – T)
0.4) + 500
Int
(1-T)
+
Loan
Investment
SOLVENCY RATIOS
I. Short Term
25 Current Ratio
CA / CL
26 Liquid Ratio / Quick
Ratio
QA / QL
3500 / 500
1500 / 500
7:1
3:1
27 Cash Reserve Ratio/
Super Quick Ratio
Cash + Mkt Securities / CL
500 / 500
1:1
28 Debt Equity
L. T. Debt / Share Holders
fund
5000 / 25840 =
0.21 : 1
L
T
Debt
+
P.S.
Cap
/
5000 + 5000 / 18840
0.53 : 1
Equity
Total Debt / Equity
[5000 + 500] / 23840
0.23:1

Question 2: Current Ratio = 2, Liquid Ratio = 1 and Working Capital = Rs.1,00,000. Calculate Current Asset, Current Liabilities and Liquid Asset

CR WC CA / CL = 2/1 CA – CL 1 1,00,000 2 – 1
CR
WC
CA / CL = 2/1
CA – CL
1
1,00,000
2 – 1
2,00,000 – 1,00,000
LR
LA /
CL = 1 /
1 =
1,00,000 / 1,00,000

Question 3: CR = 2, LR = 1, Stock= Rs. 100,000

Calculate CA / CL / LA

CR = CA / CL = 2/1

LR = LA / CL = 1 / 1

ST = CA LA

1 = 2 1= 1,00,000 = 2,00,000 1,00,000

Q uestion 4: Calculation of Ratios: JKL Limited has the following B/S as on March 31of 2006 and 2005:

Particulars Rs. in lakhs 31.03.06 31.03.05 Sources of Funds: Shareholders Funds 2,377 1,472 Loan Funds
Particulars
Rs. in lakhs
31.03.06 31.03.05
Sources of Funds:
Shareholders Funds
2,377
1,472
Loan Funds
3,570
3,083
5,947
4,555
Applications of Funds:
Fixed Assets
3,466
2,900
Cash and bank
489
470
Debtors 1,495 1,168 Stock 2,867 2,407 Other Current Assets 1,567 1,404 Less: Current Liabilities (3,937)
Debtors
1,495
1,168
Stock
2,867
2,407
Other Current Assets
1,567
1,404
Less: Current Liabilities
(3,937)
(3,794)
5,947
4,555

The Income Statement of the JKL Ltd. for the year ended is as follows:

Particulars Rs. in lakhs 31.03.06 31.0305 Sales 22,165 13,882 Less: Cost of Goods sold 20,860
Particulars
Rs. in lakhs
31.03.06
31.0305
Sales
22,165
13,882
Less: Cost of Goods sold
20,860
12,544
Gross Profit
1,305
1,338
Less: Selling, General & Admn. expenses
1,135
752
Earnings before Interest & Tax (EBIT)
170
586
Interest Expense
113
105
Profits before Tax
57
481
Tax
23
192
Profits after Tax (PAT)
34
289

Required:

(i)

Calculate for the year 2005-06:

(a)

Inventory turnover ratio

(b)

Financial Leverage

(c)

Return on Investment (ROI)

(d)

Return on Equity (ROE)

(e)

Average Collection period.

(ii)

Give a brief comment on the Financial Position of JKL Limited.

Solution:

Ratios for the year 2005-2006

(PE-II-May 2006)(12 marks)

(a)

Inventory turnover ratio: = COGS/Average Inventory = 20860/((2867+2407)/2) = 7.91

(b)

Financial Leverage = EBIT/(EBIT-I) = for 2005-06: 170/57 = 2.98 and for 2004-05: 596/481 = 1.22

(c)

ROI = NOPAT/Average Capital Employed = 57(1-0.4)/((5947+4555)/2) = 34.2/5251 = 0.65%

(d)

ROE = PAT/Average Shareholders’ Funds = 34/((2377+1472)/2) = 34/1924.5 = 1.77%

(e)

Average Collection Period = Ave. Debtors/Ave. Sales per day = ((1495+1168)/2)/(22,165/365) = 60.7 lacs

(ii)

Brief Comment on the financial position of JKL Ltd: The profitability of operations of the company are

showing sharp decline due to increase in operating expenses. The financial and operating leverages are becoming adverse. The liquidity of the company is under great stress.

Question 5: Preparation of Balance Sheet:

From the following information, prepare a summarised Balance Sheet as at 31 st March, 2002:

Working Capital Rs.2,40,000 Bank overdraft Rs.40,000
Working Capital
Rs.2,40,000
Bank overdraft
Rs.40,000
Fixed Assets to Proprietary ratio Reserves and Surplus Current ratio Liquid ratio 0.75 Rs.1,60,000 2.5
Fixed Assets to Proprietary ratio
Reserves and Surplus
Current ratio
Liquid ratio
0.75
Rs.1,60,000
2.5
1.5

(PE-II-Nov.2002) (6 marks)

Solution:

Working notes:

1. Current assets and Current liabilities computation:

Working Capital = Current Assets Current Liabilities = 2.5 1 = 1.5 = 240,000

Therefore = Current Asset = 240,000×2.5/1.5 = 400,000 and Current Liabilities = 160,000

2. Computation of stock:

Stock = Current Assets Liquid Assets = 400,000 240,000 = 160,000 Where, Liquid Asset from Liquid Ratio = Liquid assets / Current Liabilities = 1.5 × 160,000 = 240,000

3. Computation of Proprietary fund; Fixed assets; Capital and Sundry creditors Proprietary ratio = Fixed Assets/Proprietary fund = 0.75

Fixed assets

=

0.75 Proprietary fund

and

Net working capital

=

0.25 Proprietary fund

Or

Rs.2,40,000/0.25

=

Proprietary fund

Or

Proprietary fund

=

Rs.9,60,000

and

Fixed assets

=

0.75 proprietary fund

 

=

0.75 Rs.9,60,000 =

Rs.7,20,000

Capital

=

Proprietary fund Reserves & Surplus

=

Rs.9,60,000 Rs.1,60,000 =

Rs.8,00,000

Sundry creditors

=

(Current liabilities Bank overdraft)

=

(Rs.1,60,000 Rs.40,000) =Rs.1,20,000

Construction of Balance sheet: (Refer to working notes 1 to 3) Balance Sheet

Liabilities Capital Reserves & Surplus Bank overdraft Sundry creditors Rs. Assets Rs. 8,00,000 Fixed assets
Liabilities
Capital
Reserves & Surplus
Bank overdraft
Sundry creditors
Rs.
Assets
Rs.
8,00,000
Fixed assets
7,20,000
1,60,000
Stock
1,60,000
40,000
Current assets
2,40,000
1,20,000
11,20,000
11,20,000

Question 6: Completion of Balance Sheet:

With the help of the following information complete the Balance Sheet of MNOP Ltd.:

Equity share capital Rs. 1,00,000 The relevant ratios of the company are as follows: Current
Equity share capital
Rs. 1,00,000
The relevant ratios of the company are as follows:
Current debt to total debt
Total debt to owner’s equity
.40
.60
Fixed assets to owner’s equity Total assets turnover Inventory turnover .60 2 Times 8 Times
Fixed assets to owner’s equity
Total assets turnover
Inventory turnover
.60
2 Times
8
Times

(PE-II-May 2005) (7 marks) Solution:

MNOP Ltd Balance Sheet Liabilities Rs Assets Rs Owner equity 1,00,000 Fixed assets 60,000 Current
MNOP Ltd Balance Sheet
Liabilities Rs
Assets
Rs
Owner equity
1,00,000
Fixed assets
60,000
Current debt 24,000
Cash
60,000
Long term debt
36,000
Inventory
40,000
1,60,000
1,60,000

Working Notes

1. Total debt = 0.60 Owners equity = 0.60 Rs 1,00,000 = Rs 60,000 Current debt to total debt = 0.40 , hence current debt = 0.40 60,000 = 24,000

2. Fixed assets = 0.60 Owners equity = 0.60 Rs 1,00,000 = Rs 60,000

3. Total equity = Total debt + Owners equity = Rs.60,000+Rs.1,00,000 = Rs.1,60,000

4.Total assets consisting of fixed assets and current assets must be equal to Rs.1,60,000 (Assets = Liabilities + Owners equity). Since Fixed assets are Rs 60,000 , hence, current assets should be Rs 1,00,000

5. Total assets to turnover = 2 Times : Inventory turnover = 8 Times Hence, Inventory /Total assets = 2/8=1/4, Total assets = 1,60,000 Therefore Inventory = 1,60,000/4 = 40,000 Balance on Asset side Cash = 1,00,000 40,000 = 60,000

Question 7: Completion of Balance Sheet:

Using the following data, complete the Balance Sheet given below:

Gross Profits Shareholders’ Funds Gross Profit margin Credit sales to Total sales Total Assets turnover
Gross Profits
Shareholders’ Funds
Gross Profit margin
Credit sales to Total sales
Total Assets turnover
Inventory turnover
Average collection period(360 days year)
Current ratio
Long-term Debt to Equity
Rs. 54,000
Rs.6,00,000
20%
80%
0.3 times
4 times
20 days
1.8
40%
Balance Sheet Creditors XXX Cash XXX Long-term debt XXX Debtors XXX Shareholders’ funds XXX Inventory
Balance Sheet
Creditors
XXX
Cash
XXX
Long-term debt
XXX
Debtors
XXX
Shareholders’ funds
XXX
Inventory
XXX
Fixed assets
XXX

Solution:

Gross Profits (given) = Rs. 54,000Solution: Gross Profit Margin given = 20%,  Sales = (PE-II-Nov. 2005)(12 Marks) = Rs. 54,000

Gross Profit Margin given = 20%,  Sales = Sales =

(PE-II-Nov. 2005)(12 Marks)

= Rs. 54,000 / 0.20 = Rs. 2,70,000

Credit Sales to Total Sales2005)(12 Marks) = Rs. 54,000 / 0.20 = Rs. 2,70,000 Total Assets Turnover = 0.3 times,

Total Assets Turnover = 0.3 times,  Total Assets = Sales / Total Assets = 270,000/0.3= 900,000 Total Assets = Sales / Total Assets = 270,000/0.3= 900,000

Sales – Gross Profits = COGS;  COGS = Rs. 270,000 – 54,000 = Rs. 2,16,000 Gross Profits = COGS; COGS = Rs. 270,000 54,000 = Rs. 2,16,000

Inventory turnover = 4 times  Inventory = COGS/Inventory Turnover = 216,000/4= Rs.54,000 Inventory = COGS/Inventory Turnover = 216,000/4= Rs.54,000

Average Collection Period = 20 days  Debtors turnover = 360/Average Collection Period = 360/20=18 Debtors turnover = 360/Average Collection Period = 360/20=18

= 80%, Credit Sales = Rs. 2,70,000×0.80 = Rs. 2,16,000

Debtors = Credit Sales / Debtors turnover = Rs 216,000/18= Rs.12,000

Current ratio = 1.8 , hence 1.8 = (Debtors + Inventory + Cash)/Creditors= Credit Sales / Debtors turnover = Rs 216,000/18= Rs.12,000 1.8 Creditors = (Rs. 12,000 +

1.8 Creditors

= (Rs. 12,000 + Rs. 54,000 + Cash)

1.8 Creditors

= Rs. 66,000 + Cash

Long-term Debt to Equity = 40% Shareholders Funds = Rs. 6,00,000  Long-term Debt= Rs. 6,00,000×40% = Rs. 2,40,000 Creditors (Bal .fig)= 9,00,000 – (6,00,000 + Long-term Debt= Rs. 6,00,000×40% = Rs. 2,40,000 Creditors (Bal .fig)= 9,00,000 (6,00,000 + 2,40,000) = Rs. 60,000

Cash = (60,000×1.8) 66,000 = Rs. 42,000

Balance Sheet (in Rs) Creditors (Bal. Fig) Long- term debt Shareholders’ funds 60,000 42,000 2,40,000
Balance Sheet (in Rs)
Creditors (Bal. Fig)
Long- term debt
Shareholders’ funds
60,000
42,000
2,40,000
12,000
6,00,000
Cash
Debtors
Inventory
Fixed Asset(Bal.fig)
54,000
7,92,000
9,00,000
9,00,000

Question 8: Completion of Balance Sheet:

Using the following information, complete the Balance Sheet given below:

(i) Total debt to net worth 1 : 2 (ii) Total assets turnover 2 (iii)
(i)
Total debt to net worth
1 : 2
(ii)
Total assets turnover
2
(iii)
Gross profit on sales
30%
(iv)
Average collection period
(Assume 360 days in a year)
40days
(v)
Inventory T.O ratio (COGS/Cl. Inventory)
3
(vi)
Acid test ratio
0.75
Balance Sheet as on March 31, 2007 Liabilities Equity Shares Capital Rs. Assets Rs. 4,00,000
Balance Sheet as on March 31, 2007
Liabilities
Equity Shares Capital
Rs.
Assets
Rs.
4,00,000
Fixed Assets
Reserves and Surplus
Total Debt:
6,00,000
Current Assets:
Inventory
Current Liabilities  Debtors  Cash 
Current Liabilities
Debtors
Cash

Solution:

Net Worth = Capital + Reserves and surplus = 4,00,000 + 6,00,000 = Rs. 10,00,000Current Liabilities  Debtors  Cash  Solution: Total Debt/ Networth = ½ = Rs 500,000

Total Debt/ Networth = ½ = Rs 500,000

Total Liability side = 4,00,000 + 6,00,000 + 5,00,000 = Rs. 15,00,000= Total Assets= Rs. 10,00,000 Total Debt/ Networth = ½ = Rs 500,000 Total Assets Turnover = Sales

Total Assets Turnover = Sales / Total assets = 2 = Sales / 15,00,00 Sales = Rs. 30,00,000

Gross Profit on Sales : 30% i.e. Rs. 9,00,000,  COGS = Rs. 30,00,000 – Rs. 9,00,000 = Rs. 21,00,000 COGS = Rs. 30,00,000 Rs. 9,00,000 = Rs. 21,00,000

Inventory turnover = COGS/Inventory =3 = 2100,000/Inventory  Inventory = Rs. 7,00,000 Inventory = Rs. 7,00,000

Ave collection period = Ave debtors /Sales/ day = 40 = Debtors /3000,000/360, Debtors = Rs 333,333 Debtors = Rs 333,333

Acid test ratio = (Current Assets – Stock) /Current Liabilities 0.75 = (Current Assets – 700,000)/500,000 Stock) /Current Liabilities 0.75 = (Current Assets 700,000)/500,000

Current Assets = Rs. 10,75,000.

Fixed Assets = Total Assets Current Assets = 15,00,000 10,75,000 = Rs. 4,25,000

Cash and Bank balance = Current Assets– Inventory – Debtors = 1075,000 – 700,000 – 333,333 = 41,667 InventoryDebtors = 1075,000700,000333,333 = 41,667

Balance Sheet as on March 31, 2007 Liabilities Rs. Assets Rs. Equity Share Capital 4,00,000
Balance Sheet as on March 31, 2007
Liabilities
Rs.
Assets
Rs.
Equity Share Capital
4,00,000
Fixed Assets
425,000
Reserves & Surplus
6,00,000
Current Assets:
Total Debt:
Inventory
7,00,000
Current liabilities
5,00,000
Debtors
3,33,333
Cash
41,667
5,00,000
15,00,000

Question 9: Preparation of Profit and Loss A/c and Balance Sheet from Ratios:

The following accounting information & financial ratios of PQR Ltd. relate to the year ended 31.12.2006:

I Accounting Information: Gross Profit 15% of Sales Net profit 8% of sales Raw materials
I Accounting Information:
Gross Profit
15% of Sales
Net profit
8% of sales
Raw materials consumed
20% of works cost
Direct wages
10% of works cost
Stock of raw materials
3 months’ usage
Stock of finished goods
6% of works cost
Debt collection period
60 days
All sales are on credit
II Financial Ratios:
Fixed assets to sales
1
:
3
Fixed assets to Current assets
13 : 11
Current ratio
2 :
1
Long-term loans to Current liabilities
2 :
1
Capital to Reserves and Surplus
1
:
4

If value of fixed assets as on 31-12-2005 amounted to Rs. 26 lakhs, prepare a summarised P&L A/c of the company for the year ended 31-12-2006 & also the B/S. (PE-II-May 07)

Solution:

(a)

Working Notes:

i.

Sales = Fixed Assets/ Sales = 1/3 26,00,000 /Sales = 1/3 = Sales = Rs. 78,00,000

ii.

Current Assets (CA) = Fixed Asset /CA = 13/1126,00,000 /CA = 13/11= CA= Rs. 22,00,000

iii.

Calculation of Raw Material Consumption and Direct Wages

Sales Less: gross profit Works cost Raw material consumption (20% of works cost) Direct wages
Sales
Less: gross profit
Works cost
Raw material consumption (20% of works cost)
Direct wages (10% of works cost)
78,00,000
11,70,000
66,30,000
13,26,000
663,000

iv.

Stock of Raw Materials (= 3 months usage) = 13,26,000 3/12 = Rs. 331,500

v.

Stock of Finished Goods (= 6% of Works Cost) = 66,30,000 6/100 = Rs. 397,800

vi.

Current Liabilities (CL) = CA / CL = 2 22,00,000/CL = 2 = CL = Rs. 11,00,000

vii.

Debtors = ACP = Debtors/Credit Sales×365= Debtors/78,00,000×365 = 60 = Debtors = 12,82,192

viii.

Long term loan (LTL) = LTL / CL = 2/1 = LTL / 11,00,000 = 2/1 = LTL = 22,00,000

ix.

Calculation of Cash Balance

Current assets 22,00,000 Less: debtors 12,82,192 Raw materials stock 3,31,500 finished goods stock 3,97,800 Cash
Current assets
22,00,000
Less: debtors
12,82,192
Raw materials stock
3,31,500
finished goods stock 3,97,800
Cash balance
20,11,492
1,88,508

x.

Calculation of Net worth

Fixed assets 26,00,000 Current assets 22,00,000 Total assets 48,00,000 Less: long term loan 22,00,000 current
Fixed assets
26,00,000
Current assets
22,00,000
Total assets
48,00,000
Less: long term loan
22,00,000
current liabilities
11,00,000
33,00,000
Net worth
15,00,000

Net worth = Share capital + Reserves = 15,00,000

xi.

Share Capital = Capital / R/S = ¼ = Share Capital = 15,00,000 × 1/5 = Rs. 300,000

xii. Reserves and Surplus (R/S) = Capital / R/S = 4/5 = R/S = 15,00,000 × 4/5 = Rs. 1200,000

PROFIT AND LOSS A/C OF PQR LTD.FOR THE YEAR ENDED 31-12-2006 Particulars Rs. Particulars Rs.
PROFIT AND LOSS A/C OF PQR LTD.FOR THE YEAR ENDED 31-12-2006
Particulars
Rs.
Particulars
Rs.
To
Direct materials
13,26,000
By
Sales
78,00,000
To
Direct wages
Works (O.H) (bal fig)
6,63,000
To
46,41,000
To
Gross Profit c/d (15% of sales)
11,70,000
78,00,000
78,00,000
To
Selling & distribution (bal)
5,46,000
By
Gross Profit b/d
11,70,000
To
Net profit (8% of sales)
6,24,000
11,70,000
11,70,000
BALANCLE SHEET OF PQR LTD.AS AT 31-12-2006 Liabilities Rs. Assets Rs. Share capital 3,00,000 Fixed
BALANCLE SHEET OF PQR LTD.AS AT 31-12-2006
Liabilities
Rs.
Assets
Rs.
Share capital
3,00,000
Fixed assets
26,00,000
Reserves & surplus
12,00,000
Current assets:
Long term loans
22,00,000
Stock of raw material
3,31,500
Current liabilities
11,00,000
Stock of finished goods
3,97,800
Debtors
12,82,192
Cash
1,88,508
48,00,000
48,00,000

Question 10: Complete Ratio Analysis:

Following incomplete information of X Ltd. are given below:

Trading and Profit & Loss A/c for the year ended 31.3.2008 Particulars Rs.’000 Particulars Rs.’000
Trading and Profit & Loss A/c for the year ended 31.3.2008
Particulars
Rs.’000
Particulars
Rs.’000
To
Opening stock
700
By
Sales
?
To
Purchases
?
By
Closing stock
?
To
Direct expenses
175
To
Gross profit c/d
?
?
?
To
Establishment expenses
740
By
Gross profit b/d
?
To
Interest on loan
60
By
Commission
100
To
Provision for taxation
?
To
Net profit c/d
?
?
?
To
Proposed dividends
?
By
Balance b/f
140
To
Transfer to G.Reserve
?
By
Net profit b/d
?
To
Balance
transferred
to
?
Balance sheet
?
?
Balance Sheet as at 31 st March, 2008 Liabilities (Rs.’000) Assets (Rs.’000) Paid-up capital 1,000
Balance Sheet as at 31 st March, 2008
Liabilities
(Rs.’000)
Assets
(Rs.’000)
Paid-up capital
1,000
Fixed assets:
General reserve:
Plant & machinery
1,400
Balance at the beginning of the year
?
Other fixed assets
?
Proposed addition
?
Current assets:
Profit and loss account
?
Stock
?
10% Loan account
?
Sundry debtors
?
Current liabilities
?
Cash at bank
125
?
?

Other information:

i. Current ratio is 2:1.

ii. Closing stock is 25% of sales.

iii.

Proposed dividend to paid-up capital ratio is 2:3.

iv. Gross profit ratio is 60% of turnover.

v. Loan is half of current liabilities.

vi. Transfer to general reserves to proposed dividends ratio is 1:1.

vii. Profit carried forward is 10% of proposed dividends.

viii. Provision for taxation is equal to the amount of net profit of the year.

ix. Balance to credit of general reserve at the beginning of the year is twice the amount transferred to that account from the current year’s profits.

You are required to complete:

Trading and Profit & Loss A/c for the year ended 31.3.2008 &the c urrent year’s profits. You are required to complete: The Balance Sheet as on that

The Balance Sheet as on that date. (20 Marks)(May, 2008)and Profit & Loss A/c for the year ended 31.3.2008 & Solution: Trading and Profit &

Solution:

Trading and Profit & Loss A/c for the year ended 31-3-2008 Particulars (Rs.‘000s) Particulars (Rs.‘000s)
Trading and Profit & Loss A/c for the year ended 31-3-2008
Particulars
(Rs.‘000s)
Particulars
(Rs.‘000s)
To
Opening stock
700.00
By
Sales (W.N.10)
5366.66
To
Purchases (Bal. Fig.)
2613.33
By
Closing stock (W.N.11)
1341.67
To
Direct expenses
175.00
To
Gross profit c/d (W.N.9)
3,220.00
6,708.33
6,708.33
To
Establishment expenses
740.00
By
Gross profit (Bal. Fig)
3,220.00
To
Interest on loan
60.00
By
Commission
100.00
To
Provision for tax (W.N.8)
1,260.00
To
Net profit c/d
1,260.00
3,320.00
3,320.00
To
Proposed dividends (W.N.1)
666.67
By
Balance b/f
140.00
To
Transfer to general reserve (W.N.2)
666.67
By
Net profit (Bal Fig)
1,260.00
To
Balance transferred to B/S(W.N.3)
66.66
1,400.00
1,400.00
Balance Sheet as at 31 st March, 2008 Liabilities (Rs.‘000s) Assets (Rs. in ‘000s) Paid-up
Balance Sheet as at 31 st March, 2008
Liabilities
(Rs.‘000s)
Assets
(Rs. in ‘000s)
Paid-up capital
1,000.00
Fixed assets:
General reserve:
Plant & machinery 1,400.00
Balance at the beginning (W.N.14)
1333.34
Other fixed assets (Bal Fig)
1066.67
Proposed addition (W.N.2)
666.67
Current Assets:
Profit and loss A/c
66.66
Stock (W.N.11)
1341.67
10% Loan A/c (W.N.4)
600.00
Sundry debtors (W.N.13) 933.33
Current liabilities (W.N.5)
1,200.00
Cash at bank
125.00
4,866.67
4,866.67

Working Notes:

1. Proposed dividend to paid-up capital is 2:3: i.e. Proposed dividend =2/3 of capital =
1. Proposed dividend to paid-up capital is 2:3: i.e. Proposed dividend =2/3 of capital =
Rs.1,000,000 ×2/3 = Rs. 666,667
2. Transfer to General Reserve is equal to proposed dividend i.e., 1:1. Proposed dividend is
Rs.666,667, therefore general reserve is also Rs. 666,667
3. Profit carried forward to Balance Sheet = 10% of Proposed Dividend
i.e., Rs. 666.67 thousand × 10% = Rs.66.66 thousand
4. 10% Loan implies interest on loan being 10%: i.e. Rs.60,000×100/10= Rs. 600,000
5. Loan is half of current liabilities which means current liabilities are twice of loan
i.e., Rs.600,000 × 2 = Rs.1,200,000
6. Current Ratio = Current Assets/Current Liabilities = 2/1
i.e. Current Assets = 2 × Current Liabilities or 2 × Rs.1,200,000 = Rs.2,400,000
7. Current Net Profit
(Rs. in ‘000s)
Proposed dividend
666.67
Transfer to general reserve
666.67
Profit and loss balance transferred to balance sheet
66.66
1,400.00
Less: Balance b/f
140.00
Net profit for the year
1,260.00
8. Provision for taxation is equal to current net profit i.e., = Rs.1,260,000
9. Gross profit being balancing figure of Profit and Loss A/c = Rs. 3220,000
10. Gross profit = 60% of sales i.e.
Rs.3,220,000 = 60% of sales
Or, sales = Rs 3220,000×100/60 = Rs= Rs. 5366,670
11. Closing stock is 25% of sales i.e., 25% of Rs. 5,366,670 = Rs. 1,341,670
12. Purchases being balancing figure of Trading A/c = Rs.2,613.33 thousand
13. Debtors = Current Assets – Closing Stock – Cash at Bank
= Rs.2,400,000 – Rs.1,341,670 – Rs.125,000 = Rs.933,30
14. Balance of general reserve at the beginning of the year is twice of the amount transferred
to general reserve during the year i.e. 2 x Rs.666,670 = Rs.1,333,340
15. Other fixed assets = Total of B/S (liabilities side) - Current assets – Plant and machinery
i.e., Rs. 4,866,670 - Rs. 2,400,000 – Rs.1,400,000 = Rs.1,066,670