ILLUSTRATION: Trading, Profit & Loss A/C Trading A/c Particulars

Sales Less Sales Returns Closing Stock

Particulars
Opening Stock Purchases Manufacturing Expenses Carriage Inwards Gross Profit c/d

Rs.
90,000 1,50,000 30,000 10,000 1,20,000

Rs.
3,00,000 1,00,000

4,00,000

4,00,000

Paticulars
Selling and Distribution Expenses Interest on long term debt Loss on sale of fixed assets Taxation To Profit & Loss Appropriation A/c c/d

Rs.

Profit & Loss A/c Particulars

Gross Profit b/d

Rs.
1,20,000

20,000 35,000 10,000 10,000 45,000

1,20,000 Profit & Loss Appropriation A/c Rs. Particulars

5,000 40,000 By Profit & Loss A/c

1,20,000

Particulars
To Preference Dividend To Balance c/d

Rs.
45,000

45,000 Note: Credit Sales are 20% of total sales Cash Purchases are 50% of total Purchases. Market Price per Share = Rs. 50.

45,000

Liabilities

Balance Sheet of XYZ Ltd. as on 31.3.07 Rs. Assets

2,00,000 50,000 Fixed Assets Land & Building Plant & Machinery Furniture & Fixtures Current Assets, Loans & Advances Stock Debtors Cash Bank Prepaid Expenses Bills Receivables Miscellaneous Expenses Preliminary Expenses Discount on shares

Rs.
3,00,000 3,00,000 25,000

Share Capital 20,000 equity shares @ Rs. 10 each 10% preference share capital Reserves and Surplus General Reserve Capital Reserve Profit & Loss A/C Secured Loans 10% Bank Loans 10% debentures Current Liabilities and Provisions Bills Payable Creditors Provision for taxation Bank overdraft Provision for Preference dividend

50,000 40,000 40,000

2,50,000 1,00,000

60,000 40,000 50,000 50,000 20,000 50,000

30,000 1,40,000 10,000 10,000 5,000

10,000 20,000

9,25,000

9,25,000

Calculation of Financial Ratios:

LIQUIDITY RATIO
1. Current ratio = Total Current Assets Total Current Liabilities = 2,70,000/1,95,000 = 1.38

2. Quick Ratio =

Quick Assets Quick Liabilities

= 1,90,000/1,85,000 = 1.027 3. Absolute Liquidity Ratio = Super Quick Assets Quick Liabilities = 1,00,000/1,85,000 = 0.54 4. Stock to Working Capital Ratio = Stock at the end Working Capital = 1,00,000/75,000 = 1.33

SOLVENCY RATIOS:
1. Proprietary Ratio = Total Shareholders Funds Total Assets = 3,50,000/8,95,000 = 0.39 2. Debt-Equity Ratio = Total Debts Owners Funds

= 3,50,000/3,50,000 = 1 3. Capital Gearing Ratio = Fixed Assets/Dividend Bearing Securities Equity Share Capital + Reserves & Surplus = 4,00,000/3,00,000 = 1.33 4. Times Interest Earned = Profit before Interest and Tax ` Interest on Debt = 90,000/35,000 = 2.57 times 3

PROFITABILITY RATIOS:
1. Gross Profit Ratio = Gross Profit Net sales = 1,20,000/3,00,000 x 100 = 40% 2. Operating Ratio = COGS + Operating Expenses Net Sales = 2,00,000/3,00,000 = 0.66

3. Net Profit Ratio = Net Profit Net Sales = 45,000/3,00,000 x 100 = 15%

4. Operating Profit Ratio = Operating Profit Net Sales = 1,00,000/3,00,000 = 0.33 5. Return On Total Assets = EBIT Total Assets = 90,000/8,95,000 = 0.1 PAT Preference Dividend No. of Equity Shares Outstanding

6. Earning Per Share Ratio =

= 40,000/20,000 = 2 7. Return on Equity Ratio = PAT x 100 Equity = 45,000/3,50,000 x 100 = 12.85% 8. Return on Capital Employed = EBIT x 100 Capital Employed

= 90,000/7,00,000 x 100 = 12.85% 9. Price Earning Ratio = Market Price per Share EPS = 50/2 = 25

ACTIVITY RATIOS:
1. Stock Turnover Ratio = Cost of goods sold Average Inventory at cost

= 1,80,000/95,000 = 1.89 2. Average no. of days to turnover velocity = No. of days Stock Turnover Ratio

= 52/1.89 = 27.5 3. Debtors Turnover Ratio = Net Credit Sales Debtors + Bills Receivables

= 60,000/ 90,000 = 0.66 4. Debt Collection Period = No. of weeks Debtors Turnover Ratio

= 52/ 0.66 = 78.8 5. Creditors Turnover Ratio = Net Credit Purchases Creditors + Bills Payable

= 75,000/1,70,000 = 0.44 6. Debt Payment Period = No. of weeks Creditors Turnover Ratio

= 52/ 0.26 = 200 7. Working Capital Turnover Ratio = Cost of Goods Sold Working Capital = 1,80,000/75,000 = 2.4

8. Capital Turnover Ratio =

Net Sales Capital Employed

= 3,00,000/ 7,00,000 = 0.42

9. Fixed Assets Turnover Ratio =

Net sales Net Fixed Assets

= 3,00,000/ 6,25,000 = 0.48 5