Financial Analysis

3.
FINANCIAL ANALYSIS & PLANNING
Learning Objective
Inter-Firm and Intra-Firm analysis
Brief note on use of Ratios in Cash Flow Statements
Financial Forecasting Technique
Tools of Financial Forecasting
Implementation
Functional management
Types of Financial Statement analysis
Whatever you can do, or drem you can do, begin it. Boldness has genius, power, and magic in it Begin it now
Goethe
Toppers Institute
Q.1
Financial Analysis 3.2
Who are the entities interested in Financial Statements Analysis?
Financial Statement Analysis is a meaningful interpretation of financial statements, in order to meet the information
requirements of the parties who use such financial information.
The users of financial information include:
(a)
Management- for day to day decision making and also for performance evaluation.
(b) Proprietor / Shareholders -for analysing performance, profitability and financial position. Prospective
investors
need to know track record of performance.
(c)
Lenders -Banks and Financial Institutions -for determining financial position of the company, debt service
coverage etc.
(d)
Suppliers -to determine the credit worthiness of the company in order to grant credit.
(e) Customers -to know the general business viability before entering into long-term contracts and
arrangements.
(f)
Government -to ensure prompt collection of direct and indirect tax revenues, to evaluate performance and
contribution to social objectives.
(g)
Research Scholars -for study, research and analysis purposes.
Q.2 What are the types of financial statement analysis?

Financial Statement Analysis may be of the following types:
(1) Internal and External Analysis :

Internal Analysis
External Analysis
It is done within the Company, i.e. by the Corporate

Finance Department.
It is done by outside parties e.g. bankers, investors, suppliers

etc.
It is more extensive and detailed. It looks into all

aspects of functioning and performance.
It is restricted according to the requirements of the user. For

example, a trade creditor may be interested in the general
profitability and financial standing. A lender may be
interested in debt-service coverage etc.
(2) Horizontal and Vertical Analysis:

Horizontal Analysis
Vertical Analysis
It involves comparison of financial statements of one

year with other years.
It involves analysis of relationship between various items

in the financial statements of one year.
Items are compared on a one-to-one basis, e.g. sales

increase, comparative net profit for two years etc.
Relationship between items i.e. ratios or percentages are

considered under this analysis.
(3) Inter-Firm and Intra-Firm analysis:

Inter-Firm Analysis
firm with other firms.
Intra-Firm Analysis
firm for different time periods or different divisions of
the firm for the same year.
Q.3 Ratios are not everything in financial analysis. Outline the limitations of Financial Ratio Analysis.
Ratios are useful tools for financial analysis. However the following limitations do exist.
(a) Window Dressing: Ratios depict the picture of performance at a particular point of time. Sometimes, a business
can make year-end adjustments in order to result in favourable ratios (e.g. current ratio, operating profit ratio,
debt-equity ratio etc.)
Toppers Institute
(b) Impact of Inflation: Financial Statements are affected by inflation. Ratios may not depict the correct picture. For
example, fixed assets are accounted at historical cost while profits are measured in current rupee terms. In
inflationary situations, the Return on Assets or Return on Capital Employed may be very high due to less
investment amount of fixed assets. Ratios may not indicate the true position in such situations.
(c) Product Line diversification: Detailed ratios for different divisions, products and market segments etc. may not be
available to the users in order to make an informed judgement. For example, loss in one product may be set off
by substantial profits in another product line. But, the overall net profit ratio may be favourable.
(d) Impact of Seasonal Factors: When the operations do not follow a uniform pattern during the financial period,
ratios may not indicate the collect situation. For example, if the peak supply season of a business is between
February to June, it will hold substantial stocks on the balance sheet date. This will lead to a very favourable
current ratio on that date. But the position for the rest of the year may be entirely different.
(e) Differences in Accounting Policies: Different firms follow different accounting policies) e.g. rate and methods of
depreciation. Straight-jacket comparison of ratios may lead to misleading, results.
(f) Lack of Standards: Even though some norms can be set for ratios there is no uniformity as to what an "ideal" ratio
is. Generally it is said that Current Ratio should be 2:1. But if a firm supplies mainly to Government
Departments where debt collection period is high, the Current Ratio of 4:1 or 5:1, may also be considered
normal.
(g) High or Low: A number by itself cannot be 'high" or "low". Hence, a ratio by itself cannot become "good" or
"bad". The line of difference between "good ratio" and "bad ratio" is very thin.
(h) Interdependence: Financial Ratios cannot be considered in isolation. Decision taken on the basis of one ratio may
be incorrect when a set of ratios are analysed.
Q.4
Write a brief note on use of Ratios in Cash Flow Statements.
Cash Flow Statement can be prepared by reference to the Direct and Indirect Methods, as prescribed by the
Accounting Standard - 3 issued by the ICAI.
The ratios used in cash flow Statement Analysis are:
(a) Cash Generating Efficiency Ratios : It is the ability of the firm to generate cash from its current or continuing
operations. This may be measured by any of the following ratios:
Net Cash Flow from Operating Activities
(i) Cash flow yield =
(ii) Cash flow Sales =
(iii) Cash flow yield =
Net Sales
Average Total Assets
(b) Free Cash Flow Ratios : Free cash flow represents the amount of cash that remains after deducting current
commitments and outflows. It is equal to the cash flow that remains after meeting current operating expenses,
interest, instalments (if any), income-tax, dividends and net capital expenditure. A positive free cash flow will
indicate that surplus funds are available for investment or repayment of debt. A negative free cash flow will
require sale of investments or raising of finance through loans or equity. The ratios based on free cash Flow are:
Price per share
(i) Price to Free Cash Flow =
Free cash Flow per Share
(ii) Operating Cash Flow to Profit =
Operating Cash Flow
Operating profit
(iii) Self financing investment ratio =
Internal funding
Net Investment
Toppers Institute
Q.5. What is Financial Forecasting? Describe in brief, its utility and how it is affected.
Forecasting is the first stage in the financial planning process. This refers to the formal process of predicting future
events technique of determining in advance the requirements and utilisation of funds for a future period. It
While forecasting refers to finding the most profitable course of events or at best a range of probabilities, planning is
deciding what one will do about it. Planning deals with the futurity of present decisions in terms of (a) setting goals
and developing strategies to achieve them and (b) translating strategies into detailed operational programmes and
assuring that plans are carried out. The former one can be called as strategic planning, the other is termed as
programming.
Financial forecasting aims at pre-determining the demand for funds and the avenues wherein the funds are to be
utilised. Thus, a systematic projection of financial data is made in the form of projected financial statements with the
help of fund flow statements, ratio analysis etc. These projections are based on past record of the organisation with a
view to predict the future financial performance. Forecasting generates information which is utilised by the
management of an enterprise, for making proper decisions and for judging the financial efficiency of the funds and
projecting a scale of standards to be followed in the future course. Another objective of financial forecasting is to use
it as control device. Standards of financial performance of an enterprise could bc laid down through financial
forecasting for evaluating the results and assuring its growth. Optimum utilisation of funds can be achieved through
forecasting. A pre-testing of financial feasibility of implementation of production prospects or programmes can also
be made by rupees forecasting.
Through use of computers, financial forecasting has scaled new heights. Financial forecasting has utility for a
business organisation because
(i)
It generates useful information for decision making.
(ii)
It provides significant information for successful financial planning.
(iii)
It facilitates the organisation to plan its growth and its financial needs.
(iv)
It functions as a control device by providing a standard of financial performance for the future.
(v)
It enables the organisation to make optimum utilisation of available funds/resources.
(vi)
It makes the organisation to adopt appropriate financial policies.
(vii)
It updates the financial plans periodically and make them relevant according to changing circumstances.
Financial forecasting uses the following tools: (a) Day's sales method (b) Percentage of sales method (c) Simple
regression method (d) Multiple regression method.
Financial forecasting helps an organisation in the preparation of statements like proforma income statement,
proforma balance sheet, funds flow statement, cash budget etc. as tools for long and medium term financial planning.
Q.6. Write a short note on Financial Forecasting Technique.

Financial forecasting is the starting point in a planning process. It facilitates pre-testing of the financial feasibility of
various programmes, acts as a control device, helps in funds, and improves utilisation of surplus cash.
A few forecasting techniques are briefly discussed as under:
(i) Percentage of Sales Method

It is the simplest approach to forecasting financial requirements of a firm. This method expresses the firm's financial
needs ill terms of the percentage of annual sales invested in each individual item of Balance Sheet. Under this
method, the forecaster computes past relationship between assets and liabilities on one hand and sales on the other on
the assumption that the same relationship will continue, he app lies new sales forecast figure to get an estimate the
financial requirements. This method is more suitable for short-term forecasting.
(ii) Simple Regression Method

An alternative method used to forecast financial requirements is the simple regression scatter diagram method. With
the sales forecast as the starting point and based on the past relationship between sales and Balance sheet items, it is
possible to construct a line-of best it or the regression line. It is possible to link sales with one item of asset at a time.
This method is more suitable for long-term forecasting.
(iii) Multiple Regression Method
Toppers Institute
A more sophisticated approach to financial forecasting calls for the use of multiple regression analysis. Unlike simple
regression method, here sales are assumed to be a function of several variables. It is, therefore, a superior method.
Q.7 Write a short note on the Tools of Financial Forecasting:

(1) Days' sales method is a traditional method under which an attempt is made to calculate the number of. days sales
and tie it up with the balance sheet items. As different components of the balance sheet are forecasted in terms of
days's sale, this method measures the resources that are to be financed.
(2) Percentage of sales method is another tool of financial forecasting in which the balance sheet items are expressed
as percentages of sales. This will clearly (to some extent) show the financial needs caused by increase in sales.
(3) Simple regression method: On the basis of past relationship between sales and different items, a line of the best
fit is drawn. This method requires linking sales with one item at "a time. Thus data about different items can be
projected with changes in sales level for study and evaluation.
(4) Multiple regression method: In the case of simple regression method sales are considered as a function of one
variable. Multiple regression line is drawn considering the sales as a function of several variables.
A financial analyst may adopt any of the above techniques depending upon the availability of data and purpose of
forecasting.
Q.8 Mention a few symptoms which might indicate that industrial sickness lies ahead.
As far as the case of industrial sickness in India is concerned, the Tiwari Committee had identified certain symptoms
which would be quite helpful in the detection of sickness at the incipient stage. Such symptoms of sickness are
continuous irregularity in cash credit accounts, low capacity utilisation, profit fluctuations, downward trends in sales
and stagnation or fall in profits followed by contraction in the share of the market, high rate of rejection of goods
manufactured, reduction in credit summations failure to pay statutory liabilities, larger and longer outstanding in the
bill accounts, longer period of credit allowed on sale documents negotiated through the bank and frequent returns by
customers of the same, constant utilisation of cash facilities to the maximum and failure to pay timely instalment of
principal and interest on term loans and instalment credits non-submission of periodical financial data/stock
statements, etc. in time, financing capital expenditure out of funds provided for working capital purpose, rapid
turnover of key personnel, existence of a large number of law suits against the company rapid expansion and too
much diversification within a short time, sudden/frequent changes in management whether professional or
otherwise and/ or dominated by on man/few individuals, diversion of funds for purposes other than running the unit,
any major change in the shareholdings.
Q.9 Briefly indicate the cause of industrial sickness in India.

Causes of Industrial sickness:
The causes of industrial sickness in India may be broadly classified as follows:
A. Internal causes: Under this category, the following causes arc generally responsible' the industrial sickness in India.
(1) Planning
(a)
Technical feasibility: Viz. Inadequate technical know- how, locational disadvantage, outdated production
process.
(b) Economic viability: High cost of inputs, break-even point too high, uneconomic of project, under-estimation of
the financial requirements, unduly large investment in fi assets, over-estimation of demand, poor labour
relations, lack of trained/skilled labour technically competent personnel.
(c)
Marketing management: Dependence on a single customer or a limited number customers/single or a limited

number of products, poor sales realisation, defective pricing policy, booking of large orders at fixed prices in
an inflationary market, weak market feed back and market research. Lack of knowledge of marketing
techniques, unscrupulous sales/purchase practices.
(d) Financial management: Poor resources management and financial planning, faulty costing, liberal dividend
policy, general financial indiscipline and application of funds unauthorised purposes, deficiency of funds,
over-trading, unfavourable gearing or keeping adverse debt Equity-ratio, inadequate working capital, absence
of cost consciousness, lack of effective collection machinery.
Toppers Institute
(e)
(2)
Administrative management: Over centralisation, lack of professionalism, lack of feed-back to management.

Implementation: Cost over-runs resulting from delays in getting licences/sanctions, inadequate mobilisation of
finance.
(3) Functional management:

(a)
Production management: Inappropriate product-mix, poor quality control, high of production, poor inventory
management, inadequate maintenance and replacement, of timely and adequate modernisation, etc., high
wastage, poor capacity utilisation.
(b) Labour-management relations: Excessively high wage structure, inefficient had of labour problems, excessive
manpower, poor labour productivity,
(c)
Lack of proper manage information system and controls, lack of timely diversification, excessive expenditure
Research & Development, divided loyalties (where the same management has interest in than one unit, cases
are known where promoters of limited companies who also have own private interests first tend to look after
the interest of the latter, often at the cost former), dissension within the management, incompetent and
dishonest management. ,
B. External causes and other factors:

The following factors may be mentioned in this respect
(a) Government controls and policies, etc.: Government price controls, fiscal abrupt changes in Government
policies affecting costs/prices/imports/exports/licensing.
(b) Procedural delays on the part of financial/licensing/other controlling or regulation authorities like Banks,
Financial Institution, Government departments, Lice Authorities, MRTP authorities, etc.
(c) Market constraints : Market saturation, Revolutionary technological advances rendering the products
absolute, and Recession fall in domestic/export demand.
Extraneous factors: Natural calamities, Political situation (domestic as well as international) and strikes and
multiplicity of labour unions etc.
Profitability Ratios
Income statement
Sales
Material Consumed
Opening stock
Add. : Purchase
Less : Closing Stock
Wages
Carriage
Other direct exps.
Cost of sales
Gross profit
Admin. exps.
Selling exps.
Operating profit
non - operating Income
Non operating exps.
Net profit
Capital employed:
Return
Equity share cap.

Reserves & surplus
Less: Fictitious assets: Preliminary exps.
P/L A/C (Dr.)
Equity Shareholders fund
Add: Preference Share Capital
Shareholder's fund
Add: Debentures
Operating Profit
Add: Non operating Income
Less: Non operating Exps.
Profit before interest and tax (PBIT)
less: interest on long term fund
Profit before tax (PBT)
Less: Provision for tax
Profit after tax (PAT)
Toppers Institute
Long Term Loan

Gross Cap. employed
Less: Non trading investment
Net capital employed (investment)
Less: Preference Dividend

Earnings available to Eq. Sh. holder
RATIO ANALYSIS
A. PROFITABILITY RATIOS BASED ON SALES
Ratio
1. Gross Profit Ratio
2. Operating Profit ratio
3. Net Profit Ratio
B.
FORMULA
Gross Profit
Sales
Operating
Profit
Sales
Net Profit
Sales
NUMERATOR
Gross Profit as per Trading
Account
Sales Less : Cost of Sales
DENOMINATOR
Sales net of returns
Net Profit
PROFITABILITY RATIOS- OWNER'S VIEW POINT
1. Return on
Investment (ROI)
or Return on
Capital Employed
(ROCE)
Total
Earnings
Total
Capital
Employed
PBIAT
2. Return on Equity
[ROE]
Earnings
after Taxes
Net Worth
Profit After
Taxes
3. Earnings Per
Share [EPS]
[PAT-Pref.
Divid.]
Number of
Equity
Shares
Dividends
Number of
Equity
Share
Net Profit
after taxes
Average
Total
Assets
Profit After
Taxes Less
Preference
dividend
4. Dividend per
Share [DPS]
5. Return on Assets
[ROA]
C.
USEFULNESS
Indicator of Basic
Profitability
Indicator of
Operating
Performance of
business.
Indicator of
overall
profitability
Profits
distributed to
Equity
Shareholders
Net Profit
after taxes
Assets Route:
Net Fixed Assets (including
intangible assets like patents, but
not fictitious assets like
miscellaneous expenditure not
w/off)
+ Net working Capital
Liability Route:
Equity Share Capital
+ Preference Share Capital
+ Reserves & Surplus
+ Debentures and Long Term
Loans
Less: Accumulated Losses
Less: Non-Trade Investments
Net Fixed Assets
+ Net Working Capital invested
Less: External Liabilities (long
term
Overall profitability of the

business for the capital
employed; Indicates the
return on the total capital
Employed Comparison of
ROCE with rate of interest
of debt leads to financial
leverage. If ROCE >
interest Rate, use of debt
funds is Justified.
Number of Equity Shares

outstanding
Return or income per

share, whether or not
distributed as dividends.

Face Value per share
Average Total Assets i.e. of

opening and closing Balance
TURNOVER / ACTIVITY / PERFORMANCE RATIOS
Profitability of Equity
Funds in the business.
Amount of Profits
distributed per share
Net Income per rupee of

average fixed assets.
Toppers Institute
1 Capital
Turnover Ratio
2. Fixed Assets
Turnover Ratio
3. Working
Capital
Turnover Ratio
4. Finished
goods or Stock
Turnover Ratio
5. Raw Material
Turnover ratio
Sales
Capital Employed
Turnover
Fixed Assets
Turnover
Net Working
Capital
Cost of Goods
sold
Average stock
Cost of Material
Consumed
Average stock of
RM
6. Debtors
Turnover ratio
Credit Sales
Average A/c
Receivable
7. Creditor
Turnover ratio
Credit Purchases
Average A/c
Payable
Note :
Sales net of
returns
Sales net of
returns
Sales net of
returns
For
Manufacturers
:
Opening
Stock
+ Cost of
Production
Less: Closing
Stock
For Trader:
Opening
Stock
+ Purchases
Less: Closing
Stock
Opening stock
of RM
+ Purchases
Less: Closing
stock
Credit Sales
net of returns
Credit
Purchases net
of returns, if
any
Assets Route : Net

fixed asset
+ Net working
capital
Liability Route:
+ Preference Share
Capital
+ Reserves &
Surplus
+ Debentures and
Long Term Loans
Less: Accumulated
Losses
Less: Non- Trade
Investments
Net Fixed Assets
Current Assets Less
Current Liabilities
(Opening stock +
Closing Stock)
2
Ability to generate sales per rupee of longterm investment.

The higher the turnover ratio, the better it
is.
Ability to generate sales per rupee of

Fixed Asset.
Ability to generate sales per rupee of
Working Capital.
Indicate how fast inventory is used/ sold.
A high turnover ratio generally indicates
fast moving material while low ratio may
mean dead or excessive stock.
or
(Max. stock + Min.
Stock)
2
(Opening stock +
Closing Stock)
2
Indicates how fast raw materials are used

in production.
A/c Receivables =
Debtors + B/R
Average A/c
Receivable =
(Opening Bal. +
Closing Bal. )
2
A/c Payable =
Creditors + B/P
Average A/c
Payable =
(Opening Bal. +
Closing Bal. )
2
Indicates speed of collection of credit

sales.
Indicates velocity of debt payment.
The turnover ratios can also be computed in terms of days as 365 / Turnover Ratio. For example, Number of
days average stock is held = 365 / Stock Turnover Ratio
D. LIQUIDITY RATIOS - Short Term Solvency
Toppers Institute
Ratio
1. Current
Ratio
2. Quick
Ratio or Acid
3. Absolute
Cash Ratio
4. Interval
Measure

Formula
Current Assets
Current Liabilities
Quick Assets
Quick Liabilities
(Cash + Marketable
Securities)
Current Liabilities
Quick Assets
Cash Expenses Per Day
Numerator
Inventories
+ Debtors
+ Cash & Bank
+ Receivables /
Accruals
+ Short terms Loans
+ Marketable
Investments
Current Assets
Less: Inventories
Less: Prepaid Expenses
Cash in Hand
+ Balance at Bank
(Dr.) + Marketable
Securities & short term
investments
Current Assets
Less: Inventories
Less: Prepaid Expenses
Denominator
Sundry Creditors (for
goods)
+ Outstanding Expenses
(for services)
+ Short Term Loans &
Advances (Cr.)
+ Bank over draft / Cash
Credit
+ Provision for taxation
+ Purpose or Unclaimed
Dividend
Current Liabilities
Less: Bank Overdraft
Less: Cash Credit
Sundry Creditors (for
goods)
+ Outstanding Expenses
(for services)
+ Short Term Loans
&Advances (Cr.)
+ Bank Overdraft / Cash
Credit + Provision for
taxation
+ Proposed or Unclaimed
Dividend
Annual Cash Expenses
365
Significance I Indicator
Ability to repay
short-term
commitments
promptly. (Shortterm Solvency)
Ideal Ratio is 2:1.
High Ratio
indicates existence
of idle current
Assets.
Ability to meet
immediate test ratio
liabilities. Ideal
Ratio is 1: 33: 1
Availability of cash
to meet short term
commitments.
Ability to meet
regular cash
expenses.
Cash Expenses = Total

Expenses less Depreciation
and write offs.
E. CAPITAL STRUCTURE RATIOS - Indicator of Financing Techniques & long - term

solvency
1. Equity to
Total
Funds Ratio
Shareholde
r's Funds
Total
Funds
2. Debt Equity
Ratio
Debt
Equity
3. Capital
Gearing Ratio
Fixed
Charge
Bearing
Capital
Equity
Shareholde
r's Funds
Equity Share
Capital
+ Preference
Share Capital
+ Reserves &
Surplus
Less:
Accumulated
Losses
Long Term
Borrowed
Funds, i.e.
Debentures,
Long Term
Loans from
institutions
Preference
Share Capital
+ Debentures
+ Long Term
Loans
Total Liabilities
(including Current
Liabilities & Provisions)
Indicates Long Term Solvency; mode of

financing; extent of own funds used in
operations.

+ Preference Share
Capital
Indicates the relationship between Equity

debt & equity; Ideal ratio is 2: 1.

Less: Accumulated
Losses
Shows proportion of fixed charge

(dividend or interest) bearing capital to
equity funds; the extent of advantage or
leverage enjoyed by Equity shareholders.
Toppers Institute
4. Fixed
Assets to
Long Term
Fund Ratio
Fixed
Assets
Long Term
Fund
Net Fixed
Assets i.e.
Gross Block
Less:
Depreciation
Long Term Funds =

Shareholder's funds (as in
BI) + Debt funds (as in
B2)
5. Proprietary
Ratio
Proprietary
Funds
Total
Assets
Equity Share
Capital
+ Preference
Share Capital
+ Reserves &
Surplus
Less:
Accumu1ated
losses
Net Fixed Assets

+ Total Current Assets
Less: Accumulated
Losses
Shows proportion of fixed assets (longterm assets) financed by long term funds.
Indicates the financing approach followed
by the firm i.e. conservative, matching or
aggressive;
Ideal Ratio is less than one.
Shows extent of owner's funds utilised in
financing assets.
Note:
Proprietary Funds can be computed through two ways from the Balance Sheet:
Liability Route : [Equity Share Capital + Preference Share Capital + Reserves & Surplus] Less: Accumulated
losses
Assets Route: (Net Fixed Assets + Net Working Capital] Less: Long Term Liabilities.
F. COVERAGE RATIOS - Ability to Serve Fixed Liabilities

1. Debt
Service
Coverage
Ratio
Earnings for
Debt Service
(Interest +
Instalment)
2. Interest
Coverage
Ratio
Earnings before
Interest & Tax
Interest
3. Preference
Dividend
coverage
Ratio
Earnings after
Tax
Preference
Dividend
Net Profit after

taxation
Add : Taxation
Add: Interest on
Debt Funds
Add: Non-cash
operating
Expenses (e.g.
depreciation and
amortization's)
Add: Non-operating
adjustment
(e.g. loss on sale of
fixed assets )
Earnings before
Interest and Taxes
=Sales Less Variable
and Fixed Costs
(excluding interest)
(or) EAT + Taxation
+ Interest
Earnings after Tax =
EAT
Interest on
Debt
Add:
Instalment of
Debt
(Principal
repaid)
Indicates extent of current earnings

available for meeting commitments and
outflow towards interest instalment. Ideal
ratio must be between 2 to 3 times
Interest on
Debt Fund
Indicates ability to meet Interest obligations

of the current year Should generally be
greater than 1.
Dividend on
Preference
Share Capital
Indicates ability to pay dividend on

preference share capital.
Theory
Q.1.
Indicate the important accounting ratios that would be used by each of the following : (i)
A long term creditor interested in determining whether his claim is adequately secured.
(ii)
A bank who has been approached by a company for short term loan / overdraft.
A shareholder who is examining his portfolio and who is to decide whether he should hold or sell his
shares in a company.
Toppers Institute
PRACTICAL PROBLEMS
Calculation of Ratios
Problem 1.
Following figures have been extracted from the final accounts of Sumant Ltd.:
Sundry Creditors as on 31.3.1996
Purchases for the year ended 31.3.1996
Sundry Creditors as on 31.3.1995
Rs.
30,000
3,00.000
26,000
Bills Payable as on 31.3.1996

Purchase Return for the above period
Bills Payable as on 31.3.1995
20,000
10,000
4,000
Taking year for 360 days, calculate: (i) Creditors Turnover Ratio (ii) Average Payment Period.
Solution
Creditors Turnover Ratio :
Credit purchase
2,90,000
7.25
Average Creditors and B / P 40,000
Average Payment :
Average Creditors and B / P 40,000 360

50days
Average dialy credit purchases 2,90,000
Working Notes:
1. Average creditors and B/P:
Opening Balance of creditors and B/P + Closing Balance of creditors and B/P
2
30,000 + 50,000
2
= Rs. 40,000.
2. Purchases less returns (net purchases) will be taken.
3. In the absence of information total purchases have been treated as credit purchases.
Problem.2.
The balance sheets of Pilcom Ltd. For the last 3 years read as below;
Sources
Share Capital
(shares of Rs. 10 each)
Share Premium
Reserves
(after 10%dividend)
Long Term Loan
Represented by
Fixed Assets
Less : Depreciation
Capital Work-in-progress
Investments
Net Current Assets :
Current Assets :
Debtors
Stocks
Cash & Bank
(Rs. In lakh)
1994
1995
1996
2,000
2,000
3,000
1,500
1,500
1,500
1,700
500
1,800
1,000
6,000
800
6,000
800
6,100
2,000
2,500
3,000
700
1,300
800
200
2,300
950
1,550
900
200
2,650
1,250
1,750
700
200
2,650
1,700
1,800
500
1,800
1,900
500
1,850
2,400
500
Toppers Institute
Others
400
4,400
700
3,700
6,000
3,900
Current Liabilities
Total Assets
Sales
600
4,800
1,450
3,350
6,000
4,000
1,400
6,150
2,700
3,450
6,100
5,000
Sales excludes excise duty and sales tax at 20%. Calculate for the years 1995 & 1996:
(i) Fixed Assets Turnover Ratio.
(ii) Stock Turnover Ratio
(iii) Debtors Turnover ratio in terms of number of days sales
(iv) Earnings per share.
Briefly comment on the performance of the company.
Solution
(i)
(ii)
(iii)
(iv)
1995
2.80 times
2.16 times
133 days
Rs. 2.00
1996
3.03 times
2.33 times
111 days
Rs. 1.33
Problem 3.
The following extracts of financial information relate Curious Ltd. (Rs. In lakhs)
Balance Sheet as at 31st December
Share Capital
Reserves and Surplus
Loans funds
Fixed Assets (Net)
Current Assets
Stock
Debtors
Cash and Bank Balances
Other Current Assets
(A)
1995
10
30
60
100
30
1994
10
10
70
90
30
30
20
30
30
10
20
30
10
100
80
Less : Current Liabilities
30
20
Net Current Assets
(B)
70
60
Total Assets
100
90
Sales (Rs. Lakhs)
270
300
(i)
Calculate for two years, Debt-equity Ratio, quick Ratio, and Working Capital Turnover Ratio and
(ii)
Find the sales volume that would have been generated in 1995 if the company has maintained
its Working Capital Turnover Ratio.
Solution
Debt Equity Ratio [1.5 times 3.5 times]; Quick Ratio [1.33 : 1], 2.5 : 1 ; Working Capital Turnover Ratio [3.86
Times, 5 times.]
Problem4.
The Balance Sheet of Y Ltd. Stood as follows:
Toppers Institute
Liabilities
Capital
Reserves
Loans
Creditors and
Other Current
Liabilities
31.3.95
250
116
100
31.3.94
250
100
120
129
25
595
495
Assets
Fixed Assets
Less: Depre.
31.3.95
400
140
260
40
120
70
20
25
60
595
Investment
Stock
Debtors
Cash/Bank
Misc. Expenditure
31.3.94
300
100
200
30
100
50
20
25
70
495
You are given the following information for the year 199495.
Sales
600
Interest
24
Proposed Dividend
50
PBIT
150
Provision for tax
60
From the above particulars calculate for the years 199495;

(a) Return on Capital Employed Ratio.
(d) Stock Turnover Ratio
(b) Return on Net Worth Ratio.
(e) Current Ratio
(c) Proprietory Ratio
[CA Final]
[Ans. Return on capital employed 22.33%; Stock turnover ratio5.45 times ; Return on net worth 22.53%; Current
ratio = 1.82 times; Proprietory ratio 0.57.]
Problem 5.
Mr. T. Munim is made an offer by the promoters of Siva Enterprises Ltd. to invest in the project of the company by
purchasing a substantial portion of the share capital. He is promised good returns by way of dividends and capital
appreciation.
Mr. Munim desires that you compute the following ratios for the financial analysis. Workings should form part of
your answer.
1. Return on Investment Ratio;
2. Net Profit Ratio;
3. Stock Turnover Ratio;
4. Current Ratio;
5. Debt Equity Ratio;

The figure given to him are as under : (Rs. 000s)
Sales
Consumables
Other Direct Expenses
Selling Expenses
Fixed Assets
Depreciation
Reserves & Surplus
Unsecured Term Loans
Investments
Receivables
Provisions
16,000
800
480
260
14,000
700
1,500
1,500
400
3,700
650
Raw Materials Consumed

Direct Labour
Administrative Expenses
Interest
Income Tax
Share Capital
Secured Term Loans
Trade Creditors
Inventories
Cash at hand & bank
Other Current Liabilities
7,800
750
1,200
1,440
50%
5,000
12,000
3,350
6,000
100
200
[CA Inter]
[Ans. (1) 13.625 % (2) 8.03 % (3) 1.64 times (4) 2.33 : 1 (5) 2.08 times.]
Toppers Institute
Problem 6.
The following are the summarised Profit and Loss A/c of Hind Products Limited for the year ending 31s1 March
1994 and the Balance Sheet as on that date.
PROFIT AND LOSS ACCOUNT
To Opening Stock
To Purchases
To Incidental Expenses
To Gross Profit
To Operating Expenses
To Non-Operating Expenses
To Net Profit
.
Rs.
99,500
5,45,250
14,250
3,40,000
9,99,000
1,95,000
4,000
1,50,000
3,49,000
By Sales(Credit)
By Closing Stock
Rs.
8,50,000
1,49,000
By Gross Profit
By Non-Operating Income
9,99,000
3,40,000
9,000
3,49,000
BALANCE SHEET
Liabilities
Share Capital 2,000 Equity Share of Rs. 10
each
Reserves
Profit and Loss A/c
Bills Payable
Rs.
2,00,000
90,000
90,000
60,000
40,000
4,80.000
Assets
Land and Building
Plant and Machinery
Stock in Trade
Sundry Debtors
Cash and Bank Balance
Bills Receivable
From the above statements you are required to calculate the following ratios:
(i)
Gross Profit Ratio,
(ii)
Net Profit Ratio,
(iii)
Operating Profit Ratio,
(iv)
Operating Ratio,
(v)
Return on Capital Employed,
(vi)
Net Profit to Fixed Assets Ratio,
(vii) Stock Turnover Ratio,

(viii) Receivable Turnover Ratio,
(ix)
Creditors Turnover Ratio,
(x)
Sales to Working Capital,
(xi)
Sales to Fixed Assets,
(xii) Sales to Capital Employed,

(xiii) Return on Total Resources,
(xiv) Turnover of Total Assets.
Additional Information
Average Receivables Rs. 85,000
Average Payables Rs. 80,000
Rs.
1,50,000
80,000
1,49,000
41,000
30,000
30,000
4,80.000
Toppers Institute
Solution
Gross Pr ofit
100
Sales
3,40,000
=
100 40%
8,50,000
(i)
Gross Profit Ratio
(ii)
Net Profit Ratio
1,50,000
Gross Pr ofit
100 17.65%
100
8,50,000
Sales
(iii)
Operating Profit Ratio
Operating Pr ofit
1,45,000
100 17.06%
100
8,50,000
Sales
(iv)
Operating Ratio
(v)
Return on capital Employed
(vi)
Net Profit to F A
(vii)
Stock turnover Ratio
Cost of goods Operating exp enses 100

Sales
5,10,000 1,95,000
100 82.94%
8,50,000
operting Pr ofit
1,45,000
100 41.43%
100
3,50,000
Capital Employeed
1,50,000
Net Pr ofit
100 65.22%
100
2,30,000
Fixed Assets
Cost of goods sold

Average Inventory
Sales Gross Pr ofit

Opening Stock Clo sin gStock
2
8,50,000 3,40,000 5,10,000
4.1times
99,5000 1,49,000 1,24,250
2
Net Credit Sales

8,50,000
10 times
85,000
Average Re ceivable
(viii)
Receivables Turnover Ratio
(ix)
Creditors Turnover Ratio
5,45,200
Credit Purchase
6.8 times
80,000
Average Account payable
(x)
Sales to Working Capital
Sales
Working Capital
(xi)
Sales to Fixed Assets
Sales
Fixed Assets
8,50,000
7.08 : 1
1,20,000
8,50,000
3.7 : 1
2,30,000
Toppers Institute
(xii)
Sales to Capital Employed
8,50,000
Sales
2.43 : 1
3,50,000
Capital Employed
(xiii)
Return on total Resources
Net Pr ofit
100
Total Assets
(xiv)
Turnover on total Assets
Net Sales
Total Assets
1,50,000
100 31.25%
4,80,000
8,50,000
1.77 : 1
4,80,000
Problem 7.
The following Balance Sheet of Rim Zim Ltd. as on 31st March, 1994 calculate (i) Current
Ratio, (ii) Quick Ratio (iii) Absolute Liquidity Ratio, (iv) Ratio of Inventory to Working Capital, (v) Ratio of Current
Assets to Fixed Assets (vi) Debt to Equity Ratio, (vii) Proprietary Ratio, (viii) Capital Gearing Ratio and (ix) Fixed
Assets Ratio.
BALANCE SHEET
Liabilities
Equity Share capital
6% Preference Share Capital
General Reserve
Profit and loss A/c
Provision for Tax
Bills payable
Bank Overdraft
Creditors
12%debentures
Rs.
10,00,000
5,00,000
1,00,000
4,00,000
1,76,000
1,24,000
20,000
80,000
5,00,000
29,00,000
Assets
Goodwill (At cost)
Plant and Machinery
Land and Building
Furniture and fixtures
Stock-in-trade
Bills Receivable
Debtors
Bank
Marketable Securities
Rs.
5,00,000
6,00,000
7,00,000
1,00,000
6,00,000
30,000
1,50,000
2,00,000
20,000
29,00,000
Solution
(i)
Current Ratio
Current Assets
Rs .10,00,000
2.5 : 1
Current Liabilitie s Rs .4,00,000
(ii)
Quick Ratio
Liquid Assets
Rs .4,00,000
1.05 : 1
Liquid Liabilitie s Rs .3,80,000
(iii) Absolute Liquidity ratio
Cash at Bank Marketable Securities 2,20,000
0.55 : 1
Current Liabilitie s
4,00,000
Inventory
6,00,000
1:1
Working Capital 6,00,000
(iii)
Inventory to Working Capital
(iv)
Current Assets to Fixed Assets
(vi) Debt to Equity Ratio

or
Current Assets Rs.10,00,000
10 : 19 or 0.526 : 1
Fixed Assets
Rs.19,00,000
Long term Debts

5,00,000
0.25 : 1
Shareholder' s funds 20,00,000
Toppers Institute
(vii)
Proprietary Ratio
(viii)
Capital Gearing Ratio
(ix) Fixed Assets Ratio
Shareholder' s funds 20,00,000
20 : 29 or 0.69 : 1
Total Assets
29,00,000
Fixed int erest Bearing Securities

Equity Share Capital Re serves & Surplus
10,00,000
1 : 1.5
15,00,000
Fixed Assets
Rs.19,00,000
0.76 : 1
Capital Employed Rs.25,00,000
Problem 8.
From the following Balance sheet and the sub-joined information of a Company, you are required to calculate.
1. Current ratio
2. Quick ratio
3. Inventory turnover
4. Average collection period presuming 360 days in a year.
5. Owned funds to liabilities ratio.
Balance Sheet
Rs.
Assets
2,00,000 Goodwill
58,000 Plant and machinery
1,00,000 Stock
40,000 Debtors
20,000 Cash
2,000 Misc. Current assets
4,20,000
Liabilities
Share capital
Reserves and surplus
Debentures
Creditors
Bills payable
Other current liabilities
Sales (credit) for the year
Rs. 4,00,000
Gross profit
Rs. 1,60,000
Rs.
1,20,000
1,50,000
80,000
45,000
17,000
8,000
4,20,000
[CS Dec. 98]
Solution
Current Assets
(i) Current Ratio
Rs. 1,50,000
=
Current Liabilities
Current Assets
= Stock + Debtors + Cash + Misc. current Assets

= Rs. 1,50,000
= Creditors + Bills payable + other current Liabilities

= Rs. (40,000 + 20,000 + 2,000)
(ii) Quick Ratio =
2.41 : 1
Rs. 62,000
= Rs. (80,000 + 45,000 + 17,000 + 8,000)

Current Liabilities
Current Assets - Closing Stock

1,50,000 80,000
1.129 : 1
62,000
= Rs. 62,000
Toppers Institute
(iii) Inventory turnover =
Cost of goods sold

Average Inventory
Cost of goods sold
Average Inventory
Liabilities
360
Net credit sales

Rs. 4,0,000
=
Sundry debtors + B/R
45,000 + 0
2. Owned funds to Liabilities Ratio

Owned funds
=
Liabilities
Own funds
Rs. 2,40,000
Rs. 80,000
=3
= Sales Gross profit

= Rs. 4,00,000 Rs. 1,60,000 = Rs. 2,40,000
= Rs. 80,000
Note: Opening inventory has not been given

(iv) Average collection period
Days in a year
=
Debtors turnover
Debtors turnover
= 40 days
4,00,000
= = 8.88 = 9 (approx)
45,000
Rs. 2,58,000
Rs. 1,62,000
= 1.6 : 1
= Share capital + Reserve & Surplus

= Rs. 2,00,000 + Rs. 5,800
= Rs. 2,58,000
= Debentures + Creditor + B/P + Other Current Liabilities
= Rs. (1,00,000 + 40,000 + 20,000 + 2,000)
= Rs. 1.62,000
Problem 9.
The AB Company s financial statements contain the following information:
31st March, 98
2,00,000
3,20,000
2,00,000
18,40,000
28,000
25,88,000
56,00,000
6,40,000
16,00,000
20,00,000
4,68,000
Cash
Sundry debtors
Temporary investments
Stock
Prepaid expenses
Total current assets
Total assets
Current liabilities
10% Debentures
Equity share capital
Retained earnings
31st March, 99
1,60,000
4,00,000
3,20,000
21,60,000
12,000
30,52,000
64,00,000
8,00,000
16,00,000
20,00,000
8,12,000
Statements of Profit for the year ended 31st March, 1999

Sales
Less: Cost of goods sold
Less: interest
Net profit for 1999
Less: Taxes @ 50%
Rs.
40,00,000
28,00,000
1,60,000
29,00,000
10,40,000
5,20,000
5,20,000
Dividend declared on equity shares Rs. 2,20,000.

From the above figures, appraise the financial position of the Company from the points of view of (I) liquidity; (ii)
solvency; (iii) profitability and (iv) activity.
[June-96]
Toppers Institute
Solution
I.
Liquidity Ratios
Current Assets
Current Liabilities
Rs. 25,88,000
=
Rs. 6,40,000
Quick Assets
=
Current Liabilities
a. Current Ratio
1998
b. Acid Test Ratio
1998
II.
Rs. 7,20,000
Rs. 6,40,000
= 4.04
Rs. 30,52,000
1999 =
Rs. 8,00,000
= 3.82
= 1.12
Rs. 8,80,000
1999 =
Rs. 8,00,000
= 1.1
Solvency Ratios
Long-term Debts
a. Debt Equity Ratio =
Shareholders Funds
1998
Rs. 16,00,000
Rs. 16,00,000
= = 0.65 (approx) 1999 =
Rs. 24,68,000
Rs. 28,12,000
b. Interest Coverage Ratio =
1999
III
= 0.57(approx)
Profit before interest + Taxes
Interest charges
Rs. 12,00,000
= 7.5 times
Rs. 1,60,000
Profitability Ratios
a. Net Profit Ratio
1999
Net Profit
Sales
Rs. 5,20,000
Rs. 40,00,000
b. Returns on capital employed =
1999
100
100 = 13 %
Net Profit before interest + taxes

100
Average capital employed
Rs. 12,00,000
Rs. 42,40,000
100 = 28.3 %
IV Activity Ratios
a. Stock turnover ratio
b. Total assets turnover ratio =
Cost of goods sold

=
Average Stock
Sales
Total Assets
Rs. 28,00,000
Rs. 20,00,000
= 1.4 times
Rs. 40,00,000
Rs. 64,00,000
= 0.625 times
Toppers Institute
Comments: Company s position is sound from the point of view of (i) Liquidity (ii) Solvency (iii) Profitability.
However its activity ratios do not seem to be adequate.
Problem 10.
Particulars
Return
Sales
Capital Employed
1st Case
75,000
3,00,000
2,00,000
2nd Case
80,000
3,00,000
2,25,000
3rd Case
60,000
3,00,000
1,75,000
Compute capital turnover Ratio, Net operating Profit ratio and applying Dupont analysis stat the relationship
between the two.
Solution
Case I
1. Capital Turnover Ratio
Case II
3
1.5 Times
2
Turnover
Capital
Case III
1.33 Times
1.71 Times
= 26.67%
20%
35.47%
34.2%
2. Net operating Profit Ratio
Return
100
sales
75
100 25%
300
3. ROI (1 2)
37.5%
Problem 11.
The profit margin of a company is 10% and the capital turnover is 3 times. What is the return on investment (ROI) of
the company? Applying Du Pont analysis, state by what percentage will the company's return on investment increase
or decrease if
(i) the profit margin increases by 2%
(ii) the profit margin decreases by 2%;
(iii) the capital turnover increases by 1: and
(iv) the capital turnover decreases by I?
[Ans.: ROI - 36%, 24%, 40%, 20%]
[Increase/Decrease in ROI +6%, -6%, +10%, -10%]
Problem 12.
Compute the return on capital employed from the following data relating to company A and B applying Du Pont
analysis:Net Sales for the year
Capital Employed
Operating Profit on Sales
Turnover on Capital Employed
Gross Profit margin
A Company
Rs.5,00,000
Not known
5%
5 Times
30%
Problem 13.
B Company
Not known
Rs.1,00,000
6%
Not known
Rs.90,000(15%)
[Ans: ROI: A- 25%; B-36%
Calculate Absolute Cash Ratio from following information.
Bank Balance
Cash
Investments (Total)
Current Liabilities
Trade Investments
Market value of quoted Total investments
Yr.1
Rs.
50,000
15,000
1,50,000
4,00,000
20,000
1,35,000
Yr.2
Rs.
70,000
5,000
1,20,000
5,00,000
30,000
96,000
Toppers Institute
Solution
Only Non-Trade Investments at its market value will be taken.
Less:
Yr.1
1,50,000
20,000
1,30,000
Total Investments
Trade Investments
Non- Trade Investments
Market Value
1,35,000 1,30,000
1,50,000
= Rs. 1,17,000
Yr.2
1,20,000
30,000
90,000
96,000 90,000
1,20,000
= Rs. 72,000
Comment: Absolute cash ratio has declined from .46 to .29. This indicates that availability of cash to pay firms current
liabilities has sharply declined.
Absolute Cash Ratio =
Cash + Non - Trade marketable securities

Current Liabilities
Problem 14.
Relevant figures derived from the Balance sheet of A Ltd. as on 31.3.1996 are as under: Total Assets (including
preliminary Expenses of Rs. 10 lacs)
=
Rs. 190 Lacs
Cash in hand.
Rs. 5 Lacs
Bank Balance.
Rs. 12 Lacs
Total Investments.
Rs. 6 Lacs.
Details of Investments: Trade -Rs. 4 Lacs, Non- Trade Rs. 2 Lacs, Quoted Rs. 3 Lacs out of which Non- Trade is Rs.
1.50 Lacs. Market quotations are Rs. 4.50 Lacs of which Rs. 1.75 Lacs are ) for Non- Trade Investments. Other
investments are not readily marketable. Calculate Cash Position to Total Assets Ratio. Industry average of the ratio is
.18.
Solution
Cash position to Total Assets Ratio = Cash Reservoir
Total Assets
Cash Reserve:
Cash in hand
Bank Balance
Non- Trade Investments in marketable securities.
Total Assets:
Assets as given.
Less: Preliminary Expenses.
180.00
Add: Increase in value of marketable non-trade investments.
Rs. (in Lacs)

5.00
12.00
1.75
18.75
190.00
10.00
0.25
180.25
Cash position to Total assets Ratio = 18.75 / 180.25 =.10
Comment: Industry average of the ratio is .18, where as ratio of the firm is only .10. This shows firm is maintaining
low cash balance. This may adversely affect firm's capacity to pay its current liabilities and meet day to day
expenses.
Toppers Institute
Problem 15.
The following data is available from the records of X Ltd. and Y Ltd. in the same industry the year ended 31st
March, 2000:
(Rs. '000)
X Ltd.
Y Ltd.
Assets
Plant and machinery
6,780
9,600
Stock
4,920
3,800
Debtors
1,320
2,520
Cash
840
1,280
13,860
17,200
Liabilities
4,400
7,000
Retained earnings
3,860
2,000
10% debentures
2,000
4,000
Sundry Creditors
3,600
4,200
13,860
17,200
Sales
22,400
32,800
Cost of goods sold
16,000
25,800
Other operating expenses
3,200
3,440
Interest expenses
200
400
Income tax
1,500
1,580
Dividend
.
400
720
You are required to calculate the relevant ratios and answer the following questions:
(i)
Which of the companies is able to meet its current debts in a better way?
(ii)
Which of the companies collects its receivables faster, assuming all sales are on credit basis?
(iii)
Which of the companies is making more profitable use of the shareholders' money?
(iv)
If you have to purchase the debentures of one of the companies, which company would be preferred by you?
(v)
Which of the companies retains a larger proportion of its income in the business?
[Ans.: X Ltd.]
Problem 16.
Following is Profit and Loss account of A. B. C. Ltd. for the year ended 31st March. 1996,
To Opening stock
To Purchases
To Gross Profit
To salaries, allowance and bonus
To Stationery
To Telegrams, Postage Telephones
To Advertisements
To Commission
To Depreciation
To Preliminary expenses written off
To Loss on sale of fixed assets
To Provision for taxation
To Net Profit
Rs.
4,00,000
16,00,000
12.00.000
32.00.000
3,20,000
32,000
8,000
8,000
4,000
16,000
4,000
8,000
4,00,000
4,00,000
12,00,000
By Sales
By Closing stock.
Rs.
24,00,000
8,00,000
By Gross Profit
32,00,000
12,00,000
12,00,000
Advance tax paid Rs. 3,40,000, Cash Reservoir Rs. 1,40,000. Find out average daily cash expenses and calculate
cash interval.
Toppers Institute
Solution
Average daily cash expenses:
Expenses as per Profit and Loss Account excluding non-cash items:
Purchases
Salaries, allowances, bonus
Stationery
Telegrams, postage, telephones
Advertisements
Commission
Add Advance tax.
Rs.
16,00,000
3,20,000
32,000
8,000
8,000
4,000
19,72,000
3,40,000
23,12,000
-Average daily expenses = 23,12,000 / 365 = Rs. 6.334

Cash Interval
Cash Reservoir
Average daily cash expenses
1,40,000/ 6,334 = 22 days.
Problem 17.
A business furnishes you with the following details:
(i)
(ii)
(iii)
Opening Stock
Closing Stock
Sales:
Credit
Cash
(iv)
Gross profit
(v)
Year end debtors
Less: Provision
For bad debts
(iv) Year end bills receivable
Rs. 50,000
Rs. 70,000
Rs. 2,10,000
Rs. 1,50,000
Rs. 60,000
Rs. 20,000
Rs. 2,000
18,000
Rs. 15,000
A year may be taken to be of 360 days. You are asked to:

(i)
Work out stock turnover and debtors turnover ratios.
(ii)
Calculate the operating cycle and state its significance.
[CA Nov'99]
Analysis of Ratio
Problem 18.
You have the following information on the performance of Prosper Co., as also industry averages:
(i) determine the indicated ratios for the Prosper Co. ; and
(ii) indicate the company's strengths and weaknesses as shown by your analysis.
Liabilities
10% debentures
Sundry creditors
Bills payable
Balance Sheet as on 31st December, 1998

Rs.
Assets
24,00,000
Net fixed assets
4,60,000
Cash
3,30,000
Sundry debtors
4,40,000
Stock
2,20,000
38,50,000
Rs.
12,10,000
4,40,000
5,50,000
16,50,000
38,50,000
Toppers Institute
Statement of Profit for the year ending 31st December, 1998

Rs.
55,00,000
Sales
Less: Cost of goods sold:
Materials
Wages
Factory overheads
Gross Profit
Less: Selling & distribution cost
Administration and general
expenses
Earning before Interest and taxes
Less: Interest charges
Earnings before taxes
Less: Taxes (50%)
Net Profit
Ratios considered:
Current assets/current liabilities
Sales/debtors
Sales/stocks
Sales/total assets
Net profit/sales
Net profit/total assets
Net profit/net worth
Total debts/total assets
20,90,000
13,20,000
6,49,000
40,59,000
14,41,000
5,50,000
6,14,000
11,64,000
2,77,000
46,000
2,31,000
1,15,500
1,15,500
Industry
2.4
8.0
9.8
2.0
3.3%.
6.6%
10. 7%
63.5%
[CS June-91]
Solution
Company strength:
(a)
Current ratio is better than that of industry.
(b)
Sales / Debtors ratio indicates that the debts collection period of the company is better than that of industry.
Company's weakness:
(a)
As for the industry's standard the stock should have been Rs. 5,61,224 (55,00,000/9.8). But the company's
stock was Rs. 16,50,000 i. e. three times more. Thus it is seen that the greatest weakness of the company is
the high level of inventories.
(b)
The high level of inventory leads 10 a decline in the Sales / Total assets Ratio.
(c)
The cost of high level of inventory affects the profitability in an adverse manner.
(d)
Due to low profitability the ratio at 5,6 &7 are also lower than those of the industry.
(e)
The Net Profit / Net Worth is low because1he company is using less amount of debts i.e. 37.7 % as
compared to the industry's figure of 63.5%.
Remedial Action
The stock should be maintained at Rs. 5,50,000 i. e. stock should be reduced by Rs. 11,00,000. If it is reduced the
ratios at 3 & 4 will be as follows:
Sales
Rs. 55,00,000
=
Stock
Rs. 5,50,000
Sales
Rs. 55,00,000
Total Assets
Rs. 27,50,000
= 10.0
= 2.0
Toppers Institute
Due to reduction in stock level the profitability of the company will improve. Further debentures can be obtained.
This will improve the ratio of Net Profits / Net Worth. To sum up reduction of stock and increase of debt will be
highly beneficial to the company.
Problem 19.
Given below are cash position ratios of MRD Ltd. and the Industry Average. Industry Average is arrived at by taking
average position of 25 companies of the similar trade :
Absolute Cash ratio
MRD. Ltd.
0.36
Industry Average
0.30
How do you feel about the cash position of MRD Ltd.?
Cash Position to total

Assets ratios
12.50%
15%
Cash interval
25 days
33 days
[Ans. (i) Absolute cash ratio is better than industry average.

(ii) Cash position to total assets ratio of MRD Ltd. is lower than that of industry.
(iii) Overall assessment: it can be concluded that MRD Ltd. is maintaining low cash position.]
Problem 20.
On the basis of the following figures derived from the accounts of a company; prepare a report on the level of
efficiency of financial and operational management of the company:
Years
1
2
3
4
Capital
Turnover
Ratio
1.0
2.0
3.0
5.0
Net Profit
on Sales
(%)
8
10
11.5
13
ROI
(%)
Current
Ratio
8
20
34.5
65
6.0
4.0
2.0
0.5
[June 86]
Solution
To,
The Managing Director
Sub.:- Level of efficiency of financial and operational management
Sir,
After analysing the figures derived from the accounts of our company I have come on the point that the level of
efficiency on financial and operational management of the company are as follows.
1st year
In the first year there is poor utilisation of the available capital as the capital turnover ratio is very low. While the
current ratio is too high which also indicates that company did not utilised its funds. Considering these two ratios, it
can be concluded that there is a case of over capitalisation. The percentage of net profit on sales and ROI are also not
upto mark.
2nd year
In the second year though there is improvement in all the ratios so there is very much scope for reduction in current
ratio and improvement in the capital turnover ratio.
3rd year
In the third year the capital turnover ratio has gone upto 3:0 and current ratio has come down to 2:0 which indicates a
good situation in this year. ROI is also excellent at 34.5 %.
4th year
In the fourth year as the capital turnover ratio, percentage of net profit on sales and ROI are very high. i.e. 5.0, 13,
65. As current ratio has come down to 0.5 this shows that there was no sufficient working capital to meet the
Toppers Institute
financial liabilities of the company, which is not a good situation. So efforts should be made to improve the current
ratio to 2.
Final conclusion
It is advised to maintain these ratios in the fourth year and improve the current ratio to 2 by ploughing back profits
for meeting the working capital requirement.
Yours faithfully
Date
Sd/Management Accountant
Problem 21.
A Ltd. and B Ltd. are two Companies belonging to the same industry. In 198889 each of them has maintained the
inventory almost at the same level at which its inventory stood at the beginning of the year. The industry has
developed the following accounting ratios for inter firm comparison.
Current Ratio 1.8 Liquid Ratio 1.1 (liquid liability is taken after excluding overdraft); Gross Profit Ratio to sales .25
(after considering only material cost) Return on own capital 40; Debtors velocity 80 days Creditors Velocity 75 days
and stock Velocity 4.
From the following details of A Ltd. and B Ltd. relating to 198889, comment upon the financial management and
operational efficiency of the two companies in terms of the norms for the industry as stated above.
A Ltd.
Rs. 250 lakhs
Rs. 25 lakhs
3 months
20%
Rs. 35 lakhs
Rs. 30 lakhs
8
Rs. 65 lakhs
Rs. 3 lakhs
Rs. 4 lakhs
Sales
Bank overdraft
Debtors velocity
Gross profit % on sales (considering only material cost)
Stock
Expenses
Own capital velocity (with respect to sales)
Trade creditors
Expenses creditors
Liquid assets (other than Book Debts)
B Ltd
Rs. 200 lakhs
Rs. 10 lakhs
2 months
30%
Rs. 40 lakhs
Rs. 25 lakhs
2
Rs. 28 lakhs
Rs. 2 lakhs
Rs. 8 lakhs
Note : For calculation of velocity in days 365 days in a year have been considered in all the cases.
[CA May 1989]
Solution
To Cost of Sales (80%) of sales
(Material consumed)
To Gross Profit (20%) of sales
To Expenses (12%) of sales

To Profit before Interest and Tax
(8% ) of sales
Liabilities
Own Capital
Bank Overdraft
Trade Creditors
Expense Creditors
A Ltd.
Profit & Loss Account
200.00
By Sales
50.00
250.00
30.00
250.00
By Gross Profit
20.00
50.00
Balance Sheet as on
(Rs. in Lakhs)
Amount
Assets
31.25
Fixed Assets
25.00
(balancing figure)
65.00
Stock
3.00
Liquid Assets
Debtors
124.25
250.00
50.00
50.00
Amount
22.75
35.00
4.00
62.50
124.25
Toppers Institute
B Ltd.
140.00
By Sales
60.00
200.00
25.00
By Gross Profit
To Material consumed
To Gross Profit (30%) of sales
To Expenses (12.5%) of sales
To Profit before Tax
(17.50% ) of sales
35.00
60.00
200.00
200.00
60.00
60.00
Balance Sheet as on (Rs. in Lakhs)

Liabilities
Capital own
Bank Overdraft
Creditors
Expense for Creditors
Amount
100.00
10.00
28.00
2.00
Assets
Fixed Assets
(balancing figure)
Stock
Liquid Assets
Debtors
Amount
58.67
40.00
8.00
33.33
140.00
140.00
Notes:
(i)
It has been assumed that expenses include interest cost.
(ii)
In the absence of information about tax, it has been assumed that return on capital computed is before tax.
Statement showing relevant ratios of industry Averages, A Ltd. and B Ltd. and comments thereon
Ratio
Current Ratio:
Current Assets/Current Liabilities
Liquid Ratio:
Quick Assets / Quick Liabilities
(CL-Bank overdraft)
Gross Profit Ratio:
Gross Profit/Sales 100
Return on Own Capital
Profit / own capital 100
Industry
Average
1.8
1.1
25%
40%
A Ltd.
B Ltd.
101.50
1.09
93
66.50
.99
68.00
81.33
2.03
40
41.33
1.38
30
50
100 20%
250
20
100 64%
31.25
365
62.50 91 days
250
60
100 30%
200
35
100 35%
100
365
33.33 61 days
200
Debtors velocity (in days):

365/credit sales closing debtors
80 days
Creditors Velocity (in days):

365/credit purchase closing creditors
75 days
365
65 119 days
200
365
28 73 days
140
Stock Velocity (time):

Cost of Goods sold/Closing stock or
Average stock
200
5.71
35
140
3.5
40
Current ratio indicates short term financial position of a firm. A Ltds current ratio (1.09) is much below the industry
average of 1.8 indicating weak short term financial position, whereas B Ltd. s current ratio of 2.03 above the
industry average points towards its sound short-term financial position. It may be noted that the generally accepted
current ratio is 2 : 1
Liquid ratio of 0.98 (taking current liability without bank overdraft) of A Ltd, is also below industry average of 1.1,
indicating that the company does not possess adequate liquidity to pay current liabilities at a given point of time even
after excluding overdraft. The liquidity ratio of B Ltd (1.38) is better than industry average of 1.1, showing much
better short term solvency position than that of A Ltd. and also in comparison to industry as a whole.
Toppers Institute
A Ltd. is earning 5% less gross profit than industry average whereas B Ltd. is earning 5% more than industry
average. It shows that operational efficiency, particularly management of purchase of B Ltd. is higher than that of A
Ltd. and also better than industry average.
A Ltd. s debtors velocity is lower than industry average. However, debtors velocity of B its is slightly better than
that of A Ltd. and in comparison to industry average.
A Ltd. shows much higher return on own investments i.e. 64% in spite of lower net profit ratio. It has been possible
mainly because of higher fixed assets turnover ratio, apart from higher stock Velocity. B Ltd. s return on investment
is lower than industry average. It may be explained by lower fixed assets turnover and lower stock velocity.
A Ltd. is taking 119 days to pay its creditors against the industry average of 75 days. It may partly responsible for
paying higher purchase price resulting in lower GP ratio. B Ltd. is taking 73 days to pay its creditors four days less
than industry average. It may be said that it is making timely payment to its creditors enjoying better credit
worthiness.
Higher stock velocity of A Ltd. (5.71) as compared to industry average of 4, shows comparatively less investment in
stock. B Ltd.s stock velocity of 3.5 is below industry average indicating relatively more investment in stock.
In conclusion, it may be said that B Ltd. has better financial management and operational efficiency in comparison to
A Ltd. It is also surprising why it has heavy investment in fixed assets
Problem 22.
The Balance Sheets of A Ltd. and B Ltd. as on 31st March 1994 are as follows:
Liabilities
Share Capital
Reserves & Surplus
Secured Loans
Current Liabilities & Provisions :
Sundry Creditors
Outstanding Expenses
Provision for Taxation
Proposed Dividend
Unclaimed Dividend
Assets
Fixed Assets Less Depreciation
Investments
Inventory at cost
Sundry Debtors
Cash and Bank
A Ltd.
40,00,000
32,30,000
25,25,000
B Ltd.
40,00,000
25,00,000
32,50,000
15,00,000
2,00,000
3,00,000
6,00,000
15,000
1,23,70,000
14,00,000
3,00,000
3,00,000
80,00,000
15,00,000
23,00,000
5,70,000
1,23,70,000
50,00,000
45,00,000
17,00,000
5,50,000
1,17,50,000
1,17,50,000
Additional information available:

(i)
(ii)
75% of the Inventory in A Ltd. readily saleable at cost plus 20%

50% of Sundry Debtors of B Ltd. are due from C Ltd. which is not in a position to repay the amount B Ltd.
agreed to accept 15% debentures of C Ltd.
(iii)
B Ltd. had also proposed 15% dividend but that was not shown in the accounts.
(iv)
At the year end, B Ltd. sold investments amounting to Rs. 1,20,000 and repaid Sundry Creditors.
On the basis of the given Balance Sheet and the additional information, you are required to evaluate liquidity of the
companies. All working should form part of the answer.
Solution
Particulars
CA.
Stock (23,00,000 75%) + 20%
Debtor (17,00,000 50%)
Cash & Bank
A
20,70,000
5,70,000
B
8,50,000
5,50,000
Toppers Institute
Liquid Assets
Stock(23,00,000 25%)
26,40,000
5,75,000
14,00,000
45,00,000
Total CA
CL
Proposed Dividend
Creditor
Out Exp.
Provision for tax
Unclaimed Dividend
32,15,000
59,00,000
6,00,000
15,00,000
2,00,000
3,00,000
15,000
26,15,000
6,00,000
15,20,000
3,00,000
3,00,000
27,20,000
Evaluation of Liquidity
1.
2.
CA
CL
LA
Liquid Ratio
CL
Current Ratio
32,15, 000
1.23
26,15, 000
26,40,000
1.009
26,15,000
59, 00, 000

2.17
27, 20, 000
14,00,000
.51
27,20,000
Problem 23.
Mr. Smarty intends to supply goods on credit to Surya Ltd. and, Chandra Ltd. The relevant financial data relating to
the companies for the year ended 31st December; 1998 are as follows:
Surya Ltd.
Chandra Ltd.
Terms of payment
3 months
3 months
(Started)
(Rs.)
(Rs.)
Stock
8,00,000
1,00,000
Debtors
1,70,000
1,40,000
Cash
30,000
60,000
Trade creditors
3,00,000
1,60,000
Bank overdraft
40,000
30,000
Creditors for expenses
60,000
10,000
Total purchases
9,30,000
6,60,000
Cash purchases
30,000
20,000
Advise with reasons, as to which of the companies he should prefer to deal with.
[CS Dec.-87]
Solution
First of all Let us find out current ratio, liquid ratio, creditors velocity and average credit period as follows.
Surya Ltd.
Chandra Ltd.
Rs.
Rs.
Debtors
1,70,000
1,40,000
Cash
30,000
60,000
Liquid Assets
2,00,000
2,00,000
Stock
8,00,000
1,00,000
Current Assets
10,00,000
3,00,000
Trade creditors
3,00,000
1,60,000
Bank overdraft
40,000
30,000
Creditors for expenses
60,000
10,000
Current liabilities
4,00,000
2,00,000
(i) Current ratio:
Surya Ltd.
Chandra Ltd.
Rs.
Rs.
Current Assets
10,00,000
3,00,000
Current Liabilities
4,00,000
2,00,000
= 2.5
= 1.5
(ii) Liquid Ratio (Including Bank overdraft)
Toppers Institute
Liquid Assets
Current Liabilities
(iii) Creditor's Turnover Ratio

Credit purchases
=
Trade creditors
(iv) Average Credit Period:

Days in a year
Creditor's Turnover Ratio

=
Rs. 2,00,000
Rs. 4,00,000
= 0.50
Rs. 9,00,000
Rs. 3,00,000
= 3 times
365
3
122 days
Rs. 2,00,000
Rs. 2,00,000
= 1.00
Rs. 6,40,000
Rs. 1,60,000
= 4 times.
365
4
=
91 days
After calculating all above ratio we see that liquid ratio, creditors velocity and average credit period are better in case
of chandra Ltd.
Terms of payment: 3 months chandra Ltd. is following this as the average credit period in this case is 91 days.
Though Current Ratio is better, Surya Ltd. is not reliable in regard to liquidity, creditors velocity and Average credit
period which is of 4 months instead of 3 months. That means Surya Ltd. is discharging liabilities in an average period
of 4 months.
So my advise is to deal with chandra Ltd. due to above reasons.
Problem 24.
Assuming the current ratio is 2, state and explain in each of the following cases whether the current ratio will
improve or decline or will have no change:
(i)
Payment of a current liability;
(ii)
purchase of fixed assets;
(iii)
cash collected from customers;
(iv)
bills receivable dishonoured; and
(v)
issue of new shares.
[CS Dec. 90]
Solution
Current Ratio =
Current Assets
2 :1
Let us assume current assets are Rs. 21akhs and current liabilities are Rs. 1 lakh.
(i) Payment of a current liability: Current ratio will improve:- When current ratio is 2 : 1, payment of current liabilities will
reduce in the same amount in the numerator and denominator. Hence current ratio will improve. Exp. Payment of
current liability
= Rs. 10,000
then current asset
= Rs.1 ,90,000
current liability
= Rs. 90,000
Current Ratio =
Rs.1,90,000
2 :1
Rs.90,000
(ii) Purchase of fixed assets

(a) On Cash for Rs. 10,000
Current liabilities
= Rs. 1,00,000
Then Current Asset
= Rs. 1,90,000
Toppers Institute
Current Ratio =
Rs.1,90,000
1.9
Rs.1,06,000
Current ratio will decline.

(b) On Credit for Rs. 10,000
Current liabilities
= Rs. 1,10,000
Then Current Asset
= Rs. 2,00,000
Current Ratio =
Rs. 2,00,000
1.82
Rs.1,10,000
Current ratio will decline

Note: In both the cases i.e. purchase of fixed asset on cash or on credit current ratio will decline.
(iii) Cash collected from customers: Current ratio will not change.
Reason: Cash will increase and debtors will decrease. Hence no change in current assets.
(iv) Bills receivable dishonoured: Current ratio will not change. Reason: Bills receivable will come down and debtors will
increase. Hence no change in current assets.
(v) Issue of new shares: Current ratio will improve.
Example: Issue of new shares for Rs. 20,000 cash. Cash will increase by Rs. 20,000 and consequentially increase in
current assets.
Current ratio =
Rs. 2,20,000
2.2
Rs.1,00,000
Problem 25.
Following figures are available from the accounts of a large industrial unit. Compute relevant ratios to assess the
efficiency of working capital management for 1999-2000 and 2000-01.
(Rs. crores)
Particulars
1998-99
Inventories
Debtors
Other current assets
Cash and bank balances
Total
Current liabilities
Net working capital
Sales
Total assets
50.0
67.0
5.0
30.0
152.0
52.0
100.0
300.0
220.0
1999-2000
Solution Working Notes:

1. Average Inventory
(Op. Stock + Closing Stock)/2
1999-2000
2000-2001
2. Average Debtors
(Op. Balance + Closing Balance)/2
1999-2000
2000-2001
3. Average Working Capital
1999-2000
(Rs. crores)
(50 + 52.5)/2
(52.5 + 65)/2
2000-2001
52.5
65.0
57.0
77.0
15.0
20.0
10.0
15.0
134.5
177.0
54.5
72.0
80.0
105.0
300.0
340.0
200.0
240.0
(CWA Dec., 1994)
51.25
58.75
(67 + 57)/2
(57 + 77)/2
62
67
(100 + 80)/2
90
Toppers Institute
2000-2001
4. Average Current Assets
1999-2000
2000-2001
(80 + 105)/2
92.5
(152 + 134.5)/2
(134.5 + 177)/2
143.25
155.75
Computation of Ratios for assessment of Working Capital (Rs. crores)

Particulars
1. Current Ratio
(Current assets/Current liabilities)
2.
3.
4.
5.
6.
7.
Liquid Ratio
(Current Assets -Inventory/Current Liabilities)
1999-2000
2000-2001
(134.5/54.5)
= 2.47
(177 /72)
= 2.46
(134.5- 52.5)/54.5
= 1.50
(177- 65)/72
= 1.56
(134.5/200)
= 0.67
(177/240)
= 0.74
(300/51.25)
= 5.85
(340/58.75)
= 5.79
(300/62)
(340/67)
(300/143.25)
= 2.09
(340/155.75)
= 2.18
(300/90)
= 3.33
(340/92.5)
= 3.68
Current Assets to Total Assets

(Current assets/Total assets)
Inventory turnover ratio
(Sales/Average inventory)
Debtors Turnover Ratio
(Sales/Average debtors)
Current Assets Turnover Ratio
(Sales/ Average current assets)
Working Capital Turnover Ratio
(Sales/ Average net working capital)
B. Financial Statement
Problem 26.
Assume that a firm has owners' equity of Rs. 1,00,000. The ratios for the firm are:
Current debt to total debt
Total debt to owners' equity
Fixed assets to owners' equity
Total assets turnover
Inventory turnover
Complete the following balance sheet, given the above information.
Liabilities
Current debt
Long-term debt
Total debt
Owners' equity
Total Capital
Rs.
.
.
.
.
.
.40
.60
.60
2 times
8 times
Assets
Cash
Inventory
Fixed assets
Total assets
Rs.
.
.
.
.
.
Rs.
Assets
24,000
Cash
36,000
Inventory
60,000
1,00,000
Fixed assets
1,60,000
Total assets
Total Debt = 1,00,000 X 0.6 = 60,000
Current Debt = 60,000 X 0.4 = 40,000
Rs
60,000
40,000
1,00,000
60,000
1,60,000
Solution
Equities
Current debt
Long-term debt
Total debt
Owners' equity
Total Capital
Toppers Institute
Fixed Assets = 1,00,000 X 0.6 = 60,000
Problem 27.
Complete the following annual financial statements on the basis of ratios given below :Dr.
To cost of goods sold
Operating Expenses
Earning before interest
and Tax
Profit and loss account for the year ended 30th June, 1990
Rs.
Cr.
6,00,000
By Sales
---
Rs.
20,00,000
-------
To Debenture Interest
Income tax
Net Profit
10,000
-------
By Earnings before
Interest & tax
-----
Balance Sheet as at 30th June, 1990

Rs.
Net Worth :
Share Capital
Reserve &
Surplus
10% Debentures
Sundry Creditors
Net Profit to sales
5%
Return on net worth
20%
Share capital to reserves
Solution
To Cost of good sold
To Operating Exp
EBIT
To Debt Int.
To Income Tax
To N.P
-----
4:1
--------60,000
Current Ratio
Rs.
----
Fixed Assets
Current Assets:
Cash
Stock
Debtors
--------35,000
_______
1.5 times
Inventory turnover (based on cost of goods sold)

Rate of Income- tax
15 times
50
P/L Account
6,00,000
11,90,000
2,10,000
20,00,000
10,000
1,00,000
1,00,000
2,10,000
By Sales
20,00,000
EBIT
20,00,000
2,10,000
2,10,000
Balance Sheet
S. Capital
Reserve
N. W.
10% Deb
Creditors
4,00,000
1,00,000
5,00,000
1,00,000
60,000
6,60,000
Fixed Assets
CA
Cash
Stock
Deb
5,70,000
15,000
40,000
35,000
90,000
6,60,000
Problem 28.
Working capital of a company is Rs. 1,35,000 and currant ratio is 2.5 Liquid ratio is 1.5 and proprietary ratio is 75%.
Bank overdraft is Rs. 30,000. There are no long term loans and fictitious assets. Reserves and surplus amount to Rs.
90,000 and the gearing ratio (equity Capital/Preference Capital) is 2.
From the above draw the statement of proprietary fund.
Toppers Institute
Solution
Computation of Net Block and Proprietary Fund:
Proprietary Ratio
= Proprietary Fund / Total Assets

= Proprietary Fund / Net Block + Current Assets = 0.75
i.e. Proprietary Fund
= 0.75 Net Block + .75 2,25,000

= .75 Net Block + 1,68,750
Since there in no long term loan,

Hence, Proprietary funds = Net Block + Working Capital
= Net Block + 1,35,000
=
0.75 Net Block + 1,68,750
or, 0.25 Net Block
= Rs. 33,750
Net Block
= Rs. 1,35,000
Proprietary Funds Statement
Particulars
Sources:
Equity Capital
Preference Capital
Reserve and Surplus
Rs.
Rs.
1,20,000
60,000
90,000
2,70,000
Applications:
Net Block
Current Assets:
Stock
1,35,000
1,35,000
90,000
Less: Current Liabilities

Bank Overdraft
2,25,000
3,60,000
30,000
60,000
90,000
2,70,000
Problem 29.
Important ratios of a firm for the year ended 1999 are given below:
Stock velocity (stock holding period)
Creditors payments period
4 months
73 days
Gross profit margin
20%
Credit purchase
25%
Debt collection period
2 months
Gross profit
Rs. 2,00,000
Cash and Bank balance
5% of Sales
The firm expects in increase of 50% in sales in the ensuing year

Estimate the working capital requirement of the firm for the ensuing year.
Ans. W.C. 6,65,000
Problem 30.
Using the following data, complete the Balance Sheet of X Ltd. as at 31.3.2000.
Gross profit
Shareholders equity
Total turnover to total assets
25% of Sales
Gross profit
Rs. 1,20,000
Rs. 20,000
Credit Sales to total sales
80%.
4 times
Cost of sales to inventory
10 times
Toppers Institute
Average collection period
5 days
Current ratio
Long-term debt
1.5
Sundry creditors
Rs. 60,000
assume 365 days in a year

Balance Sheet of X Ltd. as at 31.3.2000
Liabilities
Sundry Creditors
Long-term Debt
Share Capital
Rs.
Assets
Cash
Sundry Debtors
Inventory
Fixed Assets
Rs.
Problem 31.
From the following prepare a balance sheet:
Current ratio is
1.75
Stock turnover ratio (closing stock) is

Debtors collection period is
9 times
1.5 months
Turnover fixed Assets is
1.2
Fixed Assets to net worth is
1.25
Solution
Liquid ratio is
1.25
Gross profit ratio is
25%
Reserves to capital is
0.2
Capital gearing ratio is
0.6
Sales for the year is
Balance Sheet
Liabilities
Share capital
Reserves & Surplus
Rs.
6,66,670
1,33,330
Assets
Fixed Assets
Investment
Current Assets :
Long-term Loans
Current Liabilities
4,80,000
2,00,000
Stock
Debtors
Cash
14,80,000
Working Notes:
1. Gross profit ratio
Gross Profit
Sales
Gross Profit
25% or
Gross profit
Sales Gross profit
Rs. 12,00,000 Rs. 3,00,000
=
=
=
2. Stock turnover ratio
9
9 Closing stock
Closing stock
Rs. 12,00,000
=
=
=
Gross Profit
12,00,000
Rs. 3,00,000
Cost of goods sold
Rs. 9,00,000
Cost of goods sold

Closing stock
Rs. 9,00,000
Closing stock
Rs. 9,00,000
Rs. 1,00,000
Rs.
10,00,000
1,30,000
1,00,000
1,50,000
1,00,000
3,50,000
14,80,000
Toppers Institute
3. Liquid ratio
1.25
Current Assets - Stock

Current Assets - Rs.1,00,000

Current Assets- Rs. 1,00,000 = 1.25 Current Liabilities

4. Current ratio
1.75
Current Assets
Current Assets
=
Current Assets
= 1.75 Current Liabilities
1.25 Current Liabilities
= Current Liabilities Rs. 1,00,000
= 1.75 Current Liabilities Rs. 1,00,000
Rs. 1,00,000
Current Liabilities
Rs. 2,00,000
Rs. 2,00,000 1.75 = Rs. 3,50,000
5. Debtors turnover ratio =
Debtors
12
Sales
Debtors 12
months
Rs. 12,00,000
24 Debtors
Debtors
Current Assets
Rs. 36,00,000
Rs. 1,50,000
Rs. 3,50,000
Less: Stock 1,00,000

Debtors
1,50,000
2,50,000
Cash balance
1,00,000
Sales
6. Fixed Assets turnover ratio=
Rs. 12,00,000
1.2 =
Fixed Assets
1.2 Fixed Assets
= Rs. 12,00,000
Fixed Assets
= Rs. 10,00,000
Fixed Assets
Fixed Assets to net worth
Net Worth
Rs. 10,00,000
1.25
Net Worth
1.25 Net Worth
= Rs. 10,00,000
Fixed Assets
Toppers Institute
Net Worth
= Rs. 8,00,000
7. Net worth includes share capital and reserves and surplus

Net worth = Share capital + Reserve
Rs. 8,00,000
= y + 0.2 y (reserves to capital 0.2)
1.2 y
Rs. 8,00,000
Rs. 6,66,670
Share capital is Rs. 6,66,670 and reserves Rs. 1,33,330

Long-term loans
8. Capital gearing ratio
=
Shareholders fund
Long-term loans
Rs. 8,00,000
Long-term loans = Rs. 8,00,000 0.6 = Rs. 4,80,000.
0.6
Problem 32.
From the following information make out a statement of proprietor's funds with details:
Current ratio
2.5
Proprietary ratio (fixed assets/proprietary fund)

Reserve and surplus
Liquid ratio
0.75
Rs. 40,000
1.5
Working capital
Rs. 60,000
Bank overdraft
Rs. 10, 000
There is no long term loan or fictitious assets.

[CS Dec.-91, Jun-94, Dec.-98]
Solution
Balance Sheet as on......
Particulars
Share capital
Reserves & Surplus
Bank overdraft
Rs.
2,00,000
40,000
10,000
30,000
2,80,000
Particulars
Fixed Assets
Stock
Other current assets
2,80,000
Working Notes:
(i) Proprietary ratio (fixed assets / proprietor's funds) = 0.75
Proprietary ratio (working capital/ proprietary funds) = 0.25
Let Proprietary fund = X
0.25X = Working capital = Rs.60,000
Rs. 60,000
X =
=
25
Proprietary fund = Rs. 2,40,000
Rs.2,40,000
(ii) Fixed assets = 0.75 Rs. 2,40,000

=
(iii) Current Ratio
= 2.5
Let Current Liabilities

Current Assets

Current Liabilities
=X
= 2.5
Rs.1 ,80,000
Current Assets
Rs.
1,80,000
55,000
45,000
= 2.5
Toppers Institute
Current Assets = 2.5 X

Current Assets -Current Liabilities = Working Capital
2.5X X = Rs. 60,000 or 1.5 = Rs. 60,000
Rs.60,000
or X =
= Rs. 40,000
1.5
Current Liabilities = Rs. 40,000
Current Assets = 2.5 X = 2.5 Rs. 40,000 = Rs. 1,00,000
(iv) Liquid Ratio =
Current Assets - Stock

Current Liabilitie s - Bank overdraft
= 1.5
Rs.1,00,000 - Stock
Rs.1,00,000 - Stock
= 1.5,
= 1.5
Rs.40,000 - Rs.10,000
Rs.30,000
Rs. 1,00,000 - Stock = Rs.30,000 1.5
Rs. 1,00,000 - Stock = Rs.45,000
Or Stock = Rs. 55,000
(v) Proprietors' fund
= Share capital + Reserves & Surplus
Rs. 2,40,000
= Share Capital + Rs. 40,000
Share Capital
= Rs. 2,00,000
Problem 33.
The following ratios and information relate to the business at Lakhotia Traders Ltd.
Credit period allowed to Debtors 2 months
Stock Turnover Ratio
Lag in payments to Suppliers
1 month
Gross Profit Ratio
25% on turnover
Opening stock
Rs.l,05,000
Gross profit for the year ended 31.3.1999 amounted to Rs. 3,00,000.
Find out:
(a)
Sales
(b)
Sundry Debtors
(c)
Closing Stock
(d)
Sundry Creditors
Solution
(a)
(b)
Sales
Gross Pr ofit
Rs.3, 00, 000
Rs.12, 00, 000

Gross Pr ofit Ratio 25% onturnover
Sundry Debtors Net credit Sales
Average collection Period

2
Rs.12,00,000 Rs.2,00,000
12
12
Cost of goods sold= Sales- Gross profit = Rs.12,00,000 Rs.3,00,000 =Rs.9,00,000
(c)
Average Stock
Cost of Goods sold

9, 00, 000
Rs.1,12,500
stock Turnover Ratio
8
Closing Stock = (2 Average Stock) Opening Stock = (2 Rs.1,12,500) Rs.1,05,000 =Rs.1,20,000
Toppers Institute
(d)
Purchases = Cost of goods sold + Closing Stock-opening stock = Rs.9,00,000 + Rs.1,20,000 - Rs.1,05,000 =
Rs.9,15,000
Sundry Creditors :Net Credit Purchase Log in payment to sup pliers Rs.9,15,000 1 Rs.76,250
12
12
Problem 34.
SKS does not maintain proper books of accounts. However, he provides you with the following details :
(a)
Sales and Purchase Policy. Total sales during 1987 Rs. 6,00,000. Volume of sales during 2nd half of
1987 was 1/3 that of 1st half. Volume of credit sales was twice that of cash sales throughout the year.
(b)
Credit Policy. Closing debtors represent last two months sales whereas closing creditors represent last 3
months purchases.
(c)
Price Policy. Goods were sold at 10% profit on credit sales. Cash selling price was always at a profit of
5% of Sales.
(d)
Inventory policy First 2 months requirement was held as opening stock whereas last months requirement
was held as closing stock.
From the above details ascertain the following:

1. Opening stock as on 1.1.1987, Closing stock as on 31.12.1987,
2. Total purchases during 1987 and Closing debtors and creditors as on 31.12.1987
Solution
Basic Calculations
(i) Cash & Credit Sales
(1: 2)
Cash Sales
1/3th of Rs. 6,00,000
Credit Sales
= Rs. 2,00,000
rd
2/3 of Rs. 6,00,000
= Rs. 4,00,000
st
(ii) Sales in 1 Half and 2nd Half

1st Half
Total
Rs.
2,00,000
4,00,000
6,00,000
Cash
Credit
3/4th
3/4th
2nd Half,
Rs.
1,50,000
3,00,000
4,50,000
1/4th
1/4th
Rs.
50,000
1,00,000
1,50,000
(1) Opening Stock as on 1.1.1987:

Total Sales for first two months: 1/3rd of Rs. 4,50,000
= Rs. 1,50,000
(i.e., January 1987 and February 1987):

(a)
Cash Sales: 1/3 rd of Rs. 1,50,000
= Rs.
Less: Profit Margin @ 5% on Sales
= Rs.
50,000
2,500
Cost of goods sold

(b)
47,500
Credit Sales: 2/3 of Rs. 1,50,000
= Rs. 1,00,000
Less: Profit margin @ 10%
= Rs.
10,000
Cost of goods sold
90,000
Total Opening stock at cost as on 1.1.87
1,37,500
(2) Closing Stock as on 31.12.1987:

Total Sales for last month = 1/6th of Rs. 1,50,000
(i.e., December, 1987)
(a) Cash Sales: 1/3rd of Rs. 25,000 = Rs. 8,333
= Rs. 25,000
Toppers Institute
Less: Profit Margin @ 5% on sales
Rs. 417
Rs. 7,916
(b) Credit Sales: 2/3rd of Rs. 25,000
Rs. 16,667
Less: Profit Margin @ 10% on sales
Rs. 1,667
Rs. 15,000
Total Closing Stock at cost
22,916
(3) Total Purchases during 1987:
Rs.
Total Sales during 1987
6,00,000
Less: Profit on goods sold:

5% on. Rs. 2,00,000 = Rs. 10,000
10% on Rs. 4,00,000 = Rs. 40,000
Add: Closing Stock
50,000
Less: Opening Stock

Total Purchases during 1987
5,50,000
22,916
5,72,916
1,37,500
4,35,416
(4) Closing Debtors and Creditors as on 31.12.1987:

(a) Closing Debtors:
Total credit sales for the late two months (i.e. Nov. 1987 & Dec. 1987)
= 1/3rd of Rs. 1,00,000
Rs. 33,333
(b) Closing Creditors;

Total Purchases for the last three months (i.e. October, 1987, Nov. 1987
and Dec. 1987, 1/4 of Rs. 4,35,416
Rs. 1,08,854
Problem 35.
From the following particulars prepare the balance sheet.
Current ratio
Working capital
Rs.4,00,000
Capital block to current assets
3:2
Fixed assets to turnover
1:3
Sales cash/credit
1:2
Debentures/share capital
1:2
Stock velocity
2 months
Creditors velocity
Debtors velocity
3 months
Gross profit ratio
Reserve
2 % of turnover
Net Profit
2 months
25% (to sales)
10% of turnover
[CS Dec. 92]
Solution
Working Notes :
(i) Since Current Ratio is 2,
Current Assets Current Liabilities
Current Assets = 2 Current Liabilities
W.C. = Current Asset Current Liabilities
Current Asset Current Liabilities =
2 Current Liabilities(CA= 2CL) Current Liabilities
Current Liabilities = 4,00,000
Current Assets
(ii) Capital Employed
= 2 Current Liabilities
= 8,00,000
3
2
=2
= 4,00,000
= 4,00,000
= 8,00,000
= 1,20,000
(iii) Since the total liabilities are Rs. 16,00,000 (i.e.Rs.12,00,000 + Rs.4,00,000), the total assets
Toppers Institute
will also be Rs.16,00,000.

Fixed Assets (Rs. 16,00,000 - Rs. 8,00,000)
Rs.
(iv) Turnover (Rs. 8,00,000 3)

Credit Sales
Cash Sales
(v) Debtors velocity
Debtors are therefore (Rs.16,00,000 3/12)
(vi) Gross Profit (Rs.24,00,000 25/100)
Cost of Goods Sold
(vii) Stock turnover
Stock is therefore (Rs. 18,00,000 2/12)
(viii) Creditors velocity
Creditors are therefore (Rs.18,00,000 2/12)
(ix) Cash Balance (Rs.8,00,000 - Rs. 7,00,000)
(x)
8,00,000
Rs. 24,00,000
Rs. 16 00 000
Rs. 8,00,000
3 months
Rs. 4,00,000
Rs. 6,00,000
Rs. 18,00,000
2 months
Rs. 3,00,000
2 months
Rs. 3,00,000
Rs. 1,00,000
Reserves (Rs.24,00,000 2.5/100)
Rs.
Profit (Rs.24,00,000 10/100)

(xi) Block or Fixed Capital
Reserve and Profit
Debentures and Share Capital
Share Capital
60,000
Rs. 2,40,000
Rs. 12,00,000
Rs. 3,00,000
Rs. 9,00,000
Rs. 6,00,000
Debentures
Rs.
3.00,000
Balance Sheet as on.

Liabilities
Share capital
Reserves
Debentures
Sundry Creditors
Other Current liabilities
Rs.
6,00,000
60,000
2,40,000
3,00,000
3,00,000
1,00,000
16,00,000
Assets
Fixed Assets
Rs.
8,00,000
Current Assets :
Debtors
Stock
Cash
4,00,000
3,00,000
1,00,000
16,00,000
Problem 36.
From the following information, prepare a summarised balance sheet as at March 31, 1999:
Stock Turnover ratio
6
Fixed assets turnover ratio
4
Capital turnover ratio
2
Gross profit
20%
2 months
Creditors payment period
73 days
The gross profit was
Rs. 60,000
Closing stock was Rs. 5,000 in excess of the opening stock.
[CS June-93, June-98]
Solution
Balance Sheet as at March 31, 1999
Liabilities
Capital
Creditors
1,50,000
49,000
1,99,000
Rs.
Fixed Assets
Closing Stock
Debtors
Cash (Bal. Fig.)
Assets
Rs.
75,000
42,500
50,000
31,500
1,99,000
Toppers Institute
Working Notes:
1. Gross Profit Ratio
Gross Profit 100

Rs.60,000 100
20 =
or Sales = Rs. 3,00,000
Sales
Sales
Cost of Goods Sold = Sales -Gross Profit

Rs. 3,00,000 - Rs. 60,000
2. Stock Velocity
Cost of goods sold

Average Stock
= Rs. 2,40,000
=
Rs. 2,40,000
=6
Average Stock
Average Stock = (Opening Stock + Closing Stock) / 2
= Rs. 40,000
Opening Stock + Closing Stock = Rs. 40,000 2
= Rs. 80,000
Closing Stock = Opening Stock + 5,000

Opening Stock + Opening Stock + 5,000
= Rs. 80,000
Opening Stock = Rs. 37,500

Closing Stock = Opening Stock + 5,000
3. Capital Turnover Ratio =
= Rs. 42,500
Turnover
Rs. 3,00,000
=2=
or Capital
Capital
Capital
4. Fixed Assets Turnover ratio =
Sales
Rs 3,00,000
=
Fixed Assets
Fixed Assets
Fixed Assets
= Rs. 1,50,000
= 4
= Rs. 75,000
5. Debt collection period = 2 months

Debtors = Sales
6.
2
2
3,00,000 Rs. 50,000
12
12
Creditors' payment period = 73 days

Assuming all purchases to be credit purchases, the amount of credit purchasing is determined as follows .
Cost of Goods Sold
= 2,40,000
Opening Stock + Purchases - Closing Stock
= 2,40,000
2,40,000 = Rs. 37,500 + Purchases - Rs. 42,500
Purchases = Rs. 2,45,000
Creditors = Credit Purchase 73/365 = Rs. 2,45,000 73/365 = Rs. 49,000
Problem 37.
From the following particulars you are required to prepare the balance sheet of a Zinc Company :
Fixed Assets (after writing off 30%)
Rs. 10,50,000
Fixed Assets Turnover Ratio (on Cost of Goods Sold)
2
Finished goods Turnover Ratio (on Cost of Goods Sold)
6
G.P. rate on sales
25%
Net profit (before interest) to sales
8%
Fixed charges cover (debenture interest 7%)
8
1.5 months
Material consumed to sales
30%
Stock of raw materials (in terms of months consumption)
3
Current ratio
2.4
Quick ratio
1.0
Reserve to capital ratio
0.21
Toppers Institute
Solution
Liabilities
Capital (J)
Reserves (J)
Debentures (E)
Current Liabilities (I)
Balance Sheet of Zinc Company as on

Rs.
10,00,000
2,10,000
Rs.
12,10,000
4,00,000
4,00,000
Assets
Fixed Assets
Current Assets : (I)
Debtors (F)
Stocks
Finished goods*
Raw material (H)
Cash (Bal. fig. of
current Assets )
Rs.
Rs.
10,50,000
3,50,000
3,50,000
2,10,000
50,000
20,10,000
9,60,000
20,10,000
Working notes:
A. Cost of sales/Fixed Assets = 2
Fixed Assets = 10.5 lakhs
Cost of sales = Rs. 21,00,000
B. Cost of sales/Finished goods = 6
F.
Debt collection period = 1.5 times
Debtors 28,00,000
21,00,000
6
Finished goods
6 Finished goods = Rs. 21,00,000
* Finished goods = Rs. 3,50,000
C. Gross Profit on sales = 25%
Cost of sales + Profit = Sales
Rs. 21,00,00 + .25X = X
Rs. 21,00,000
Sales =
= Rs. 28,00,000
0.75
Gross profit = 7,00,000
D. Net Profit before interest = Rs. 28,00,000 8%
= Rs. 2,24,000
Net profit before interest
=8
Interest
Interest charges = Rs. 28,000
E. 7% interest charges = Rs. 28,000
Rs. 28,000
Debentures
= = Rs. 4,00,000
7%
1.5
Rs.3,50,000
12
G. Material consumed to sales is 30%..

Material consumed = Rs. 28,00,000 30%
= Rs. 8,40,000
H. Stock of raw material = Rs. 8,40,000 3 / 12
= Rs. 2,10,000
I.
J.
Current Assest
= 2.4 times
Liquid Assets
= 1 times
Value of Stock = 2.4 1.0 = 1.4

Finished goods + Raw material
= Rs. 3,50,000 + Rs. 2,10,000 = 1.4
Current assets = Rs. 9,60,000
Current Liabilities = Rs. 4,00,000
Reserves to capital = 0.21
If capital is 1.00 then Reserve = .21
If net worth is Rs. 12,10,000
then Capital = Rs. 10,00,000
Reserve = Rs. 2,10,000
Problem 38.
From the following information relating to Wise Limited you are required to prepare its summarised Balance Sheet .
Current ratio
2.5
Acid test ratio
1.5
Gross profit/sales ratio
0.2
Net working capital/Net worth ratio
0.3
Sales / Net Fixed Assets ratio
2.0
Sales/Net worth ratio
1.5
Sales/ Debtors ratio
6.0
Reserves/Capital ratio
1.0
Stock velocity
2 months.
Paid up share capital
Rs. 10 lakhs
Net worth /long term loan
20.0
[CA Final]
Solution
Liabilities
Paid-up Share Capital
Reserves
Long-term LoansCurrent Liabilities
Total
Wise Ltd.
Balance Sheet as on
Rs.
10
10
1
4
25
Assets
Fixed Assets
Stock
Debtors
Total
Rs.
15
4
5
1
25
Toppers Institute
Problem 39.
From the following information and Ratios prepare the profit and Loss Account for the year ended 31st March. 1994;
and the Balance Sheet as on that date of M/s Stan & Co. an export company.
Current Assets to Stock
3:2
Current Ratio
3.00
Acid Test Ratio
1.00
Financial Leverage
2.20
Earnings per Share (each of Rs. 10 )
10.00
Book Value per Share (Rs.)
40.00
5.00
Fixed Assets Turnover Ratio
1.20
External Liabilities to Net Worth
2.75
Net Working Capital
Net Profit to Sales
10%
Variable Cost
60%
Longterm Loan Interest
12%
Taxation
NIL
Rs. 10.00 lakhs
Ave. Collect. Period (assume 360 days in the year) 30 days
Solution
[CA Inter Nov. 94]
M/s. Stan & Co.

Profit and Loss Account for the year ended 31st March, 94
Rs.
50,00,000
30,00,000
20,00,000
9,00,000
11,00,000
6,00,000
5,00,000
Nil
5,00,000
Sales
Less: Variable costs
Less: Fixed costs (excluding interest)
Earnings before interest and taxes
Less: Interest
Earnings before tax
Less: Tax
Profit after tax
Balance Sheet as at 31st March, 1994

Rs.
Sources
Shareholder's Funds
Long term Liabilities
Applications
Fixed Assets
Current Assets:
Stock
Debtors
Others
Net Current Assets
Investments (balancing figure)
Rs.
20,00,000
50,00,000
70,00,000
41,66,667
10,00,000
4,16,667
83,333
15,00,000
5,00,000
10,00,000
18,33,333
70,00,000
Problem 40.
From the following information, prepare the projected trading and profit and Loss
year ending December 31, 1985 and the projected Balance Sheet as on that date:
Ratio of Gross Profit
Creditors Velocity
Proprietary Ratio(Fixed Assets to Capital Employed)
General Reserve and profit and Loss to Equity Capital
Net Profit to Equity Capital
Account for the next financial

[CA Final]
25%
5 times
3 months
80%
25%
10%
Toppers Institute
Average Debt Collection Period

2 months
Current Ratio
2
Capital Gearing Ratio (Pref. Shares and debentures to Equity)
30%
Preference Share Capital to Debentures
2
Cost of Sales consists of 40% for materials and balance for Wages and Overheads.
Gross Profit
Rs. 6,00,000
Problem 41.
The balance sheet of Major Ltd. as on 31st March, 1998 is as follows:
Liabilities
Rs.
Assets
Share Capital:
Fixed assets:
2,000 eq. sh. of Rs. 100 each fully paid 2,00,000
Cost
7% preference shares
1,00,000
Less: Depreciation
General reserve
60,000
Current assets:
12% debenture
60,000
Stock
Current liabilities:
Debtors
Sundry Creditors
80,000
Bank
5,00,000
Rs.
5,00,000
1,60,000
3,40,000
60,000
80,000
20,000
5,00,000
The company wishes to forecast balance sheet as on 31st March, 1999. The following additional particulars are
available:
(i)
Fixed assets costing Rs. 1,00,000 have been installed on 1st April, 1998 but the payment will be made on
31st March, 1999.
(ii)
The fixed assets turnover ratio on the basis of gross value of fixed assets would be 1.5.
(iii)
The stock turnover ratio would be 14.4 (calculated on the basis of average stock).
(iv)
The break up of cost and profit would be as under:
Material
40%
Labour
25%
Manufacturing expenses
10%
Office and selling expenses
10%
Depreciation
5%
Profit
10%
100%
The profit is subject to interest and taxation at 50%

(v)
Debtors would be 1/9 of sales
(vi)
Creditors would be 1/5 of material consumed.
(vii)
In March, 1999, a dividend @ 10% on equity capital would be paid.
(viii)
12% debentures for Rs. 25, 000 have been issued on 1st April, 1998.
Prepare the forecast balance sheet as on 31st March, 1999 and show the following resultant ratios:
(a) Current ratio; (b) Fixed assets/net worth ratio; and (b) Debt equity ratio.
Solution
Working Notes:
(1) Fixed assets at cost
= Rs. 5,00,000 + Rs. 1,00,000
(2) Fixed assets turnover ratio
= Rs. 6,00,000
Sales
= 1.5 (by Question)
Fixed assets
[CS June-90]
Toppers Institute
= Rs. 6,00,000 1.5 = Rs. 9,00,000
Sales
(3) Average stock
Cost of goods sold

7,20,000
=
= Rs. 50,000
14.40
Stock turnover ratio
(4) Materials = 40% of sales
= 3,60,000
Labour
25%
= 2,25,000
Mfg exp.
10%
= 90,000
Depreciation
5%
= 45,000
Cost of goods sold
= 7,20,000
office and selling exp. 10%
= 90,000
Cost of sales or total cost
= 8,10,000
Profit = 10% of sales

Sales
= 90,000
= 9,00,000
Rs.
To interests on Debentures
(Rs. 7,200 + Rs. 3,000)
To Provision for taxation
(50% of Rs. 90,000 - Rs. 10,200)
To Net Profit
Rs.
10,200
By EBIT
(Earning before
Interest & tax)
39,900
39,900
90,000
To Preference Dividend
(7.5% of Rs. 1,00,000)
To Equity Dividend
(10% on Rs. 2,00,000)
To Balance c/d to B/s
90,000
______
90,000
7,500
By Net profit
39,900
20,000
12,400
39,900
39,900
(5) Debtors
Rs.9,00,000
9
Rs. 1,00,000
(6) Creditors
Further data:Closing stock on 31-3-99
Net profit after tax
Fund from Operations
Rs. 3,60,000/5
= Rs. 72,000
=
=
=
(Rs. 50,000 2) Rs. 60,000 = Rs. 40,000

Rs. 39,900 + Depreciation = Rs. 39,900 + Rs. 45,000
Rs. 84,900
Bank A/c
To Balance b/d
To Stock Decrease
To Debentures
To Funds from operations
To Provision to Income for taxation
(Increase in liability due to
nonpayment)
Rs.
20,000
20,000
25,000
84,900
39,900
_______
1,89,800
By Debtors increase
By Creditors decrease
By Purchase of fixed assets
By Preference dividend
By Equity dividend
By Balance c/d
Rs.
20,000
8,000
1,00,000
7,500
20,000
34,300
1,89,800
Toppers Institute
Forecast Balance sheet as on 31.3.1999

Liabilities
Share capital:
2,000 Equity shares of
Rs. 100 each fully paid
7 % preference share
General reserve
P & L A/C
Net Worth
12% Debentures
Current liabilities:
Sundry creditors
Provision for taxation
Rs.
2,00,000
1,00,000
60,000
12,400
3,72,400
85,000
Assets
Fixed Assets:
Actual cost
6,00,000
Less: Depreciation
(1,60,000 + 45,000) 2,05,000
Current Assets:
Stock
Debtors
Cash at Bank
Rs.
3,95,000
40,000
1,00,000
34,300
72,000
39,900
5,69,300
5,69,300
Calculation of Ratios:
(a)
Calculation of Current Assets and Current Liabilities
Current Assets
= Stock + Debtors + Bank

= Rs. 40,000 + Rs. 1,00,000 + Rs. 34,300 = Rs.1,74,300
Current Liabilities
= Sundry Creditors + provision for tax

= Rs. 72,000 + Rs. 39,900
Current Ratio
Current Assets
Rs.1,74,300
1.56 : 1
Rs.1,11,900
(b) Fixed Assets / Net Worth Ratio =
(c) Debt Equity Ratio =
= Rs.1,11,900
Rs.3,95,000
1.06 : 1
Rs.3,72,400
Debt
Rs.85,000
Rs.85,000
0.19 : 1
Equity Debt Rs.3,72,400 Rs.85,000 Rs.4,57,400
Problem 42.
Following is the abridged balance sheet of the Everest Co. Ltd. As at 31st March, 1996:
Paid up share Capital
Current Liabilities
Rs.
5,00,000
85,000
2,00,000
Rs.
4,00,000
Free hold Property

Plant & Machinery
Depreciation
Stocks
Debtors
Bank
2,50,000
75,000
1,75,000
1,05,000
1,00,000
5,000
7,85,000
7,85,000
From the following information you are required to prepare profit and loss account and balance sheet as at 31st
March, 1997:
(a) The composition of the total of the Liabilities side of the companys balance sheet as 31st March, 1997 (the paid
up share capital remaining the same as at 31st March, 1996) was :
Share capital
50 per cent
Profit and loss A/c 15 per cent
7 per cent debentures
10 per cent
Creditors
st
th
25 per cent
The Debentures were issued on 1 April, 1996, interest being paid on 30 September 1996 and 31st March, 1997.
Toppers Institute

st
(b) During the year ended on 31 March 1997. Addition plant and machinery had been bought and a further Rs.
25,000 depreciation written off. Freehold property remained unchanged. The total fixed assets then constituted
60 per cent of total fixed and current assets.
(c) The current ratio was 1.6 : 1. The quick assets ratio was 1: 1
(d) The debtors (fourfifths of the quick assets) to sales ratio revealed a credit period of two months.
(e) Gross profit was at the rate of 15 per cent of selling price and return on Net worth as at 31st March, 1997 was
10 per cent. Ignore taxation.
Solution
Balance Sheet as at 31st March, 1996
Liabilities
Share Capital:
Reserves & Surplus
Profit & Loss A/c
Rs.
5,00,000
7% Debentures
1,00,000
Creditors
Dr.
1,50,000
2,50,000
________
10,00,000
Assets
Fixed Assets :
Freehold Property
Plant and Machinery
Less: Depreciation
Rs.
3,00,000
1,00,000
Current Assets:
Stock
Debtors
Bank
1,50,000
2,00,000
50,000
4,00,000
Profit and Loss Account for the year ended March 31, 1996
Particulars
To Opening stock
To Purchases (Balance figure)
To Gross Profit
To Expenses (Balance figure)
To Debenture Interest
To Depreciation
To Net Profit
Rs.
1,05,000
10,65,000
1,80,000
13,50,000
83,000
7,000
25,000
65,000
1,80,000
2,00,000
6,00,000
4,00,000
10,00,000
Cr.
Particulars
By Sales
By Closing Stock
by Gross Profit b/d
(i)
Total of Liabilities Side = Rs. 5,00,000/ .50 = Rs. 10,00,000.
(ii)
Profit & Loss A/c (Cr. Balance ) = 15% of Rs. 10,00,000 = Rs. 1,50,000.
(iii)
7% Debentures = 10% of Rs. 10,00,000 = Rs. 1,00,000.
(iv)
Creditors = 25% of Rs. 10,00,000 = Rs. 2,50,000.
(v)
Net fixed Assets = 60% of Rs. 10,00,000 = Rs. 6,00,000.
(vi)
Net Plant & Machinery = Rs. 6,00,000 Rs. 4,00,000 = Rs. 2,00,000.
(vii)
Gross Plant & Machinery = Rs. 2,00,000 + (Rs. 75,000 + Rs. 25,000) = Rs. 3,00,000.
(viii)
Current Assets = Rs. 2,50,000 1.6 = Rs. 4,00,000.
(ix)
Liquid Assets = RS. 2,50,000 1 = Rs. 2,50,000
(x)
Stock = Rs. 4,00,000- Rs. 2,50,000 = Rs. 1,50,00.
(xi)
Debtors = Rs. 2,50,000 4 5 = Rs. 2,00,000.
(xii)
Sales = Rs. 2,00,000 12/2 = Rs. 12,00,000.
(xiii)
Gross Profit = 15 % of Rs. 12,00,000 = Rs. 1,80,000
(xiv)
Net Worth = Rs. 5,0,000 + Rs. 1,50,000 = Rs. 6,50,000.
(xv)
Net Profit = 10% of Rs. 6,50,000 = Rs. 65,000.
Rs.
12,00,000
1,50,000
________
13,50,000
1,80,000
________
1,80,000
Toppers Institute
THEORETICAL QUESTIONS
Q.1
Discuss any three ratios computed for investment analysis.

[Nov-2004] 3 Marks
Answer
The three ratios computed for investment analysis are as follows:
Q.2
(i)
Equity to Total Funds Ratio
(ii)
Debt Equity Ratio
(iii)
Capital Gearing Ratio
(iv)
Fixed Assets to Long Term Fund Ratio
(v)
Proprietary Ratio
Shareholder's Funds
Total Funds
Debt
Equity
Fixed Charge Bearing Capital
Equity Shareholder's Funds
Fixed Assets
Long Term Fund
Proprietary Funds
Total Assets.
Note:
Proprietary Funds for B-5 can be computed through two ways from the Balance Sheet:
Liability Route : [Equity Share Capital + Preference Share Capital + Reserves & Surplus] Less: Accumulated
losses
Assets Route: (Net Fixed Assets + Net Working Capital] Less: Long Term Liabilities.
Discuss the financial ratios for evaluating company performance on operating efficiency and liquidity position
aspects.
Answer
[Nov-2006] 4 Marks
The financial ratios for evaluating company performance on operating efficiency and liquidity position aspects are
discussed as follows:
Evaluation of Operating Efficiency: Ratios throw light on the degree of efficiency in the management andutilisation of assets
and resources. These are indicated by activity or performance or turnover ratios e.g. Stock Turnover Ratio, Debtors
Turnover Ratio, Fixed Assets Turnover Ratio. These indicate the ability of the firm togenerate revenue (sales) per
rupee of investment in its assets.
Following are example the example of Operating Efficiency ratio/Activity based Ratios:
(i)
Capital Turnover Ratio
=
Sales
Capital Employed
(ii)
Fixed Assets Turnover Ratio
=
Turnover
Fixed Assets.
(iii)
Working Capital Turnover Ratio
=
Turnover
Net Working Capital
(iv)
Finished goods or Stock Turnover Ratio =
Cost of Goods sold
Average stock
(v)
Raw Material Turnover ratio
=
Cost of Material Consumed
Average stock of RM
Toppers Institute
(vi)
Debtors Turnover ratio
(vii)
Creditor Turnover ratio
Credit Sales
Average A/c Receivable
Credit Purchases
Average A/c Payable
Note:
The turnover ratios can also be computed in terms of days as 365 / Turnover Ratio. For example, Number of days
average stock is held = 365 / Stock Turnover Ratio.
Evaluation of Profitability: Profitability ratios i.e. Gross Profit Ratio, Operating Profit Ratio, Net Profit Ratio are basic
indicators of the profitability of the firm. In addition, various profitability indicators like Return on Capital Employed
(ROCE), Earnings per share (EPS), Return on Assets (ROA) etc. are used to assess the financial performance.
Following are example the example of Profitability based Ratios:
Q.3
(i)
Gross Profit Ratio
(ii)
Operating Profit ratio
(iii)
Net Profit Ratio
Gross Profit
Sales
Operating Profit
Sales
Net Profit
Sales
Explain the need of debt service coverage ratio.

[May-2007] 2 Marks
Or
Q.
How is Debt service coverage ration calculated? What is its significance?

[May-2009] 2 Marks
Answer
Debt service coverage ratio is the vital indicator to the lender to assess the extent of ability of the borrower to service
the loan in regard to timely payment of interest and repayment of principal amount. It shows whether the business is
earning sufficient profits to pay not only the interest charges, but also the installment due of the principal amount.
Debt service coverage ratio of 2:1 is considered ideal by the financial institutions. This ratio will enable the lender to
take correct view of the borrowers repayment capacity.
The ratio is calculated as follows:
Debt service coverage ratio =
Earning available for debt service*

Interest on loan+Instalment of the principal
*Where earning available for Debt service = Profit after tax + Depreciation+ Interest on Loan
Q.4 Diagrammatically present the DU PONT CHART to calculate return on equity.

[May-2007] 3 Marks
Answer
The financial ratios in themselves are not useful to assess the performance of a company in a given year. To interpret
the financial health of a company it is crucial to analyse and compare the ratios for a given year vis-a-vis the previous
financial years and the industry ratios. The DU-Pant company of USA pioneered a system of financial analysis which
has received widespread recognition and acceptance. The usefulness of DU-Pant chart lies in the fact that it presents
the overall picture of the performance of a firm and enables the management to identify the factors which have a
bearing on its profitability, Return on investment (ROI) represents the earning power of the company. ROI depends on
two ratios: (a) Net Profit Ratio and (b) Capital Turnover Ratio. A change in any of these ratios will change the firm's
earning power. These two ratios are affected by many factors. A change in any of these factors will change these ratios
also. The analysis has been presented by DU- Pont Company of U.S.A. through a chart popularly known as DU-Pont
Chart. The chart has been presented below:
Toppers Institute
DU PONT CONTROL CHART

Net Profit
Cost of
Goods sold
Sale
Net Profit
Ratio
+
Expenses
Sales
Return
on
Equity
(ROE)
Adm., Selling
and Distribution
Expenses
X
Working
Capital
Sales
Capital
Turnover
Current
Assets
Capital
Employed
+
Fixed Assets
Current
Liabilities
The chart shows that return on capital employed is affected by a number of factors. Any change in these factors will
affect the return on capital employed. For example, if the cast of gods said increases, without any responding
increase in the selling price of the goods, the net profit would decrease and consequently ROI would also decrease.
Similarly, if there is, increase in working capital, the total capital employed would increase and, before, in the
absence of any increase in the net profit, ROI would decrease.
The chart helps the management in concentrating attention an different farces affecting profit. An increase in fit can
be achieved either by ",are effective use of capital which will result in a higher turnover ratio or better les efforts
which will result in a higher net profit ratio.
Q.5 How return on capital employed is calculated? What is its significance?

[Nov-2008] 2 Marks
Answer
Return on capital employed =
Total Earnings
Total Capital Employed
Total Earning:
Profits after taxes
Add: Taxation
Add: Interest
Add: Non-trading expenses
Less: Non-operating incomes like rents, interest and dividends
Total Earning
Total Capital Employed:
Assets Route:
Net Fixed Assets (including intangible assets like patents,
but not fictitious assets like miscellaneous expenditure not w/off)
+ Net working Capital
Liability Route:
+ Preference Share Capital
xxx
xxx
xxx
xxx
(xxx)
xxx
xxx
xxx
___
xxx
xxx
xxx
Toppers Institute
+ Debentures and Long Term Loans

xxx
Less: Accumulated Losses
(xxx)
Less: Non-Trade Investments
(xxx)
Its significance in financial Analysis:
Overall profitability of the business for the capital employed; indicates the return on the total capital Employed
Comparison of ROCE with rate of interest of debt leads to financial leverage. If ROCE > interest Rate, use of debt
funds is Justified.
Q.6 What is Quick ratio? What does it signify?

[Nov-2008] 2 Marks
Answer
Quick Ratio or Acid
Quick Assets
Quick Liabilities
Quick Assets
=
Current Assets Less : Inventories Less: Prepaid Expenses
Quick Liabilities
=
Current Liabilities Less: Bank Overdraft Less: Cash Credit
Significance of Quick Ratio on Financial Analysis: Ability to meet immediate test ratio liabilities. Ideal Ratio is 1: 33:
1
Q.7
What do you mean by Stock turnover Ratio and Gearing ratio?

[Nov-2008] 3 Marks
Answer
Stock turnover Ratio: It establishes the relationship between the cost of goods sold during the year and average inventory
held during the year.
It calculated as follows:
Stock turnover Ratio =
Sales/Turnover
Average inventory
In above formula:
Average Inventory =
Opening Stock+Closing Stock

2
This ratio indicates that how fat inventory is sold.

A high ratio is good from the view point of liquidity and a low ratio would indicate that inventory that inventory is
not sold and remains in godown for a long time.
Note: Turnover is generally taken as cost of goods sold.
Gearing ratio: It is also called as Capital Gearing Ratio. It shows the proportion of fixed interest (dividend) bearing
capital to funds belonging to equity shareholders funds.
It calculated as follows:
Capital Gearing Ratio =
Preference capital+Debentures+Longterm loans

Eqity share Capital + Reserves and surplus - losses
This ratio helps to judge the long term solvency position of a firm.
Q.8
Discuss the composition of Return on Equity (ROI) using the DuPont model.
[May-2009] 3 Marks
Answer
Composition of Return on Equity using the DuPont Model
There are three components in the computation of return on equity using the traditional DuPont the net profit margin,
asset turnover, and the equity multiplier. By examining each input individually, the sources of a companys return on
equity can be discovered and compared to its competitors.
Toppers Institute
Net Profit Margin: The net profit margin is simply the after-tax profit a company generates for each rupee of
revenue.
(i)
Net profit margin = Net income + Revenue

Net profit margin is a safety cushion; the lower the margin, lesser the room for error.
(ii)
Asset Turnover: The asset turnover ratio is a measures of how effectively a company converts its assets into
sales. It is calculated as follows:
Asset Turnover = Revenue + Assets
The asset turnover ratio tends to be inversely related to the net profit margin; i.e., the higher the net profit
margin, the lower the asset turnover.
(iii)
Equity Multiplier: It is possible for a company with terrible sales and margins to take on excessive debt and
artificially increase its return on equity. The equity multiplier, a measure of financial leverage, allows the
investor to see what portion of the return on equity is the result of debt. The equity multiplier is calculated as
follows:
Equity Multiplier = Assets + Shareholders Equity
Computation of Return on Equity

To calculate the return on equity using the DuPont model, simply multiply the three components (net profit margin,
asset turnover, and equity multiplier.)
Return on Equity = Net profit margin Asset turnover Equity multiplier.
Q.9
Explain briefly the limitations of Financial ratios.

[May 2009] 2 Marks
Answer
Limitations of Financial Ratios
The limitations of financial ratios are listed below:
(a) Diversified product lines: Many businesses operate a large number of divisions in quite different industries.
In such cases, ratios calculated on the basis of Aggregate data cannot be used for inter-firm comparisons.
(b)
Financial data are badly distorted by inflection: Historical cost values may be Substantially different from
true values. Such distortions of financial data are also carried in the financial ratios.
(c) Seasonal factors may also influence financial data.

(d) To give a good shape to the popularly used financial ratios (like current ratio, debt-equity ratios, etc.): The
business may make some year-end adjustments. Such window dressing can change the character of financial
ratios which would be different had there been no such change.
(e) Differences in accounting policies and accounting period: It can make the accounting data of two firms noncomparable as also the accounting ratios.
(f)
There is no standard set of ratios against which a firms ratios can be compared:
(g) Sometimes a firms ratios are compared with the industry average. But if a firm desires to be above the
average, then industry average becomes a low standard. On the other hand, for a below average firm, industry
averages become too high a standard to achieve.
(h) It is very difficult to generalize whether a particular ratio is good or bad: For example, a low current ratio may
be said bad from the point of view of low. Liquidity, but a high current ratio may not be good as this may
result from inefficient working capital management.
(i)
Financial ratios are inter-related, not independent: Viewed in isolation one ratio may highlight efficiency. But
when considered as a set of ratios they may speak differently. Such interdependence among the ratios can be
taken of thoughts multivariate analysis.
(Note: Students to write any four limitations)
Toppers Institute
PRACTICAL PROBLEMS
Q.10
From the following information, prepare a summarised Balance Sheet as at 31st March, 2002:
Working Capital
Bank overdraft
Fixed Assets to Proprietory ratio
Reserves and Surplus
Current ratio
Liquid ratio
Rs. 2,40,000
Rs. 40,000
0.75
Rs. 1,60,000
2.5
1.5
[Nov. 2002] 6 Marks
Solution
Working Notes:
1. Current assets and Current liabilities computation:
Current assets
Current liabilitie s
= 2.5 k and Current liabilities = k
Or, working capital
= (Current assets- Current liabilities)
Or, Rs. 2,40,000
= k (2.5 - 1) = 1.5 k
Or,
= Rs. 1,60,000
Current liabilities
= Rs. 1,60,000
= Rs. l,60,000 2.5 = Rs. 4,00,000
Computation of stock
Liquid ratio
Or, 1.5
Or, 1.5 Rs. 1,60,000
Or,
Stock
2.
2.5 Current assets Current liabilitie s

or
k (say)
1
2.5
1
Or, Current assets
Current assets
1.
Liquied assets
Current liabilitie s
Current assets - Stock
=
Rs.1,60,000
=
= Rs. 4,00,000 Stock

= Rs. 1,60,000
Computation of Proprietary fund; Fixed assets; Capital and Sundry Creditor

Fixed assets
Proprietary ratio
= = 0.75
Proprietary fund
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
Toppers Institute
Construction of Balance sheet

Capital
Reserves & Surplus
Bank overdraft
Sundry creditors
Q.11
Amount Rs.
8,00,000
1,60,000
40,000
1,20,000
11,20,000
Amount Rs.
7,20,000
1,00,000
2,40,000
Fixed assets
Stock
Current assets
11,20,000
The Financial statements of Excel AMP Graphics Limited are as under:

Balance Sheet
As at 31 December, 2001
2001
Sources of Funds:
Shareholders Funds
Shares Capital
Reserves & Surplus
1,121
8,950
Loan Funds:
Secured Loans
Finance lease obligations
Unsecured loans
74
171
10,316
Applications of Funds:
Fixed Assets
Gross Block
Less: Depreciation
Net Block
Capital Work-in-progress
6,667
(3,150)
3,517
27
Investments
Current Assets, Loans & Advances :
Inventories
Sundry debtors
Cash & Bank Balances
Loans & Advances
Less: Current liabilities & Provisions
Current liabilities
Provisions
(Rs. in crores)
2000
931
7,999
10,071
8,930
259
115
245
9,304
5,747
2,561
3,186
28
3,544
3,214
288
222
2,709
9,468
3,206
2,043
17,426
2,540
9,428
662
1,712
14,342
10,109
513
10,622
7,902
572
8,474
5,868
Net Current Assets

Net Deferred Tax Liability
10,316
6,804
(320)
9,304
Profit and Loss Account

For the year ended 31st December, 2001
(Rs. in crores)
2001
Income:
Sales & Services
Other Income
A
Expenditure:
Cost of Materials
Personnel Expenses
Other Expenses
Depreciation
Less: Transfer from revaluation reserve
Interest
419
7
2000
23,436
320
23,756
17,849
306
18,155
15,179
2,543
3,546
10,996
2,293
2,815
412
164
383
6
377
88
Toppers Institute

B
21,844
1,912
450
(6)
1,468
Profit before Tax (A-B)

Provision for Tax: Current Tax
Deferred Tax
Profit after Tax
16,569
1,586
371
1,215
Required:
(a)
Compute and analyse the return on capital employed (ROCE) in a Du-Pont control chart framework
(b)
Compute and analyse the average inventory holding period and average collection period.
(c)
Compute and analyse the return on equity (ROE) by bringing out clearly the impact of financial
leverage.
[Nov. 2003] (8+4+4=16 Marks)
Solution
(a) Working note:
Computation of Cost of goods sold (COGS), Operating profit before depreciation, interest & tax (OPBDIT),
Operating profit before interest and tax (OPBIT), Profit before interest and tax (PBIT), Profit before tax (PBT) and
Profit after tax (PAT)
(Rs. in crores)
Year
2001
2000
Cost of goods sold (COGS)
21,268
16104
(Material consumed + Personnel expenses + Other expenses)
Operating profit before depreciation, interest and tax (OPBDIT)
2,168
1,745
(Income from sales & service - COGS)
Operating profit before interest and tax (OPBIT)
1,756
1,368
(OPDIT - depreciation)
Profit before interest and tax (PBIT)
2,076
1,674
(OPBIT + Other incomes)
Profit before tax (PBT)
1,912
1,586
(PBIT - Interest)
Profit after tax (P AT)
1,465
1,215
(PBT - Tax)
Return on capital employed (ROCE): (Before interest & tax)
Operating profits before interest and tax

Sales
Sales
Capital employed
=
OPBIT
Capital employed
Capital employed = (Balance sheet total- Capital WIP - Investments - Loans & advances)
Year
2001
22.07%
ROCE
(Refer to working note)
Operating profit margin
(Refer to working note)
Material consumed/ Sales
Personnel expenses/ S ales
Other expenses/ Sales
2000
18.63%
Rs.1,756
100
Rs.23,436
7.49%
Rs.1,756
100
Rs.23,436
64.77%
10.85%
15.13%
7.66%
Rs.1,368
100
Rs.17,849
61.61%
12.85%
15.77%
Toppers Institute
Depreciation/ Sales
(b)
1.76%
2.11%
Computation and analysis of average inventory holding period and average collection period:
(Rs.' in crores)
Year
2001
2000
1.
Inventory turnover ratio:

(Material consumed/ Closing inventory)
2.
Average inventory turnover period:

(360 days / Inventory turnover ratio)
3.
Receivables turnover ratio:

(Net credit sales / Closing Sundry debtors)
4.
Average collection period:

(360 days / Receivables turnover ratio)
(c)
ROE =
5.6
(Rs.15,179/Rs.2,709)
4.33
(Rs.10,996/Rs.2,540)
64 days
83 days
2.48
(Rs.23,436/Rs.9,468)
1.89
(Rs.17,849/Rs.9,428)
145 days
190 days
PAT
Equity Fund
2001
1,468 Cr.
10,071 Cr.
14.58 %
2000
1,215Cr.
8,930 Cr
13.61%
ROA (Post tax)

{(ROCE * (1 - .35)}
14.34%
12.11 %
Tax I PBT
23.22%
2.37%
D
ROE = ROA +
{ (ROA - i * ( 1 - Tc )}
E
Loan funds / Total funds
23.39%
4.02%
Shareholders Funds I Total funds
97.63%
95.98%
ROE is marginally better than ROA, as debt ratio employed by the company is minimal.
Q.12
With the help of the following information complete the Balance Sheet of MNOP Ltd.:
Rs. 1,00,000
The relevant ratios of the company are as follows:

Current debt to total debt
.40
Total debt to owner's equity
.60
Fixed assets to owner's equity
.60
Total assets turnover
2 Times
Inventory turnover
8 Times
[May 2005] 7 Marks
Solution
Particulars
Current debt
Long term debt
In the Books of MNOP LTD

Balance Sheet
Rs.
1,00,000
24,000
36,000
1,60,000
Assets
Fixed assets
Inventory
Cash
Rs.
60,000
40,000
60,000
1,60,000
Toppers Institute
Working Notes:
1. Total debt = 0.60 Owners equity = 0.60 Rs 1,00,000 = Rs 60,000
2. Current debt to total debt = 0.40, hence current debt
= 0.40 60,000
= Rs. 24,000
3. Fixed assets = 0.60 Owners equity = 0.60 Rs. 1,00,000 Rs.60,000
4. Total equity = Total debt + Owners equity = Rs.60,000 + 1,00,000
= Rs.1,60,000
5. Total assets consisting of fixed assets and current assets must be equal to
Rs.1,60,000 hence, current assets should be Rs 1,00,000.
6. Total assets turnover = 2 Times: Inventory turnover = 8 Times
Inventory
2 1

Total Assets 8 4
Inventory
1
Rs.1, 60, 000 4

Or, 4 Inventory
= 1 Rs.1,60,000
= Rs.1,60,000
Or, Inventory
Rs.1,60,000
4
= Rs.40,000
Balance on Assets side
Cash
Q.13
= Rs.1,60,000 Rs. 60,000 Rs. 40,000

= Rs.60,000
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
Inventory turnover
Average collection period (a 360 days year)
Current ratio
Long-term Debt of Equity
..
..
..
Creditors
Long-term debt
Shareholders' funds
Rs. 54,000
Rs. 6,00,000
20%
80%
0.3 times
4 times
20 days
1.8
40%
Balance Sheet
Cash
Debtors
Inventory
Fixed assets
..
..
..
[Nov. 2005] 12 Marks
Solution
Liabilities
Creditors
Long term debts
Share holders fund
Balance Sheet
Amount (Rs.)
60,000
2,40,000
6,00,000
9,00,000
Working Notes:
1.
Gross Profit :
GP margin
GP
Sales
=
=
=
20%
Rs.54,000
Rs.2,70,000
Assets
Cash
Debtors
Inventory
Fixed Assets
Amount (Rs.)
42,000
12,000
54,000
7,92,000
4,00,000
Toppers Institute
2.
Credit Sales :
Cr. Sales
=
=
=
80% of total sales

2,70,000 80%
Rs.2,16,000.
Total Assets Turnover
Sales
0.3 times
Total Assets
Total Assets
2,70,000
Rs.9,00,000
0.3
3.
Total Assets :
4.
Inventory Turnover :
Inventory Turnover
Cash
100 0.3 times
Inventory
2,70,000-54,000
Inventory
Inventory
5.
Debtors :
Rs.54,000
Debtors
Credit Sales
20 days
360 days
Rs.2,16,000
20
360
Rs.12,000.
40%
40% of equity
6,00,000 40%
Rs.2,40,000.
6.
Creditors:
Long Term Debt

equity
Long term debt
Creditors + Long term debt + Shareholders funds = Rs.9,00,000
Creditors + Rs.2,40,000 + Rs. 6,00,000 = Rs. 9,00,000
Creditors = Rs. 60,000.
7. Current Ratio Cash :

Current Ratio
Current Assets
Current Liabilities
1.8
Debtors+Inventory + cash
Creditors
1.8
12,000 + 54,000 + Cash

60,000
1,08,000
66,000 + Cash
Toppers Institute
Cash
Rs.42,000
8. Fixed Assets: It is the balancing figure on assets side.
Q.14
JKL Limited has the following Balance Sheets as on March 31, 2006 and March 31, 2005:
Balance Sheet
March 31, 2006
Sources of Funds:
Shareholders Funds
Loan Funds
(Rs. in Lakh)
March 31, 2005
2,377
3,570
5,947
1,472
3,083
4,555
Applications of Funds:
Fixed Assets
Cash and bank
Debtors
Stock
3,466
489
1,495
2,867
1,567
(3,937)
5,947
The Income Statement of the JKL Ltd. for the year ended is as follows:
Sales
Less: Cost of Goods sold
Gross Profit
Less: Selling, General and Administrative exps.
Earnings before Interest and Tax (EBIT)
Interest Expense
Profits before Tax
Tax
Profits after Tax (PAT)
2,900
470
1,168
2,407
1,404
(3,794)
4,555
March 31, 2006

22,165
20,860
1,305
1,135
170
113
57
23
34
(Rs. in Lakh)
March 31, 2005
13,882
12,544
1,338
752
586
105
481
192
289
10 Marks
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.
[May 2006] 2 Marks
Solution
(i)
Computation of Ratios
Particulars
(a) Inventory Turnover Ratio
Cost of goods sold
Closing stock
(b) Financial Leverage=
EBIT
EBT
(c) Return on Investment (ROI)
March 31, 2006

20,860
7.28
2,867
March 31, 2005

12, 544
5.21
2, 407
170
2.98
57
568
1.22
481
170
100 2.86%
5, 947
586
100 12.86%
4, 555
Toppers Institute
EBIT
100
Capital employed
(d) Return on Equity

PAT
100
Net worth
(e) Average Collection Period

Debtors
365
Credit sales
(ii)
34
100 1.43%
2, 377
289
100 19.63%
1, 472
1, 495
365 24.6
22,165
1,168
365 30.7
13,882
Brief Comment on the Financial Position of JKL Ltd.:

The inventory turnover ratio is increased from 5.21 times to 7.28 times. This indicates the reduction in
investment of stock and increase in sale turnover with reduced stocks.
The financial leverage of the company is increased from 1.22 times to 2.98 times, which indicates the
lower the cushion for paying interest on borrowings. The increase in ratio warns the increase in risk as to
over gearing, which constitutes a strain on profits.
There is a steep fall in ROI from 12.86% to 2.86%, this may be due to increase in finances from fresh
issue of share and loan funds for expansion, modernization or new investment proposals, and increase in
sales has not resulted in increase of companys 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 increase in sale and reduction in investment in debtors balances has resulted in reduction of average
collection period from 30.7 days to 24.6 days.
Q.15
From the informations given below calculate the amount of Fixed assets and Proprietor's fund.
Ratio of fixed assets to proprietors fund = 0.75
Net working capital = Rs. 6,00,000.
Solution
[Nov. 2009] 2 Marks
Calculation of Fixed Assets and Proprietors Fund

Since Ratio of Fixed Assets to proprietors Fund =
0.7
Therefore, Fixed Assets
= 0.75Proprietors Fund
Net Working Capital
= 0.25 Proprietors Fund
6, 00,000
=0.25 Proprietors Fund
Therefore, Proprietors Fund
Proprietors Fund = Rs. 24, 00,000

Since, Fixed Assets
= 0.75 Proprietors Fund
Rs. 6,00,000
24,00,000
0.25
Therefore, Fixed Assets
= 0.75 24, 00,000

= Rs.18, 00,000
Fixed Assets = Rs. 18, 00,000
Q.16
The following figures and ratios are related to a company:

(i)
Sales for the year (all credit)
Rs. 30,00,000
(ii)
Gross Profit ratio
25 percent
(i)
Fixed assets turnover (basis on cost of goods sold)
(ii)
Stock turnover (basis on cost of goods sold)
1.5
6
Toppers Institute
(v)
Liquid ratio
1:1
(vi)
Current ratio
1.5 : 1
(vii)
Debtors collection period
2 months
(viii)
Reserve and surplus to Share capital
0.6 : 1
(ix)
Capital gearing ratio
0.5
(x)
Fixed assets to net worth
1.20 : 1
You are required to prepare:

(a) Balance Sheet of the company on the basis of above details.
(b) The statement showing Working capital requirement, if the company wants to make a provision for
contingencies @ 10 percent of net working capital including such provision.
[May- 2010] 4 Marks
Solution
(a)
Projected Balance Sheet

(1) Gross Pr ofit Ratio
Gross Pr ofit
Sales
0.25
GP
30,00,000
GP 7,50,000
Cost of Goods Sold = 30,00,000 75% = 22,50,000
(2) Fixed Assets Turnover Ratio =
Cost of Goods Sold

Fixed Assets
1.5
22,50,000
Fixed Assets
Fixed Assets = 15,00,000

(3)
Fixed Assets to Net Worth
Fixed Assets
NetWorth
1.20
15,00,000
NetWorth
Net Worth
(3) Let us assume that preference Share capital is zero.
Capital Gearning Ratio
Debt preference
Equity preference
0.5
Debt 0
12,50,000 0
Debt
= 6,25,000
(5) Reserves & Surplus
Share Capital
(6) Stock Turnover =
=
=
Stock Turnover
12,50,000 0.6/1.6 = 4,68,750

12,50,000 1/1.6 = 7,81,250
Cost of Goods Sold

Stock
Sales
(7) Debtors
22,50,000
Stock
Stock 3,75,000
Collection Period
2
30,00,0000 5,00,000
12
12
(8) Looking at the liquid ratio and Current ratio we can say that stock to current liability ratio is 0.5
0.5
Current Ratio
3,75,000
Current Liability
Current Liability 7,50,000
Current Assets
CurrentAsset
1.50
Current Liabitlies
7,50,0000
Cash in Hand = 11,25,000 3,75,000 -5,00,000 = 2,50,000
Current Assets = 11,25,0000
Toppers Institute
Balance Sheet
Liabilities
Rs.
Share Capital
Reserve & Surplus
Debt
Current Liabilities
7,81,250
4,68,750
6,25,000
7,50,000
26,25,000
Assets
Rs.
Fixed Assets
Stock
Debtors
Cash
15,00,000
3,75,000
5,00,000
2,50,000
26,25,000
(b)
Calculation of working capital:

Working Capital = Current Assets Current Liabilities
= 11,25,000 7,50,000
= 3,75,000
If the above amount of Rs. 3,75,000 is 90% then full amount is = 3,75,000/0.9=Rs. Rs. 4,16,667.
Q.17
MNP Limited has made plans for the next year 2010-11. It is estimated that the company will employ total assets
of Rs.25,00,000; 30% of assets being financed by debt at an interest cost of 9% p.a. the direct costs for the
year are estimated at Rs.15,00,000 and all other operating expenses are estimated at Rs.2,40,000. The sales
revenue are Required to calculate:
(i)
(ii)
(iii)
(iv)
Net profit margin

Return on Assets
Assets turnover
Return on equity
[Nov. 2010] 4 Marks
Solution
`
22,50,000
15,00,000
7,50,000
2,40,000
5,10,000
Income
Sales Revenue
Less: Direct Cost
Contribution
Less: Other operating expenses
EBDIT
Less: Interest on 9% Debt
[ 2500000 30% 9%]
EBDT
Less: Depreciation
EBT
Less: Taxes @ 40%
EAT
67,500
4,42,500
Nil
4,42,500
1,77,000
2,65,500
(i) Net Profit Margin =
100
=
100 = 11.80%
(ii) Return on Assets =
100
=
= 13.32%
(iii) Assets turnover =
100
Toppers Institute
=
(iv) Return on Equity =
= 0.90 times
100
100
= 15.17%
Q.18
Explain the following ratios:

(i)
Operating ratio
(ii)
Price earnings ratio
[May - 2011] 4 Marks
Solution
(i)
Operating Ratio: This ratio measures the relationship between operating cost & Net Sales.
Where:Operating Cost = Cost of goods sold & other operating exps
and
Net Sales = Gross Sales less Sales returns
Operating Ratio =
Operating Cost
100
Net Sales
The main objective of computing this ratio is to determine the operational efficiency with which production purchase
and selling operations are carried on.
(ii)
Price Earnings Ratio:This ratio measures the relationship between the market price per share & earning per share.
The objective of computing this ratio is to find out expectations of the shareholders about the earning of the firm.
P.E. Ratio =
MarketPr ice per share

Earning per Share
Note:- MPPS may be any share price or closing share price.
Q.19 The financial statements of a company contain the following information for the year ending 31st March, 2011.
Particulars
Cash
Sundry Debtors
Short-term Investment
Stock
Prepaid Expenses
Total Current Assets
Current Liabilities
10% Debentures
Retained Earnings
Rs.
1,60,000
4,00,000
3,20,000
21,60,000
10,000
30,50,000
10,00,000
16,00,000
20,00,000
8,00,000
Statement of profit for the4 year ended 31st March, 2011
Sales (20% cash sales)

Less: Cost of goods sold
Profit before Interest & Tax
Less: Interest
Profit Before Tax
Less: Tax @ 30%
Profit After Tax
40,00,000
28,00,000
12,00,000
1,60,000
10,40,000
3,12,000
7,28,000
Toppers Institute
You are required to calculate:

(i)
Quick Ratio
(ii)
Debt-equity Ratio
(iii)
Return on Capital employed, and
(iv)
Average collection period (Assuming 360 days in a year)

[Nov. - 2011] 8 Marks
Solution
1.
2.
3.
Current Assets Stock Pr epaid Exps

30,50,000 21,60,000
0.88 times
10,00,000
Debt.(i.e.10%)
Debt Equity Ratio
Equity(i.e.Esc Ratined Earning)
16,00,000
0.57 : 1
(20,00,000 8,00,000)
Quick Ratio
ROCE
EBIT
12,00,000
Equity Debt [(20,00,000 8,00,000) 16,00,000]

= 27.27%
4.
Debt T / O Ratio
Credit Sales
80% of 40,00,000
Average Debtors
4,00,000
= 8 Times
So Average Collection period =
360
45 day
8
Q.20 Explain the important ratios that would be used in each of the following situations.
(i)
(ii)
(iii)
(iv)
A bank is approached by a company for a loan of ` 50 lakh for working capital purposes.
A long term creditors interested in determining whether his claim is adequately secured.
A shareholder who is examining his portfolio and who is to decide whether he should hold or sell
his holding in the company.
A finance manager interested to know effectiveness with which a firm uses its available resources.
[May - 2012] 4 Marks
Solution
(i)
(ii)
(iii)
(iv)
Q.21
Current Ratio, Quick Ratio, Stock Turnover Ratio

Proprietary ratio, Debt equity ratio
Earning per share, P/E ratio, Return on equity
Capital Turnover ratio, Return on capital employed.
The following accounting information and financial rations of M Limited relate to the year
ended 31st March, 2012:
Inventory Turnover Ratio
6 Times
10 Times
8 Times
Current Ratio
2.4
Toppers Institute
Gross Profit Ratio

25%
Total sales ` 3,00,000, each sales 25% of credit sales; cash purchase ` 2,30,000; working capital
` 2,80,000; closing inventory is Rs. 80,000 more than opening inventory.
You are required to calculate:
(i)
Average Inventory
(ii)
Purchases
(iii)
Average Debtors
(iv)
Average Creditors
(v)
Average Payment Period
(vi)
Average Collection Period
(vii) Current Assets
(viii) Current Liabilities
[Nov - 2012] 8 Marks
Ans.(i) Average Inventory:Inventory Turnover Ratio =
cons.
= 6 times
Avg Inventors
6 Avg. inventory = Cons = Sales Gross profit

Avg. inventory =
(ii) Purchases:Purchase
30,00,000 25%
= 3,75,000/6
= Cons + Closing Stock Opening stock

= (30,00,000 25%) + 80,000
= 23,30,000/-
(iii) Average Debtors:Debtors Turnover Ratio =
Average Debtors =
Credit Sales
= 8 times
Average Debtors
24,00,000 25%
= 3,00,000/8 times
Credit Sales = Credit Sales + Cash Sales = 30,00,000

Credit Sale + 25% of Credit Sales = 30,00,000
Credit Sales =
(iv)
30,00,000
24,00,000
125%
Average Creditors:Creditors Turnover Ratio =
Average Creditors =
Credit Purchase
10 times
Average Creditors
Total Purchase Cash Purchase

10
=
23,30,000 2,30,000
= 2,10,000/10
Toppers Institute
(v)
Average Payment period
365 Days
365 Days
37 Days ( Appx.)
10
365 Days
365 Days
46 Days ( Appx.)
8
=
=
(vi)
Average Collection Period
=
=
(vii)
Current Assets:Current Assets - Current Liabilities = Working Capital

= 2,80,000(i)
Current Assets
2.4
Current Assets = 2.4 Current Liabilities(ii)
Current Assets Current Liabilities = 2,80,000
2.4 Current Liabilities Current Liabilities = 2,80,000
Current Liabilities =
Current Assets
2,80,000
2,00,000
1.40
= 2.4 2,00,000
= 4, 80,0000/-
(viii)
Current Liabilities = 2,00,000/-

Financial Analysis

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Financial Analysis

Transféré par

Droits d'auteur :

Formats disponibles

3.

FINANCIAL ANALYSIS & PLANNING

Inter-Firm and Intra-Firm analysis

Brief note on use of Ratios in Cash Flow Statements

Financial Forecasting Technique

Tools of Financial Forecasting

Types of Financial Statement analysis

Financial Analysis 3.2

Who are the entities interested in Financial Statements Analysis?

Research Scholars -for study, research and analysis purposes.

Q.2 What are the types of financial statement analysis?

(1) Internal and External Analysis :

It is done within the Company, i.e. by the Corporate

It is done by outside parties e.g. bankers, investors, suppliers

It is more extensive and detailed. It looks into all

It is restricted according to the requirements of the user. For

(2) Horizontal and Vertical Analysis:

It involves comparison of financial statements of one

It involves analysis of relationship between various items

Items are compared on a one-to-one basis, e.g. sales

Relationship between items i.e. ratios or percentages are

(3) Inter-Firm and Intra-Firm analysis:

Financial Analysis 3.3

Write a brief note on use of Ratios in Cash Flow Statements.

(ii) Cash flow Sales =

(iii) Cash flow yield =

Net Cash Flow from Operating Activities

Average Total Assets

Free cash Flow per Share

(ii) Operating Cash Flow to Profit =

Operating Cash Flow

(iii) Self financing investment ratio =

Financial Analysis 3.4

It generates useful information for decision making.

It provides significant information for successful financial planning.

It enables the organisation to make optimum utilisation of available funds/resources.

It makes the organisation to adopt appropriate financial policies.

Q.6. Write a short note on Financial Forecasting Technique.

(i) Percentage of Sales Method

(ii) Simple Regression Method

(iii) Multiple Regression Method

Financial Analysis 3.5

Q.7 Write a short note on the Tools of Financial Forecasting:

Q.9 Briefly indicate the cause of industrial sickness in India.

Marketing management: Dependence on a single customer or a limited number customers/single or a limited

Financial Analysis 3.6

Administrative management: Over centralisation, lack of professionalism, lack of feed-back to management.

(3) Functional management:

B. External causes and other factors:

Equity share cap.

Financial Analysis 3.7

Long Term Loan

Less: Preference Dividend

3. Net Profit Ratio

Sales net of returns

PROFITABILITY RATIOS- OWNER'S VIEW POINT

Sales net of returns

Overall profitability of the

Number of Equity Shares

Return or income per

Equity Share Capital

Average Total Assets i.e. of

TURNOVER / ACTIVITY / PERFORMANCE RATIOS

Net Income per rupee of