Engineering Economics Problems and Illustrations for chapter 2 Instructor: Ms.

Tanzeela Siddiqui

Illustration 1 Calculate current ratio and Liquid assets ratio from the following and interpret what this ratio indicates: Rs. Debtors 400,000 Stock 160,000 Marketable securities 80,000 Cash 120,000 Prepaid expenses 40,000 Bill payables 80,000 Sundry creditors 160,000 Outstanding Expenses 160,000 Ans: 2:1 Illustration 2 Calculate liquidity ratios from the following information: Rs. Total current assets 90,000 Stock (included in current assets) 30,000 Current liabilities 60,000 Ans: 1:1 Illustration 3 The balance sheet of ABC Ltd. shows the following figures: Common Stock 152,000 Cash in hand and at Bank 30,000 Fixed Assets 113,000 Creditors 20,000 Bill Payables 4,000 Debtors 18,000 Stock 52,000 Retained Earnings 8,000 Prepaid expenses 5,000 Calculate (i) current ratio and (ii) liquid ratio. Ans: Current Ratio = 4.37:1 Liquid Ratio = 2.2:1

Illustration 4 From the following information, if Rs 1000 is paid to creditors what will be the effect (increase or decrease or no change) on current ratio, if before payment, balances are: Cash Rs 15000, Creditors Rs 7,500? Illustration 5 From the following detail of a business concern ascertain the gross profit ratio:

Ans:

For % For 200637.5%

Illustration 6 Calculate the gross profit ratio from the following data: Sales Rs.325, 000 Sales returns Rs.25,000 Cost of goods sold Rs. 2,40,000 Ans: Gross Profit Ratio = 20% Illustration 7 Calculate Net profit ratio from the following: Net profit Sales Sales Returns Ans: Net Profit Ratio = 7.5% Illustration 8 Calculate gross profit ratio and net profit ratio from the following figures. Sales Rs 150,000 Cost of goods sold Rs 120,000 Operating expenses Rs 12,000 Ans: Gross Profit Ratio= 20%, Net Profit Ratio = 12%

Rs 45,000 Rs 640,000 Rs 40,000

Illustration 9 From the following details of a business concern ascertain the operating profit ratio

SOLUTION: 2005 Net profit before interest and tax = Net profit + Interest+tax = Rs 3,800 + Rs 1,000 + 0 = Rs 4,800 Operating profit ratio = =Rs 4,800/Rs 60,000*100 = 8% 2006 Net profit before interest Operating profit ratio

= Rs 6,000 + Rs 2,000 = Rs 8000 =Rs 8,000/Rs 80,000*100= 10%

Illustration 10 Calculate operating profit ratio from the following data: Sales Gross profit Administration expenses Selling and distribution expenses Income on investment Loss by fire Ans: 20% Illustration 11 From the following data, calculate the return on total assets: Net fixed assets Rs 100,000 current assets Rs 50,000, current liabilities Rs 25,000, Gross profit Rs 32,500, Interest on long-term debt Rs 7500 tax Rs 8750, office and administrative expenses Rs 2500, selling and distribution expenses Rs 5000. Ans: 5.8% Illustration 12 From the following, calculate the debt ratio Equity Rs. 100,000 Rs 300,000 120,000 35,000 25,000 15,000 9,000

Retained earnings Long term Debt Account Payable Creditors Cash Prepaid Rent Debtors Machinery Furniture and Fixtures

45,000 30,000 15,000 10,000 10,000 30,000 15,000 25,000 10,000

Ans: 61% Illustration 13 From the following calculate (i) Debt Ratio, (ii) Long term Debt to total Capitalization : Rs Liabilities and Equity Common stock 100,000 Preference share capital 50,000 Reserves 25,000 Lont term Debt 60,000 Creditors 15,000 Total 250,000 Assets Fixed assets 125,000 Current Assets 50,000 Investment 75,000 Total 250,000 Illustration 14 Following is the Income Statement of M/s Bunu Ltd for the year 31st December, 2006. Sales
less:

560,000 Cost of Goods Sold Opening Stock Purchases Insurance

less:

Closing Stock

100,000 350,000 9,000 459,000 (100,000) (359,000) 201,000

Gross Profit
less:

Operating Expenses:
Administrative expenses Salaries Rent 20,000 89,000 30,000 (139,000)

Operating Profit
less: less: Interest Expense Tax

Earning Before Tax

62,000 (5,000) 47,000 (1,000)

Net Income

46,000

Calculate Gross Profit Margin, Net Profit Margin, Operating Profit Margin and Time Interest Earned Ratio.

Illustration 15 Calculate stock turnover ratio from the following information: Opening stock Rs 45000 Closing stock Rs 55000 Purchases Rs 160000 Ans : 3 times Illustration 16 Opening stock Rs 19,000 Closing stock Rs 21,000 Sales Rs 2,00,000 Gross Profit is 25% of sale. Calculate stock turnover ratio. Ans: 75 times Illustration 17 Annual sales Gross profit 20% on sales Opening stock Closing stock Calculate stock turnover ratio.

Rs 4,00,000 Rs 38,500 Rs 41,500

Illustration 18 From the following information calculate opening stock and closing stock: Sales during the year = Rs 2,00,000 Gross profit on sales = 50% Stock turnover ratio = 4 times If closing stock was Rs 10,000 more than the opening stock what will be the amount for the opening stock and closing stock? Illustration 19 Find out debtors turnover Following information for one year ended 31st March 2006. 31st March 2006 Rs. Annual sales 500000 Debtors 100000 Debt to be taken for the year 360 days