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Problems and Solutions – Ratio Analysis

PROBLEMS AND SOLUTIONS 

Type 1: Final Account to Ratio 

Problem 1. From the data calculate :

(i) Gross Profit Ratio               (ii) Net Profit Ratio      (iii) Return on Total Assets

(iv) Inventory Turnover (v) Working Capital Turnover (vi) Net worth to Debt 

Sales                            25,20,000        Other Current Assets                           7,60,000

Cost of sale                  19,20,000        Fixed Assets                                        14, 40,000

Net profit                     3,60,000          Net worth                                            15,00,000

Inventory                     8,00,000          Debt.                                                   9,00,000

Current Liabilities       6,00,000

Solution:

1.   Gross Profit Ratio = (GP/ Sales) *  100 = 6

Sales – Cost of Sales Gross Profit

25,20,000 – 19,20,000 = 6,00,000

2.               Net Profit Ratio = (NP / Sales)* 100 = 3

3.               Inventory Turnover Ratio = Turnover / Total Assets) * 100= 1920000/800000= 2.4 times

Turnover Refers Cost of Sales

4.               Return on Total Assets = NP/ Total Assets  = (360000/3000000)*100 = 12%

FA+ CA +inventory [14,40,000 + 7,60,000 + 8,00,000] = 30,00,000

5.                           Net worth to Debt = Net worth/ Debt= (1500000/900000)* 100 = 1.66 times

6.                           Working Capital Turnover = Turnover/Working capital

Working Capital = Current Assets – Current Liabilities

= 8,00,000 + 7,60,000 – 6,00,000

15,60,000 – 6,00,000= 9,60,000

Working Capital Turnover Ratio = 19,20,000 = 2 times.

 

Problem 2. Perfect Ltd. gives the following Balance sheet. You are required to compute     the following ratios.

(a) Liquid Ratio

(b) Solvency Ratio

(c) Debt-Equity Ratio

(d) Stock of Working Capital Ratio 

Balance Sheet                                                  $                                                                      $

Equity share capital                            1500000          Fixed Assets                            1400000

Reserve fund                                        100000            Stock                                        500000

6% Debentures                                    300000            Debtors                                   200000

Overdraft                                             100000            Cash                                        100000

Creditors                                       200000                                                      2200000

Solution :

(a)                    Liquid Ratio= Liquid Assets / Liquid Liabilities

(or )

Liquid Assets / Current Liabilities 

LA Debtors = 2,00,000 i.e., 3,00,000 / 200000 = 1.5 

Cash = 1,00,000

         = 3,00,000 

Liquid Liabilities : Creditors = 2,00,000 

(b)                                Debt – Equity Ratio = External Equities /  Internal Equities 

External Equities: 

All outsiders loan Including current liabilities 

3,00,000 + 1,00,000 + 2,00,000 = 6,00,000 

Internal Equities : 

It Includes share holders fund + Reserves 

15,00,000 + 1,00,000 = 16,00,000 

Debt – Equity Ratio = 600000/ 1600000  = 0 · 375 

©                                 Solvency Ratio = Outside Liabilities / Total Assets 

Outside Liabilities = Debenture + Overdraft + Creditors 

= 3,00,000 + 1,00,000 + 2,00,000 = 6,00,000 

Solvency Ratio =( 600000 / 2200000) * 100

 = 27.27% 

(d)                                Stock of Working Capital Ratio = Stock / Working Capital

Working Capital = Current Assets – Current Liabilities

= 8,00,000 – 3,00,000 = 5,00,000

Stock of Working Capital Ratio =* 100 = 100% 

Problem 3. Calculate the following ratios from the balance sheet given below :

(i) Debt – Equity Ratio                        (ii) Liquidity Ratio

(iii) Fixed Assets to Current Assets    (iv) Fixed Assets Turnover

Balance Sheet

Liabilities                                $                                  Assets                                      $

Equity shares of $ 10 each      1,00,000                     Goodwill                                             60000

Reserves                                  20,000                         Fixed Assets                                       140000

P.L. A/c                                   30,000                         Stock                                                   30000

Secured loan                           80,000                         Sundry Debtors                                   30000

Sundry creditors                     50,000                         Advances                                            10000

Provision for taxation                         20,000                         Cash Balance                                      10000

3,00,000                                                                                  300000

The sales for the year were $ 5,60,000.

Solution:        

Debt – Equity = Long – Term Debt / Shareholders Fund

Ratio = Secured loan $. 80,000

Shareholder’s Fund= Equity Share Capital + Reserves + P.L.A/c

= 1,00,000 + 20,000 + 30,000       = 1,50,000

Debt-Equity Ratio = 80,000 / 1,50,000=.53

Liquidity Ratio = Liquid Assets / Liquid Liabilities

Liquid Assets = Sundry Debtors + Advances + Cash Balance

30,000 + 10,000 + 30,000 = 70,000

Liquid Liabilities = Provision for Taxation + sundry creditors

= 20,000 + 50,000 = 70,000

Liquid Ratio = 70,000 / 70,000= 1

Fixed Assets to Current Assets

= Fixed Assets / Current Assets= 1,40,000/ 100000

= 1.4

Fixed Assets Turnover =Turnover / Fixed Assets= 5,60,000/1,40,000

= 4 

Problem 4. The Balance sheet of Naronath & Co. as on 31.12.2000 shows as follows:

Liabilities                                $                      Assets                                                  $

Equity capital                          1,00,000          Fixed Assets                           1,80,000

15% Preference shares            50,000             Stores                                      25,000

12% Debentures                      50,000             Debtors                                   55,000

Retained Earnings                   20,000             Bills Receivable                      3,000

Creditors                                 45,000             Bank                                        2,000

2,65,000                                                          2,65,000

Comment on the financial position of the Company i. e., Debt – Equity Ratio, Fixed Assets Ratio, Current Ratio, and Liquidity.

Solution:

Debt – Equity Ratio =  Debt – Equity Ratio / Long – Term Debt

Long-term Debt = Debentures

= 50,000

Shareholder’s Fund = Equity + Preference + Retained Earnings

= 1,00,000 + 50,000 + 20,000

= 50,000

= 1,70,000

= ·29

Fixed Assets Ratio= Fixed Assets / Proprietor’s Fund= -1,80,000

Proprietor’s Fund=Equity Share Capital + Preference Share Capital+ Retained Earnings

=1,00,000 + 50,000 + 20,000 = 1,70,000

Fixed Assets Ratio = 1,80,000 / 1,70,000= 1.05

Current Ratio = Current Assets / Current Liabilities

Current Assets = Stores + Debtors + BR + Bank= 25,000 + 55,000 + 3,000 + 2,000 = 85,000

Liquid Ratio=45,000 / 85,000= 1.88

Liquid Assets = 45,000

Liquid Liabilities = Debtors + Bill Receivable + Cash=55,000 + 3,000 + 2,000 = 60,000

Liquid Ratio = 60,000 / 45,000   = 1.33

 

Problem 5: From the following particulars pertaining to Assets and Liabilities of a company calculate :

(a) Current Ratio                     (b) Liquidity Ratio                  (c) Proprietary Ratio

(d) Debt-equity Ratio                         (e) Capital Gearing Ratio

Liabilities                                $                                  Assets                                      $

5000 equity shares $ 10

each                                                     500000                        Land & Building                     500000

8% 2000 pre shares $ 100                                                       Plant & Machinery                  600000

Each                                                    200000                        Debtors                                   200000

9% 4000 Debentures of                                                          Stock                                       240000

$ 100 each                                           400000                        Cash and Bank                        55000

Reserves                                              300000                        Prepaid expenses                     5000

Creditors                                             150000

Bank overdraft                                    50000

1600000                                                               1600000 

Solution :

Current Ratio = Current Assets / Current Liabilities

Current Assets = Stock + Cash + Prepaid Expenses + Debtors

= 2,40,000 + 55,000 + 5,000 + 2,00,000 = 5,00,000

 

Current Liabilities = Creditors + Bank Overdraft

=1,50,000 + 50,000 = 2,00,000

=5,00,000 / 2,00,000

= 2.5 : 1

 

Liquid Ratio = Liquid Assets / Liquid Liabilities

 

Liquid Assets = Cash and Bank + Debtors

=55,000 + 2,00,000 = 2,55,000

Liquid Liabilities : Creditors   = 1,50,000

 

Liquid Ratio = 2,55,000 / 1,50,000

= 1.7 : 1

 

Proprietor’s Ratio = Proprietor’s Fund / Total Tangible Assets

 

Proprietor’s Fund  = Equity Share Capital + Preference

Share Capital + Reserves and Surplus

 

=5,00,000 + 2,00,000 + 3,00,000

 

Proprietary Ratio=10,00,000 / 16,00,000

 

= 0.625 : 1

 

 

Debt – Equity Ratio = External Equities / Internal Equities

 

External Equities = Long-term Liabilities + Short-term Liabilities

= 4,00,000 + 2,00,000 = 6,00,000

 

Internal Equities = Proprietor’s funds

 

= 6,00,000 / 10,00,000

 

= 0.6 : 1

 

Capital Gearing Ratio = Fixed Interest Bearing Securities / Equity Share Capital + Reserves

 

Fixed Interest Bearing Securities = Preference Shares           2,00,000

Debentures                  4,00,000

6,00,000

 

= 6,00,000 / 8,00,000

 

= 0.75 : 1

 

Problem 6. From the following details of a trader you are required to calculate :

(i) Purchase for the year.

(ii) Rate of stock turnover

(iii) Percentage of Gross profit to turnover

 

Sales $                         33,984             Stock at the close at cost price                        1814

Sales Returns              380                  G.P. for the year                                             8068

Stock at the beginning

at cost price     1378

 

Solution :

Trading Account

 

To Opening stock                                1378                By Sales                      33984

To Purchase (BD                                 25972              Sales Return                380

To gross profit                                     8068                                                    33604

By closing Stock         1814

35418                                                  35418

(i) Purchase for the year $ 25,972

 

(ii) Stock Turnover = Cost of Goods Sold

 

Cost of Goods Sold = Cost of Goods Sold / Average Stock

 

Average Stock = (Opening Stock + Closing Stock)/ 2

 

= (1372 + 1814 )/2

=  25916/1596

=16.23 times

 

(iii) Percentage of Gross Profit to Turnover = Gross Profit / Sales *100

= 8068 / 33 ,984 * 100

= 23.74%.

 

Problem 7. Calculate stock turnover ratio from the following information :

 

Opening stock 5                                  8,000

Purchases                                            4,84,000

Sales                                                    6,40,000

Gross Profit Rate – 25% on Sales.

 

Solution :

Stock Turnover Ratio = Cost of Goods Sold / Average Stock

 

Cost of Goods Sold = Sales- G.P

= 6,40,000 – 1,60,000 = 4,80,000

 

Stock Turnover Ratio= 4,80,000 /58000

= 8.27 times

 

Here, there is no closing stock. So there is no need to calculate the average stock.

 

Problem 8. Calculate the operating Ratio from the following figures.

Items                                       ($ in Lakhs)

Sales                                                    17874

Sales Returns                                      4

Other Incomes                                                53

Cost of Sales                                       15440

Administration and Selling Exp.        1843

Depreciation                                        63

Interest Expenses (Non- operating     456

 

Solution:

 

Operating Ratio = (Cost of Goods Sold + Operating Expenses * 100) / Sales

 

= ((15,440 + 1,843)/ 17,870)*100

 

= 97%

 

Problem 9. The following is the Trading and Profit and loss account of Mathan Bros Private Limited for the year ended June 30,2001.

$                                                                                  $

To Stock in hand                                 76250                          By Sales                                  500000

To Purchases                                       315250                        By Stock in hand                    98500

To Carriage and Freight                      2000

To Wages                                            5000

To Gross Profit                                   200000

598500                                                                        598500

 

To Administration

Expenses                                 1,01,000                      By Gross profit           2,00,000

To Finance Expenses. :                                                           By Non-operating Incomes

Interest                                    1200                                        Interest on Securities 1,500

Discount                      2400                                        Dividend on Shares 3, 750

Bad Debts                   3400    7000                            Profit on Sale of Shares 750   6,000

To Selling Distribution Expenses        12000

To Non-operating expenses

Loss on sale of securities 350

Provision for legal suit 1,650  2000

To Net profit                                       84000

206000                                                                        206000

 

You are required to calculate :

(i) Gross profit Ratio               (ii) Expenses Ratio (individual)

(iii) Net profit Ratio                (iv) Operating profit Ratio

(v) Operating Ratio                 (vi) Stock turnover Ratio

Gross Profit Ratio =Gross Profit/ Sales * 100 =  2,00,000 / 500000 * 100

Expenses Ratio =Individual Expenses / Sales

Administration Expenses / Sales *100 =101000/500000 *100= 2.02%

Finance Expenses/ Sales *100 = 7000/ 500000 * 100=1.04 %

Selling and Distribution Expenses / Sales* 100= 12 000/ 500000 *100= 2.40%

Non- Operating Expenses / Sales * 100 = 2000/ 500000 * 100= 0.4%

 

Net Profit Ratio :

Net Profit/ Sales *100 = 84000/ 500000 *100= 16.8%

Operating Profit Ratio =Operating Profit / Sales *100

Operating Profit = Net Profit + Non-Operating Expenses – Non Operating Incomes

= 84,000 + 2,000 – 6,000 = 80,000

= 80•000 / 5000000* 100 = 16%

Operating Ratio = ( Cost of Goods Sold + Operating Expenses)/Sales* 100

Cost of Goods Sold = Sales – Gross profit

5,00,000 – 2,00,000=  3,00,000

Operating Expenses

All Expenses Debited in the Profit & Loss A/c Except Non-Operating Expenses

[including Finance expense]

1,01,000 + 7,000 + 12,000 = 1,20,000

Operating Ratio = (3,00,000 + 1,20,0000) 500000 * 84%

Stock Turnover Ratio = Cost of Goods Sold / Average Stock

Costs of Goods Sold = 3,00,000

Average Stock = (Opening Stock + Closing Stock)/2

=(76,250 + 95,500) / 2

= 85,875