Financial Management
Chapter: 9 Ratio analysis
Liquidity ratio: ratios measure the firm’s ability to meet current obligations.
Type:
1: Current Ratio: the relationship between current assets and current liabilities.
Formula: Current Ratio = Current Asset / Current Liabilities
Example from class given data:
Prepaid Expense 15000
Stock 40,000
Debtors 35,000
Bills Receivable 13,300
Marketable Security 20,000
Cash 1000
Accounts Payable 27,300
Unpaid Expenses 15,000
Bonds 200,000
Long term loans 150,000
Common stock @ Rs. 10 500,000
Preference Stock 6% 200,000
Reserves and funds 92,500
Sales 12,30,000
Cost of goods sold 470,000
Marketing and Selling expense 45,000
General & Administrative Expense 61,000
Interest Expenses 40,000
Depreciation (already included in general expense) 35,000
Taxes 35%
Amount to be distributed among common stock holders 210,000
Net profit After tax
Purchases 770,900
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Balance sheet:
Assets: Amount: Liabilities & owner’s equity: Amount:
Current Assets: Current Liabilities:
Cash $1,000 Accounts Payable $27,300
Marketable Securities $20,000 Unpaid Expenses $15,000
Stock (Assuming it's inventory) $40,000
Debtors (Accounts Receivable) $35,000
Bills Receivable $13,300
Prepaid Expense $15,000
Total Current assets = $124,300 Total Current Liabilities = $42,300
Non-Current Assets: Non-Current Liabilities:
Long-Term Loans $150,000 Preference Stock (6%) $200,000
Bonds $200,000 Reserves and Funds $92,500
Total Non-Current Assets = $350,000 Owner’s Equity:
Common Stock @ $10 $500,000
Retained Earnings $192,850
Total Equity = $692,850
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Total Assets = $474,300 Total Liabilities and Equity = $1,027,650
*Now, let's calculate the equity section of the balance sheet:
Dividends (Amount to be distributed among common stockholders):
$210,000
Retained Earnings:
Retained Earnings = (Net Profit After Tax - Dividends)
Retained Earnings = ($402,850 - $210,000)
Retained Earnings = $192,850
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Income Statement:
Revenue: Amount:
Sales: $1,230,000
Cost of Goods Sold:
Cost of Goods Sold: $470,000
Operating Expenses:
Marketing and Selling Expense: $45,000
General & Administrative Expense: $61,000
*Depreciation: $35,000 (already included in General Expense)
Net Income Before Tax:
(Total Revenue - Cost of Goods Sold - Operating Expenses)
($1,230,000 - $470,000 - $45,000 - $61,000 - $35,000)
Net Income Before Tax: $619,000
Tax (35%):
($619,000 * 0.35)
Tax: $216,150
Net Profit After Tax:
(Net Income Before Tax - Tax)
($619,000 - $216,150)
Net Profit After Tax: $402,850
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Current Ratio = Current Assets / Current Liabilities
From the balance sheet provided earlier:
Current Assets = $124,300
Current Liabilities = $42,300
Now, calculate the current ratio:
Current Ratio = $124,300 / $42,300
Current Ratio = 2.94 (rounded to two decimal places)
