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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 Prot Ratio (ii) Net Prot 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 prot 3,60,000 Net worth 15,00,000

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

Current Liabilities 6,00,000

Solution:

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

Sales Cost of Sales Gross Prot

25,20,000 19,20,000 = 6,00,000

2. Net Prot 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

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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

Shareholders 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

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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 nancial 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

Shareholders Fund = Equity + Preference + Retained Earnings

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

= 50,000

= 1,70,000

= 29

Fixed Assets Ratio= Fixed Assets / Proprietors Fund= -1,80,000

Proprietors 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

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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

Proprietors Ratio = Proprietors Fund / Total Tangible Assets

Proprietors 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 = Proprietors funds

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

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= 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 prot 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 prot 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 Prot to Turnover = Gross Prot / Sales *100

= 8068 / 33 ,984 * 100

= 23.74%.

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

Opening stock 5 8,000

Purchases 4,84,000

Sales 6,40,000

Gross Prot 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 gures.

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 Prot 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 Prot 200000

598500 598500

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To Administration

Expenses 1,01,000 By Gross prot 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 Prot 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 prot 84000

206000 206000

You are required to calculate :

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

(iii) Net prot Ratio (iv) Operating prot Ratio

(v) Operating Ratio (vi) Stock turnover Ratio

Gross Prot Ratio =Gross Prot/ 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 Prot Ratio :

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

Operating Prot Ratio =Operating Prot / Sales *100

Operating Prot = Net Prot + Non-Operating Expenses Non Operating Incomes

= 84,000 + 2,000 6,000 = 80,000

= 80000 / 5000000* 100 = 16%

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

Cost of Goods Sold = Sales Gross prot

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

Operating Expenses

All Expenses Debited in the Prot & 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

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