DK Goel Solutions Chapter 5 Accounting Ratios
Read below DK Goel Solutions for Class 12 Chapter 5 Accounting Ratios. These solutions have been designed based on the latest Class 12 DK Goel Accountancy book used by commerce stream students issued for the current year and the questions given in each chapter.
There are various types of ratios which are generally called accounting ratios which are being used to better understand the financial position of a company.
In this chapter, students will understand the basic concepts of these accounting ratios, their usage, and conditions in which type of accounting ratio can be utilized. This is a very important chapter as accounting ratios are utilized almost in all types of conditions in the future so that you are able to clearly understand the financial situation of a company.
The chapter contains a lot of questions which can be very helpful for Class 12 commerce students of Accountancy and will also help build strong concepts which will be really helpful in your career. These solutions are free and will help you to prepare for Class 12 Accountancy. Just scroll down and read through the answers provided below
Accounting Ratios DK Goel Class 12 Accountancy Solutions
Short Answer Questions
Q1. “Accounting Ratios ignore qualitative factors and are also not comparable if different firms follow different accounting policies.” Comment.
Solution 1 The quantitative assessment of a company’s performance is ratio analysis. This lacks the qualitative variables. For instance, he may warrant the credit to be given on the basis of financial statements provided by him while measuring the credit analysis of a consumer requesting credit, but in fact his character and credit worthiness mat is questionable.
Q2.What ratios will you calculate for the following purposes: (a) Analysis for short term debts, and (b) Analysis for long term debts?
Solution 2
(a) Liquidity Ratio for analysis for short term debts.
(b) Solvency Ratio for analysis for long term debts.
Q3. The Current Ratio of a Company is 3:1. Give your Comments.
Solution 3 A company’s current ratio of 3:1 means that a company’s current assets are three times the current liabilities. The higher the percentage, the better it is, so it would be easier for the company to pay its existing liabilities. However, for the following reasons, a much higher ratio might be perceived to be detrimental from the point of view of management:
1.) A much higher ratio suggests that because of low performance, inventory may be pilling up.
2.) Due to an ineffective collection policy, significant sums are locked away in trade receivables.
Q4. State the main limitation of Current Ratio.
Solution 4 Window Dressing: Certain businesses turn to window dressing, i.e., displaying a better position than the one that actually exists, to cover up their poor financial position. They adjust their balance sheet in such a manner that it is possible to mask the essential facts and fact.
Q5. What is ‘Window Dressing’? Explain with the help of an example
Solution 5 In attempt to cover up a poor financial situation, some businesses turn to window dressing, i.e., demonstrating a different position than the one that actually exists. They adjust their balance sheet in such a manner that it is possible to mask the essential facts and fact. For instance, the current assets of a company are Rs. 2,00,000 and its current liabilities are Rs. 1,00,000, so the current ratio is 2:1. After this, it purchased goods for Rs. 50,000 for credit in the month of March. If it records the purchases, the current assets will increase to Rs. 2,50,000 and current liabilities will increase to Rs. 1,50,000. As a result, the current ratio will be reduced to 5:3. The company may pass the entry for purchase in the beginning of the next year or may postpone the purchase itself for a few days.
Q6. Distinguish between Current Ratio and Quick Ratio.
Solution 6. Present Ratio:- The ratio describes the relation between a company’s current assets and current liabilities. The ratio estimation formula is
Current Ratio = (Current Assets)/(Current Liabilites)
Quick Ratio:- The Fast Ratio shows whether the company is in a position to pay its existing obligations immediately or within a month. As such, by dividing liquid assets (Quick Current Assets) by current liabilities, the quick ratio is calculated:
Quick Ratio = (Liquid Assets)/(Current Liabilites)
Quick Ratio:- The Fast Ratio shows whether the company is in a position to pay its existing obligations immediately or within a month. As such, by dividing liquid assets (Quick Current Assets) by current liabilities, the quick ratio is calculated:
Quick Ratio = (Liquid Assets)/(Current Liabilites)
Q7. Why Quick Ratio is considered to be more dependable than Current Ratio? Specify.
Solution 7 The Fast Ratio is a better test of the company’s short-term financial condition than the current ratio, since it recognizes only certain properties that can quickly and easily be turned into cash. Liquid assets do not involve inventory since it can take a lot of time before it is translated into currency.
Q8. What items are included in the Shareholder’s Fund?
Solution 8 Share Capital and Balance & Surplus is found in shareholder accounts.
Q9. What items are included in Equity Shareholder’s Fund?
Solution 9 Equity Share Capital was included in the equity partner portfolio.
Q10. What does debts-equity ratio indicate?
Solution 10 This ratio illustrates the relationship between long-term debt and funds from lenders. It displays the amount of assets acquired by long-term borrowings as opposed to shareholder capital. To assess the soundness of the company’s long-term financial plans, this ratio is determined.
Q11. What are implications of high and low inventory turnover ratios?
Solution 11 The higher inventory turnover ratio suggests a fast sale of products. In an organization where the product turnover ratio is high, products may be sold at a low profit margin and the profitability may be very high even then.
A poor inventory turnover ratio means that for such a long time, inventory does not sell easily and stays lying in the godown. This results in higher costs of transportation, the blocking of funds and losses on goods accounts being redundant or capable of un-sale.
Q12. Illustrate the method of determining trade receivables turnover ratio. What does it indicate?
Solution 12. Calculation of Trade receivables turnover ratio:-
Total Revenue from Operations for the year (Total Sales) Rs. 2,00,000
Cash Revenue from Operations for the year (Cash Sales) Rs. 40,000
Trade Receivables at the beginning of the year Rs. 20,000
Trade Receivables at the end of the year Rs. 60,000
Solution:-
Working Note:-
Q13. What inference would you draw from the following:-
I. A low Trade Receivables Turnover Ratio
II. A high Inventory Turnover Ratio.
Solution 13 I. The management’s liberal and inefficient credit and collection approach would imply that the exchange receivables turnover ratio is too poor. It indicates that more cash is locked-up in exchange receivables, resulting in higher bad debts, increased recovery costs, and even loss of interest on cash receivables attributable to trade type.
II. The higher inventory turnover ratio suggests a fast sale of products. In an organization where the product turnover ratio is high, products may be sold at a low profit margin and the profitability may be very high even then.
Q14. What does too low ‘Trade Receivables Turnover Ratio’ indicate?
Solution 14 .The management’s liberal and inefficient credit and collection approach would imply that the exchange receivables turnover ratio is too poor. It indicates that more cash is locked-up in exchange receivables, resulting in higher bad debts, increased recovery costs, and even loss of interest on cash receivables attributable to trade type.
Q15. What does too high ‘Trade Receivables Turnover Ratio’ indicate?
Solution 15. A high turnover ratio of trade receivables implies the timely reimbursement by trade receivables, however a too high ratio can be the result of management’s stringent credit and recovery policies that may curtail revenue and thereby adversely impact income.
Q16. “Comparison with the help of ratios is not possible if different firms follow different accounting policies.” Comment.
Solution 16. With regard to the provision of depreciation, development of provision for uncertain debts, system of assessment of closing inventory, etc., there may be various accounting practices followed by different businesses. For example, one organization might, on a straight-line basis, follow the strategy of charging depreciation, while on a written-down value system otherwise charges. This contrast makes the accounting ratios incomparable.
Q17. How ratio analysis does becomes less effective due to price level changes?
Solution 17. The price range continues to be paid over the years, so the ratio of different years will not be compared. For eg, in 2017, one company sold 1,000 machines for Rs. 10 Lakhs; in 2018, it sold 1,000 machines of the same kind again, but the selling price was Rs. 15 Lakhs due to the rising price. On the basis of the percentages, it will be inferred that revenues have increased by 50%, while sales have not increased at all in practical terms. Therefore, in view of market level adjustments, the estimates for the last year must be changed before the ratios for those years are compared.
Q18. Briefly explain the meaning and significance of any two of the following ratio:-
(i) Debt-Equity Ratio,
(ii) Inventory Turnover Ratio and
(iii) Trade Received Turnover Ratio.
Solution 18 I) Debt-Equity Ratio:- The relationship between long-term debt and shareholder funds is reflected in this ratio. It displays the amount of assets acquired by long-term borrowings as opposed to shareholder capital. To assess the soundness of the company’s long-term financial plans, this ratio is determined.
The Debt Equity Significance Ratio is determined to determine the company’s ability to satisfy its long-term obligations. A debt-equity ratio of 2:1 is usually considered stable.
(ii) Ratio of inventory turnover:- This ratio reveals the relationship between the cost of operational profits for the year and the total inventory retained during the year:
(iii) Trade Earned Turnover Ratio:- This ratio reveals the relationship between the Operating Sales loan and the average year-round trade receivables:
Q19. Briefly explain the meaning and significance of any two of the following ratio:-
(i) Gross Profit Ratio,
(ii) Inventory Turnover Ratio and
(iii) Current Ratio.
Solution 19
(i) Gross Profit Ratio:- This ratio provides a correlation between Gross Profit and Operating Revenue, i.e. Sales of Net. This ratio is measured and seen in proportion. To compute this percentage, the formula is:
(ii) Ratio of inventory turnover:- This ratio reveals the relationship between the cost of operational profits for the year and the total inventory retained during the year:
(iii) Current Ratio:- The relationship between current assets and a company’s current liabilities is clarified in this Ratio.
Q20. Briefly explain the meaning and significance of any two of the following ratio:-
(i) Debt Equity Ratio,
(ii) Operating Ratio and
(iii) Trade Receivables Turnover Ratio.
Solution 20
(i) Debt-Equity Ratio:- This ratio illustrates the relationship between long-term debt and funds from lenders. It displays the amount of assets acquired by long-term borrowings as opposed to shareholder capital. To assess the soundness of the company’s long-term financial plans, this ratio is determined.
(ii) Operating Ratio:- This ratio calculates the percentage of the cost of operational revenue and operating costs of a company relative to the operating income:
(iii) Trade Received Turnover Ratio:- The relationship between credit income from operations and average exchange receivables during the year is demonstrated by this ratio:
Q21. Briefly explain the meaning and significance of any two of the following ratio:-
(i) Gross Profit Ratio,
(ii) Quick Ratio and
(iii) Inventory Turnover Ratio.
Solution 21
(i) Gross Profit Ratio:- This ratio provides a correlation between Gross Profit and Operating Revenue, i.e. Sales of Net. This ratio is measured and seen in proportion. To compute this percentage, the formula is:
(ii) Quick Ratio:- The Fast Ratio shows whether the company is in a position to pay its existing obligations immediately or within a month. As such, by dividing liquid assets by current liabilities, the rapid ratio is calculated:
(iii) Inventory Turnover Ratio = This ratio reveals the relation between the cost of operational sales for the year and the average inventory carried during that year:
Numerical Questions:-
Question 1. From the following particulars compute the Current Ratio:
Solution1
Current Assets= Inventories + Trade Receivables + Current Inventories + Cash & cash equivalents
=Rs. 70,000 + Rs. 90,000 + Rs. 35,000 + Rs. 5,000
= Rs. 2,00,000
Current liabilities = Trade Payables + Short term Borrowings + Provision for tax + Outstanding Expenses
= Rs. 46,000 + Rs. 20,000 + Rs. 10,000 + Rs. 4,000
= RS. 80,000
Question 2. From the following compute (a) Current Ratio (b) Quick Ratio:
Solution2
Current Assets= Current Investments + Inventories (except loose tools) + Trade Receivables + Short term loans & Advances + Prepaid Insurance + Advance Payment of Tax + cash and cash equivalents
=Rs. 80,000 + Rs. 4,10,000 + Rs. 3,30,000 + Rs. 10,000 + Rs. 18,000 + Rs. 20,000 + Rs. 28,000
= Rs. 8,96,000
Current liabilities = Trade Payables + Short term Borrowings + short term provisions + Other Current Liabilities
= Rs. 1,80,000 + Rs. 60,000 + Rs. 25,000 + Rs. 15,000
= RS. 2,80,000
Liquid Assets: Current Assets – Inventories – Prepaid Insurance – Advance Payment of Tax
= Rs. 8,96,000 – Rs. 4,10,000 – Rs. 18,000 – Rs. 20,000
= Rs. 4,48,000
Question 3. Following particulars are given to you:
Calculate the Current Ratio and Quick Ratio. What Conclusions do you draw from these ratios?
Solution3.
Current Assets= Inventories + Trade Receivables + Short term Investments + Payment in Advance + Cash and cash equivalents + Accrued Income
=Rs. 2,50,000 + Rs. 1,30,000 + Rs. 30,000 + Rs. 20,000 + Rs. 40,000 + Rs. 10,000
= Rs. 4,80,000
Current liabilities = Short term Borrowings + Short term provisions + Trade Payables + expenses payable
= Rs. 20,000 + Rs. 30,000 + Rs. 95,000 + Rs. 5,000
= RS. 1,50,000
Liquid Assets: Current Assets – Inventories – Payment in advance
= Rs. 4,80,000 – Rs. 2,50,000 – Rs. 20,000
= Rs.2,10,000
Comment: The short term financial position of the company is quite satisfactory because its current ratio is 3;2;1, which is more than the ideal current ratio of 2:1. Liquid ratio of the company is 1.4:1, which is also more than the ideal liquid ratio of 1:1.
Therefore, it can be said that the company is in a position to pat its current liabilities instantly.
Question 4 Calculate Current Ratio and Quick Ratio from the following. Also give your opinion about the short -term financial position of the company:
Solution 4
Current Assets= Cash and cash equivalents + Trade Receivables + Short term Investments + Inventory of raw Materials + Inventory of Finished Goods + Prepaid Expenses
=Rs. 10,000 + Rs. 71,000 + Rs. 20,000 + Rs. 80,000 + Rs. 60,000 + Rs. 9,000
= Rs. 2,50,000
Current liabilities =Trade Payables + Provision for Taxation +outstanding Expenses
= Rs. 1,00,000 + Rs. 25,000 + Rs. 5,000
= RS. 1,30,000
Liquid Assets: Cash & Cash Equivalents +Trade Receivables + Short Term Investments
= Rs. 10,000 – Rs. 71,000 – Rs. 20,000
= Rs.1,01,000
Comment: The ideal current ratio should be 2:1. But in this case the current ratio is 1.92:1 which is less than the ideal ratio. Therefore, it can be said that the short-term financial position of the company is not satisfactory.
The ideal quick ratio should be 1:1. But in this case the quick ratio is .78: 1, hence, the short- term financial position cannot be said to be satisfactory.
Question 5. From the following compute Current Ratio:
Solution5
Current Assets= Total Assets – Non- Current Assets
=Rs. 40,00,000 – Rs. 22,00,000
= Rs. 18,00,000
Current liabilities = Total Assets – Share Capital – Reserve & Surplus – Non-Current Liabilities
= Rs. 40,00,000 + Rs. 24,00,000 + Rs. 3,00,000 – Rs. 8,00,000
= RS. 5,00,000
Question 6. Calculate Current Ratio from the following information:
Solution6
Current Assets= Total Assets – Fixed Assets – Non- Current Investments
=Rs. 12,00,000 – Rs. 6,00,000 – Rs. 1,00,000 – Rs. 1,40,000
= Rs. 3,60,000
Total Assets will be equal to the Total of Equity & Liabilities Hence,
Current liabilities = Total Assets – Shareholder’s Funds – Non-Current Liabilities
= Rs. 12,00,000 + Rs. 8,50,000 + Rs. 1,10,000
= Rs. 2,40,000
Question 7(A) Current Ratio of a Company is 2:1. Which of the following suggestions would improve the ratio, which would reduce it and which would not change it?
I.Purchase of goods on Credit.
ii.Purchase of goods against Cheque.
iii.Sale of goods Costing Rs. 50,000 for Rs. 60,000 on credit.
iv.To sell a fixed asset at a slight loss.
v.To borrow money on a promissory note (B/P).
vi.To give promissory note to a Creditor.
Solution7(A) Current Ratio as given in the question is 2:1. In order to understand the question in a simple manner, it may be assured that current assets are Rs. 2,00,000 and current liabilities are Rs. 1,00,000.
- Purchase of goods on Credit: Suppose, goods for Rs. 25,000 is purchased on credit, the revised current ratio would be:
the current ratio is reduced.
Purchase of goods against Cheque: Suppose, goods for Rs. 25,000 is purchased for cash, the revised current ratio would be:
the current ratio has not changed.
l. Sale of Goods coasting Rs. 50,000 for Rs. 60,000 on Credit: the effect of the above will be decrease in Inventory by Rs. 50,000 and increase in Trade Receivables by Rs. 60,000. Thus, the revised current ratio would be:
the current ratio is improved.
l. To sell a fixed asset at a slight loss: Sale of a fixed assets results in the increase in Cash balance even through the asset is sold at a slight loss. Suppose the fixed asset worth Rs. 50,000 is sold at a loss Rs. 1,500 i.e., at Rs. 48,500, the revised current ratio would be:
the current ratio is improved.
l. To borrow money on a promissory note (B/P): Borrowing money on the basis of a promissory note increases cash on one hand and increases B/P on the other hand. Thus, if Rs. 40,000 are borrowed on the basis of a promissory, then the revised current ratio would be:
the current ratio is reduced.
IV To give a promissory note a creditor: Suppose a promissory note for ES. 25,000 is given to a creditor. Its effect would be an increased in B/P by RS. 25,000 and decreased in the trade payables by RS. 25,000. Thus the revised ratio would ne:
the current ratio has not is reduced.
Question 7(B) The Current Ratio of a company is 2:5:1. Which of the following suggestions would improve, reduce and not change it?
i. Payment to trade payables.
ii. Sell machinery against cheque.
iii. Sale of inventory at loss against Cheque.
iv. Cash collected from trade receivables.
v. B/P dishonored.
vi. Issue of shares.
vii. Issue of shares against the purchase of a building
viii. Redemption (Repayment) of Debentures
Solution7(B)
Current Ratio as given in the question 2.5:2. Hence, it may be assured that Current Assets are Rs. 2,50,000 and current Liabilities are RS. 1,00,000.
i. Payment to trade payables: Suppose, trade payables amounting to RS. 25,000 are repaid, the revised current ratio would be:
The current ratio is improved.
i. Sell machinery against cheque: Suppose a machinery is solid for Rs. 50,000, the revised current ratio would be:
The current ratio is improved.
ii. Sale of inventory at loss against Cheque: Suppose, inventory costing 50,000 is sold for RS. 40,000 ON credit, the revised current ratio would be:
The current ratio is reduced.
iii. Cash collected from trade receivables: Suppose cash amounting to Rs. 50,000 is collected from received trade received, the revised current ratio would be:
iv. B/P dishonored: Suppose, a B/R for RS. 50,000 is dishonored, it will result in decrease in B/R and increases in trade receivables. Hence, the revised current ratio would bd:
Issue of shares: Suppose: shares for Rs. 1,00,000 are issued for cash:
The current ratio is improved.
vi. Issue of shares against the purchase of a building: Suppose, share of RS. 1,00,000 are issued against the purchase of Building. It will result increase in Capital on the one hand and increase in building on the other hand Since there is no either on Current assets or a current liabilities, the current ratio would not change.
vii. Redemption (Repayment) of Debentures: Debentures, which are to be redeemed are included in current liabilities. Hence. The current assets as well as current liabilities will be reduced. Suppose, debentures for RRs. 50,000 are redeemed:
The current ratio is improved.
Question 8. Assuming that the Current ratio is 1.5:1, State giving reasons, which of the following transactions would (i) improve, (ii) reduce, (iii) not alert the current ratio:-
i. Realization of current assets
ii. Payment of current liabilities
iii. B/R dishonored
iv. Sale of goods at par
v. Sale of goods at profit
vi. Sale of goods at loss
vii. Purchase of goods for cash
viii. Purchase of goods on credit of 3 months
ix. Sale of furniture for cash
x. Sale of machinery on a credit of 5 months
xi. Sale of land on long- term deferred payment basis
xii. Purchase of motor car for cash
xiii. Purchase of building on a credit of 4 months
xiv. Purchase of a plot of land on long-term deferred payment basis.
xv. Repayment of long- term loan which was availed from a bank
xvi. Issue of shares for cash.
Solution8 Statement showing the effect of various transactions on Current Ratio:
Question 9. The Current Ratio of a company is 3:1. State giving reasons which of the following suggestions would (i) improve, (ii) reduce, (iii) not change; the Current Ratio:-
(a) Payment of trade payables.
(b) Sale of goods costing Rs. 20,000 for Rs. 20,000 for Cash .
(c) Sale of goods costing Rs. 20,000 for Rs. 18,000 for Credit.
(d) Sale of goods costing Rs. 20,000 at a profit of Rs. 1,000.
(e) Purchase of goods on Credit.
(f) Purchase of goods for Cash.
(g) Purchase of machinery against long- term loan.
Solution9 Statement showing the effect of various transactions on Current Ratio;
Question 10. State giving reason, whether the Current Ratio will improve or decline or will have no effect in each one of the following transactions if Current Ratio is (i) 2.5:1, (ii) 1:1, (iii) 0.75:1.
- paid Rs. 50,000 to a Creditor.
- Sale of goods at a loss of 10%.
- Sale of a fixed assets for Rs. 1,00,000 (Book Value Rs. 1,20,000).
- Payment of outstanding salaries.
- Received Rs. 25,000 from a debtor of Rs. 30,000 in full settlement of his account.
- Bills payable discharged on maturity.
- Bills Receivable drawn on debtor.
- Purchase goods on credit.
- Issue debentures to the vendors of machinery.
Solution10:
The influence of different transactions on the Current Ratio is seen in this statement:
Question 11. State giving reason, which of the following transactions would Improve; Reduce or Not Change the Quick Ratio if Quick Ratio is (i) 1.5:1, (ii) 1:1, (iii) 0.8:1.
a. Payment of outstanding Liabilities.
b. Debentures of Rs. 2,00,000 converted into Equity shares.
c. Purchase goods on credit of 2 months.
d. B/R endorse to creditors.
e. Sale of goods Costing Rs. 50,000 for Rs. 45,000.
f. B/R drawn on a Debtor.
g. Paid rent Rs. 3,000 in advance.
h. Trade receivables included a debtor sh. Ashok who paid his entire amount Rs. 9,700.
Solution 11:
The influence of various transactions on the Quick Ratio is seen in this sentence:-
Question 12. Calculate Current Ratio from the following:
Working Capital Rs. 1,92,000; Long term Debt Rs. 80,000 and Total debt Rs. 2,00,000.
Solution 12
Calculation of current ratio:-
Current Ratio = (Current Assets)/(Current Liabilities)
Current Ratio = (RS.3,12,000)/(Rs.1,20,000)
Current Ratio = 2.6:1
So, the Current Ratio is 2.6 : 1.
Below is the Calculation of Current Liabilities:-
Current liabilities = Total debt – Long term Debt
Current liabilities = Rs. 2,00,000 – Rs. 80,000
Current liabilities = Rs. 1,20,000
Below is the Calculation of Current Assets:-
Current Assets = Working Capital + Current Liabilities
Current Assets = Rs. 1,92,000 + Rs. 1,20,000
Current liabilities = Rs. 3,12,000
Question 13. Calculate Current Ratio from the following:
Working Capital Rs. 4,80,000; Trade Payables Rs. 2,00,000 and Bank Overdraft Rs. 40,000.
Solution 13:
Calculation of current ratio:-
Current Ratio = (Current Assets)/(Current Liabilities)
Current Ratio = (RS.7,20,000)/(Rs.2,40,000)
Current Ratio = 3:1
So, the Current Ratio is 3 : 1.
Below is the Calculation of Current Liabilities:-
Current liabilities = Trade Payables – Bank Overdraft
Current liabilities = Rs. 2,00,000 – Rs. 40,000
Current liabilities = Rs. 2,40,000
Below is the Calculation of Current Assets:-
Current Assets = Working Capital + Current Liabilities
Current Assets = Rs. 4,80,000 + Rs. 2,40,000
Current Assets = Rs. 7,20,000
Question 14. Calculate Current Ratio from the following:
Working Capital Rs. 4,80,000; Current Assets Rs. 6,00,000; inventory Rs. 4,00,000 and Trade Receivables Rs. 1,50,000.
Solution14.
Calculation of current ratio:-
Current Ratio = (Current Assets)/(Current Liabilities)
Current Ratio = (Rs. 6,00,000)/(Rs. 1,20,000)
Current Ratio = 5:1
So, the Current Ratio is 5:1.
Below is the Calculation of Current Liabilities:-
Current liabilities = Current Assets – Working Capital
Current liabilities = Rs. 6,00,000 – Rs. 4,80,000
Current liabilities = Rs. 2,20,000
Question 15 (A)
A firm had current assets of Rs. 4,10,000. It then paid trade payables of Rs. 50,000. After this payment, the current ratio was 2.4:1. Ascertain the amount of Current Liabilities and working Capital after the payment.
Solution 15 (A)
By the formula of calculation of current ratio:-
Current Ratio = (Current Assets)/(Current Liabilities)
Current Liabilities = (Current Assets)/(Current Ratio)
Current Liabilities = (Rs.3,60,000)/2.4
Current Liabilities = Rs. 1,50,000
Below is the Calculation of Current Assets:-
Current Assets = Rs. 4,10,000 – Rs. 50,000
Current Assets = Rs. 3,60,000
Below is the Calculation of Working Capital:-
Working Capital = Current Assets – Current Liabilities
Working Capital = Rs. 3,60,000 – Rs. 1,50,000
Working Capital = Rs. 2,10,000
Question 15 (B)
A firm had current assets of Rs. 7,20,000. It then purchased goods for Rs. 30,000 on Credit. After this purchase, the current ratio was 3:1. Ascertain the amount of Current Liabilities and Working Capital after the purchase.
Solution 15 (B)
By the formula of calculation of current ratio:-
Current Ratio = (Current Assets)/(Current Liabilities)
Current Liabilities = (Current Assets)/(Current Ratio)
Current Liabilities = (Rs.7,50,000)/3
Current Liabilities = Rs. 2,50,000
Below is the Calculation of Current Assets:-
Current Assets = Rs. 7,20,000 – Rs. 30,000
Current Assets = Rs. 7,50,000
Below is the Calculation of Working Capital:-
Working Capital = Current Assets – Current Liabilities
Working Capital = Rs. 7,50,000 – Rs. 2,50,000
Working Capital = Rs. 5,00,000
Question 16 (A)
Current Ratio 2:1, Quick Ratio 1.5:1, Current Liabilities Rs. 1,60,000. Calculate Current Assets, Quick Assets and Inventory.
Solution 16 (A)
By the formula of calculation of current ratio:-
Current Ratio = (Current Assets)/(Current Liabilities)
It is given that,
Current Ratio = 2,
Current Liabilities = Rs. 1,60,000
Putting the values in formula:-
2 = (Current Assets)/(Rs.1,60,000)
Current Assets = Rs. 1,60,000 × 2
Current Assets = Rs. 3,20,000
So, the Current Assets is Rs. 3,20,000.
Calculation of Quick ratio:-
Quick Ratio = (liquid Assets)/(Current Liabilities)
It is given that,
Quick Ratio=1.5
Current Liabilities = Rs. 1,60,000
1.5 = (Quick Assets)/1,60,000
Quick Assets = Rs. 1,60,000 × 1.5
Quick Assets = Rs. 2,40,000
So, the Quick Assets is Rs. 2,40,000
Calculation of Inventory:-
Inventory = Current Assets – liquid Assets
Inventory = Rs. 3,20,000 – Rs. 2,40,000
Inventory = Rs. 80,000
Question 16.(B)
Current Ratio 2.5:1,
Quick Ratio 0.95:1,
Current Assets Rs. 17,00,000.
Calculate Current Liabilities, Quick Assets and Inventory.
Solution 16 (B)
By the formula of current ratio we get:-
Current Ratio = (Current Assets)/(Current Liabilities)
It is given that,
Current Ratio =2.5
Current Assets = Rs. 17,00,000
2.5 = (Rs.17,00,000)/(Current Liabilities)
Current liabilities = (Rs.17,00,000)/2.5
Current liabilities = Rs. 17,00,000 × 10/25
Current liabilities = Rs. 6,80,000
So, the current liabilities are Rs. 6,80,000.
By the formula of current ratio we get:-
Quick Ratio = (Quick Assets)/(Current Liabilities)
It is given that,
Quick Ratio = 0.95
Current Liabilities = Rs. 6,80,000
0.95 = (Quick Assets)/(Rs.6,80,000)
Quick Assets = Rs. 6,80,000 × 0.95
Quick Assets = Rs. 6,46,000
Calculation of Inventor:-
Inventory = Current Assets – liquid Assets
Inventory = Rs. 17,00,000 – Rs. 6,46,000
Inventory = Rs. 10,54,000
Question 16(C)
Working capital Rs. 5,40,000; current Ratio 2.8:1; Inventory Rs. 3,30,000.
Calculate Current Assets, Current liabilities and Quick Ratio.
Solution 16 (C)
(i) Calculation of Woking Capital:-
Working Capital = Current Assets – Current liabilities
It is given that,
Current Ratio = 2.8: 1
Working capital Ratio = 2.8 – 1 = 1.8
So, the Working Capital is 1.8
Current Assets = 2.8
Calculation of Current Assets:-
Current Assets = 2.8/1.8 × 5,40,000
Current Assets = Rs. 8,40,000
So, the current assets of the company is Rs. 8,40,000.
(ii) Below is the Calculation of Current Liabilities:-
Current Liabilities = Current Assets – Working Capital
Current Liabilities = Rs. 8,40,000 – Rs. 5,40,000
Current Liabilities = Rs. 3,00,000
So, the current Liabilities of the company is Rs. 3,00,000.
(iii) Below is the Calculation of Quick Ratio:-
Quick Ratio = (liquid Assets)/(Current Liabilities)
Quick Ratio = 5,10,000/3,00,000
Quick Ratio = 1.7:1
Calculation of Liquid Assets:-
Liquid Assets = Current Assets – Inventory
Liquid Assets = Rs. 8,40,000 – Rs. 3,30,000
Liquid Assets = Rs. 5,10,000
Question 17
A business has a Current Ratio of 4:1 and a Quick Ratio of 1.2 :1. If the working Capital is Rs. 1,80,000, Calculate the total current Assets and Inventory.
Solution 17
Calculation of Working Capital:-
Working Capital = Current Assets – Current Liabilities
It is given that,
Current Ratio = 4:1
Current ratio to the working capital is 4 – 1 = 3
Working Capital is 3, Current Assets = 4
So, the ratio of working capital and current assets is
Below is the Calculation of Current Assets:-
Current Assets = 4/3 × Rs. 1,80,000
Current Assets = Rs. 2,40,000
Below is the Calculation of Current Liabilities:-
Current Liabilities = Current Assets – Working Capital
Current Liabilities = Rs. 2,40,000 – Rs. 1,80,000
Current Liabilities = Rs. 60,000
It is given that,
Quick Ratio= 1.2,
Current Liabilities = Rs. 60,000
Quick Ratio = (liquid Assets)/(Current Liabilities)
1.2 = (liquid Assets)/(RS.60,000)
Liquid Assets = Rs. 60,000 × 1.2
Liquid Assets = Rs. 72,000
Calculation of Inventory:-
Inventory = Current Assets – Liquid Assets
Inventory = Rs. 2,40,000 – Rs. 72,000 = Rs. 1,68,000
Question 18. Current Ratio 2.4; Current Assets Rs. 1,81,10,400; inventories Rs. 79,23,300. Calculate the Liquid Ratio.
Solution18
Calculation of current ratio:-
Current Ratio = (Current Assets)/(Current Liabilities)
2.4 = (Rs.1,81,10,400)/(Current Liabilities)
Current Liabilities = 75,46,000
It is given that,
Current Ratio = 2.4
Current Assets = Rs. 1,81,10,400
Liquid Ratio = (liquid Assets)/(Current Liabilities)
Liquid Ratio = 1,01,87,100/75,46,000
Liquid Ratio = 1.35:1.
Calculation of Liquid Assets:-
Liquid Assets = Current Assets – Inventories
Liquid Assets = Rs. 1,81,10,400 – Rs. 79,23,300
Liquid Assets = Rs. 1,01,87,100
Comment:
The company’s short-term financial situation is adequate, since its liquid ratio is 1.35:1, which is greater than the optimal ratio of 1:1.
Question 19. Quick Ratio 1.5; Current Assets Rs. 1,00,000; Current Liabilities Rs. 40,000. Calculate the value of Inventory.
Solution 19
It is given that,
Quick ratio = 1.5
Current Liabilities=40,000;
Formula of Quick Ratio:-
Quick Ratio = (liquid Assets)/(Current Liabilities)
1.5 = (liquid Assets)/(Rs.40,000)
Liquid Assets = Rs. 40,000 × 1.5 = Rs. 60,000
Inventory – Current Assets- Liquid Assets
Inventory = Rs. 1,00,000 – Rs. 60,000
Inventory = Rs. 40,000.
So, the value of Inventory is 40,000.
Question 20. A company’s inventory is Rs. 2,00,000. Total liquid assets are Rs. 8,00,000 and quick ratio is 2:1. Calculate the current ratio.
Solution 20
It is given that,
Quick ratio = 2
Liquid assets=8,00,000;
Quick Ratio = (liquid Assets)/(Current Liabilities)
2= (Rs.8,00,000)/(Current Liabilities)
Current Liabilities = (Rs.8,00,000)/2
Current Liabilities = Rs. 4,00,000
Below is the Calculation of Current Assets:-
Current Assets = Liquid Assets + Inventory
Current Assets = Rs. 8,00,000 + Rs. 2,00,000
Current Assets = Rs. 10,00,000
Calculation of Current Ratio is :-
Current Ratio = (Current Assets)/(Current Liabilities)
Current Ratio = 10,00,000/4,00,000
Current Ratio = 2.5:1
Question 21. A firm has current Ratio 4.5:1 and quick Ratio of 3:1. If its inventory is Rs. 72,000, find out its total current assets and total current liabilities.
Solution21
It is given that,
Current Ratio is 4.5
Quick ratio is 3
Inventory is the difference between the current and quick ratios.
Inventory = 4.5 – 3
Inventory = 1.5
If Inventory is 1.5 and Current Assets = 4.5 then the ratio of current assets and inventory is
Current Assets = 4.5/1.5
Inventory = 72,000
Current Assets = 4.5/1.5 × 72,000
Current Assets = Rs. 2,16,000
So, the Current Assets is Rs. 2,16,000
Calculation of Current Liabilities:-
Current Liabilities = (Rs.2,16,000)/4.5
Current Liabilities = Rs. 48,000.
So, the value of Current Liabilities is Rs. 48,000.
Question 22.(A)
Current Assets Rs. 85,000; inventory Rs. 22,000; prepaid expenses Rs. 3,000; Working Capital Rs. 45,000. Calculate Quick Ratio.
Solution 22 (A)
Calculation of Quick Assets:-
Quick Assets = Current Assets – Inventory – Prepaid Expenses
Quick Assets = Rs. 85,000 – Rs. 22,000 – Rs. 3,000
Quick Assets = Rs. 60,000
Calculation of Current Liabilities:-
Current Liabilities = Current Assets – working Capital
Current Liabilities = Rs. 85,000 -Rs. 45,000
Current Liabilities = Rs. 40,000
Computation of Quick Ratio:-
Quick Ratio = (Quick Assets)/(Current Liabilities)
Quick Ratio = (Rs.60,000)/(Rs.40,000)
Quick Ratio = 1.5:1.
Question 22.(B)
Quick Assets Rs. 90,000; Inventory Rs. 1,08,000; prepaid Expenses Rs. 2,000; Working Capital Rs. 1,50,000. Calculate Current Ratio.
Solution 22 (B):
Calculation of current ratio:-
Current Ratio = (Current Assets)/(Current Liabilities)
Current Ratio = (Rs. 2,00,000)/(Rs.450,000)
Current Ratio = 4:1.
So, the current ratio is 4:1.
Calculation of Current Assets:
Current Assets = Quick Assets – Inventory – Prepaid Expenses
Current Assets = Rs. 90,000 – Rs. 1,08,000 – Rs. 2,000
Current Assets = Rs. 2,00,000
Below is the Calculation of Current Liabilities:-
Current Liabilities = Current Assets – Working Capital
Current Liabilities = Rs. 2,00,000 -Rs. 1,50,000
Current Liabilities = Rs. 50,000
Question 23. Working Capital Rs. 4,80,000; Total Debt Rs. 16,00,000; Long Term Debt Rs. 10,00,000; Inventory Rs. 3,40,000; Prepaid insurance Rs. 20,000. Calculate liquid ratio.
Solution23.
Calculation of Liquid ratio:-
Liquid Ratio = (Liquid Assets)/(Current Liabilities)
Liquid Ratio = (Rs. 7,20,000)/(Rs.6,00,000)
Liquid Ratio = 1.2
So, the Liquid Ratio is 1.2.
Below is the Calculation of Current Liabilities:-
Current Liabilities = Total debt – Long term Debt
Current Liabilities = Rs. 16,00,000 – Rs. 10,00,000
Current Liabilities = Rs. 6,00,000
Below is the Calculation of Current Assets:-
Current Assets = Current Liabilities + working Capital
Current Assets = Rs. 6,00,000 -Rs. 4,80,000
Current Assets = Rs. 10,80,000
Below is the Calculation of Liquid Assets:-
Liquid Assets = Current Assets – Inventory – prepaid Insurance
Liquid Assets = Rs. 10,80,000 – Rs. 3,40,000 – Rs. 20,00
Liquid Assets = Rs. 7,20,000
Question 24 The ratio of current Assets (Rs. 32,00,000) to Current liabilities (Rs. 20,00,000) is 1.6:1. The accountant of the firm is interested in maintaining a Current Ratio 2:1, by paying off a part of the Current Liabilities. Compute the amount of the Current Liabilities that should be paid, so that the Current ratio at the level 2:1 may be maintained.
Solution24
It if given that the Current Ratio of the company is 2.
Payment of existing liabilities would result in a decrease of both current assets and current liabilities.
Suppose the amount of current liabilities is = x
Current Ratio = (Current Assets)/(Current Liabilities)
Current Ratio = (Rs.32,00,000-x)/(Rs.20,00,000-x)
2 = (Rs.32,00,000-x)/(Rs.20,00,000-x)
2 × (Rs. 20,00,000-x) = Rs. 32,00,000-x
Rs. 40,00,000 – 2 x=32,00,000- x
Rs. 40,00,000 – 32,00,000=2 x- x
8,00,000 = x
To reach a Current Ratio of 2:1, current liabilities to the extent of Rs. 8,00,000 should be charged.
Question 25. The ratio of Current Assets (Rs. 5,00,000) to Current Liabilities is 2.5:1. The accountant of this firm is interested in maintaining a Current Ratio of 2:1 by acquiring some Current Assets on Credit. You are required to suggest him the amount of current Assets which must be acquired for this purpose.
Solution25
It is given that the current Ratio of the company is 2.5 and Current Assets is 5,00,000.
Calculation of Current Ratio:-
Current Ratio = (Current Assets)/(Current Liabilities)
2.5 = (Rs.5,00,000)/(Current Liabilities)
Current Liabilities = (Rs.5,00,000)/2.5
Current Liabilities = Rs. 2,00,000
Comment:-
Current Assets must be bought on credit in order to reduce the Current Ratio. However, an increase in existing assets on credit is followed by an increase in current liabilities. Assume that the volume of current assets to be purchased is x. Following the purchase, the acquirer has Existing Assets of Rs. x on credit.
Current Assets = Rs. 5,00,000 + x
Current liabilities = Rs. 2,00,000 + x
Current ratio = (Current Assets)/(Current Liabilities)
2 = (Rs. 5,00,000+x )/( Rs. 2,00,000+x )
Rs. 4,00,000 + 2x = Rs. 5,00,000 + x
2x-x = Rs. 1,00,000
x = Rs. 1,00,000
Comment:-
To sustain a Current Ratio of 2:1, current assets worth Rs. 1,00,000 should be purchased on credit.
Question 26. Calculation the debt Equity Ratio from the following:-
Solution 26:
Calculation of Debt-Equity Ratio:-
Debt- Equity Ratio = (Long term Debt )/( Shareholder^’ s Funds)
Debt Equity Ratio = (Rs.2,60,000 )/( Rs.4,60,000 )
Debt Equity Ratio = 0.57:1.
So, the Debt Equity Ratio is 0.57:1.
Below is the Calculation of Long term Debts:-
Long term Debts = Long term Borrowings + Long term Provisions
Long term Debts = Rs. 2,00,000 + Rs. 60,000 = Rs. 2,60,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Equity Share Capital + Preference Share Capital + Reserve – Profit & Loss Balance
Shareholder’s Funds = Rs. 3,00,000 + Rs. 50,000 + Rs. 1,60,000 – Rs. 50,000
Shareholder’s Funds = Rs. 4,60,000
Point for Students:-
Other formula of Debt- Equity Ratio is (Debt )/( Equity )
Question 27. From the following, ascertain Debt – Equity Ratio:
Solution 27:
Calculation of Debt-Equity Ratio:-
Debt- Equity Ratio = (Long term Debt )/( Shareholder^’ s Funds)
Debt Equity Ratio = (Rs.9,52,000 )/( Rs.11,20,000 )
Debt Equity Ratio = 0.85:1.
So, the Debt Equity Ratio is 0.85:1.
Below is the Calculation of Long term Debts:-
Long term Debts = 8% Debentures + 10% Long term loan + Long term Provisions
Long term Debts = Rs. 5,00,000 + Rs. 3,40,000 + Rs.1,12,000
Long term Debts = Rs. 9,52,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Share Capital + Capital Reserve + General Reserve + Profit & Loss Balance
Shareholder’s Funds = Rs. 6,00,000 + Rs. 3,20,000 + Rs. 60,000 + Rs. 1,40,000
Shareholder’s Funds = Rs. 11,20,000
Point for Students:-
Other formula of Debt- Equity Ratio is (Debt )/( Equity )
Question 28. Balance Sheet of X Ltd. shows the following information as at 31st March, 2016;
Calculate ratios indicating the loan-term and Short -term financial position of the Company.
Solution 28:
(i) The Debt-Equity Ratio can be used to measure a company’s long-term financial condition.
Debt- Equity Ratio = (Long term Debt )/( Shareholder^’ s Funds)
Debt Equity Ratio = (Rs.50,00,000 )/( Rs.25,00,000 )
Debt Equity Ratio = 2:1.
So, the Debt Equity Ratio is 2:1.
Below is the Calculation of Long term Debts:-
Long term Debts = Long term Borrowings + Public Deposits
Long term Debts = Rs. 10,00,000 + Rs. 15,00,000
Long term Debts = Rs. 50,00,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Share Capital + Reserve and Surplus
Shareholder’s Funds = Rs. 10,00,000 + Rs. 15,00,000
Shareholder’s Funds = Rs. 25,00,000
(ii) The short-term financial health of an organisation can be determined by measuring:-
Current Ratio = (Current Assets )/( Current Liabilities)
Current Ratio = (16,00,000 )/( 10,00,000)
Current Ratio = 1.6 : 1
So, the Current Ratio is 1.6 : 1
Point for Students:-
Other formula of Debt- Equity Ratio is (Debt )/( Equity )
Question 29. Calculate debt Equity Ratio from the following;
Solution29
Calculation of Debt-Equity Ratio:-
Debt-Equity Ratio = (Long term Debt )/( Shareholder^’ s Funds)
Debt-Equity Ratio =(Rs.17,50,000 )/( Rs.12,50,000)
Debt-Equity Ratio = 1.4 : 1.
So, the Debt-Equity Ratio is 1.4 : 1.
Below is the Calculation of Long term Debts:-
Long term Debts = Long term Borrowings + Long term Provisions
Long term Debts = Rs. 16,00,000 + Rs. 1,50,000
Long term Debts = Rs. 17,50,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Non-Current Assets + Working Capital – Non- Current Liabilities
Non- Current Assets = Tangible Fixed Assets + Intangible Fixed Assets
Non- Current Assets = Rs. 24,50,000 + Rs. 3,00,000
Non- Current Assets = Rs. 27,50,000
Below is the Calculation of Working Capital:-
Working Capital = Current Assets – Current Liabilities
Working Capital = Rs. 3,34,000 – Rs. 84,000
Working Capital = Rs. 2,50,000
Long-term obligations are referred to as non-current liabilities:-
Shareholder’s Funds = Rs. 27,50,000 + Rs. 2,50,000 – Rs. 17,50,000
Shareholder’s Funds = Rs. 12,50,000
Question 30. Calculate Debt Equity Ratio from the following:
Total Assets Rs. 2,30,000; Total Debts Rs. 1,50,000; Current Liabilities Rs. 30,000.
Solution 30
Calculation of Debt-Equity Ratio:-
Debt Equity Ratio = (Long term Debt )/( Shareholder^’ s Funds)
Debt Equity Ratio = (Rs.1,20,000 )/( Rs.80,000 )
Debt Equity Ratio = 1.5:1.
So, the Debt Equity Ratio is 1.5:1.
Below is the Calculation of Long term Debts:-
Long Term Debt = Total Debts- Current Liabilities
Long Term Debt = Rs. 1,50,000 + Rs. 30,000
Long Term Debt = Rs. 1,20,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds =Total Assets + Total debt
Shareholder’s Funds = Rs. 2,30,000 + Rs. 1,50,000
Shareholder’s Funds = Rs. 80,000
Point in Mind:-
The relationship between long-term debts and shareholder funds is represented by this ratio. It displays the percentage of funds acquired by long-term borrowings as opposed to shareholder funds. This ratio is used to decide a company’s ability to fulfil long-term obligations. A debt-to-equity ratio of 2:1 is commonly regarded as safe.
Question 31. The Debt Equity ratio of a company is 1:2. Which of the following would increase, decrease or not change it?
(i) Issue of equity shares
(ii) Cash Received from Trade Receivables
(iii) Sale of Goods on Cash Basis
(iv) Repayment of long-term borrowing
(v) Purchase Goods on Credit
Solution 31:
Debt Equity Ratio =(Debt )/( Equity ) or (Long term Debt )/( Shareholder’ s Funds)
Since the Debt – Equity Ratio in the above issue is 1:2, it is fair to conclude that long-term loans total Rs. 1,00,000 and share holders’ fund shares total Rs. 2,00,000.
(i) Issue of Equity Shares: If Rs. 1,00,000 worth of equity shares are released, the shareholder’s funds will increase to Rs. 2,00,000 + Rs. 1,00,000 = Rs. 3,00,000. As a result, the updated ratio would be as follows:
(Rs.1,00,000 )/( Rs.3,00,000 ) = .33:1
The ratio was 1:2 or (.5:1) before the issue of equity shares, but it has now been reduced to.33:1, suggesting that the ratio has decreased. As a result, it is possible to assume that an increase in shareholder assets lowered the ratio.
(ii) Cash Received from Trade Receivables: Only the cash and trade receivables will be impacted by obtaining cash from trade receivables. As a result, the debt equity ratio will not adjust because neither the long-term debt nor the shareholder funds are affected.
(iii) Sale of goods on cash Basis: Only the inventories and cash would be impacted by products exchanged for cash. As a result, the debt-to-equity ratio will not adjust because neither the long-term obligations nor the Shareholders’ Funds are affected.
(iv) Repayment of long term Borrowings: If a long-term loan of Rs. 50,000 is repaid, the Long-Term Debts will be reduced by Rs. 50,000, leaving the overall debt at Rs. 1,00,000 – Rs. 50,000 = Rs. 50,000. As a result, the new ratio would be:
(Rs.50,000 )/( Rs.2,00,000 ) =.25:1.
Prior to the repayment of long-term debt, the ratio was 1:2 (.5:1), but it is now.25:1. It signifies a decline in the ratio.
(v) Purchase of Goods on credit: Only inventories and trade payables would be impacted by products bought on credit. As a result, the debt-to-equity ratio will not adjust because neither the long-term obligations nor the Shareholders’ Funds are affected.
Question 32. Assuming that the debt- equity ratio is 2:1, state giving reasons, which of the following transactions would (i) increase (ii) decrease (iii) not alter the debt-equity ratio:-
(i)Issue of Preference Shares
(ii)Buy -back of its own shares by a Company
(iii)Issue of Debentures
(iv)Repayment of Bank Loan
(v)Sale of a fixed assets at par
(vi)Sale of a fixed assets at profit
(vii)Sale of a fixed assets at loss
(viii)Purchase of a fixed assets on a credit of 3 months
(ix)Purchase of a fixed assets on long term deferred payment basis
Solution 32:
The influence of various transactions on the Debt-Equity Ratio is shown in the following table:-
Question 33. Compute Total Assets to debt Ratio from the following information;
| Rs. | Rs. | ||
| Total Assets | 35,00,000 | Bills payables | 20,000 |
| Total Debts | 32,00,000 | Short -term Borrowings | 1,00,000 |
| Creditors | 2,50,000 | Outstanding Expenses | 30,000 |
Solution 33:
Calculation of Debt-Equity Ratio:-
Total Assets to Debt ratio = (Total assets )/( Debt )
Total Assets to Debt Ratio = 35,00,000/( 28,00,000)
Total Assets to Debt Ratio = 1.25 : 1
So, the Debt Equity Ratio is 1.25 : 1.
Below is the Calculation of Long term Debts:-
Long term debts = total Debts- Creditors – Bills payables- Short term Borrowings – Outstanding Exp.
Long term debts = Rs.32,00,000 – Rs.2,50,000 – Rs.20,000 – Rs.1,00,000 – Rs. 30,000
Long term debts = Rs. 28,00,000
Question 34. Calculate total Assets to debt ratio from the following information:
| Rs. | Rs. | ||
| Shareholder’s Funds | 32,00,000 | Total Debts | 24,00,000 |
| Reserve and Surplus | 12,00,000 | Trade Payables | 5,60,000 |
| 2,50,000 | Bank Overdraft | 40,000 |
Solution 34.
Calculation of Debt-Equity Ratio:-
Total Assets to Debt ratio = (total assets )/( Debt (i.e.,Long Term Debts) )
Total Assets to Debt Ratio = 56,00,000/( 18,00,000)
Total Assets to Debt Ratio = 3.11:1
So, the Debt Equity Ratio is 3.11:1.
Below is the Calculation of Long term Debts:-
Total Term debts = Total Debts- Trade Payables – Bank Overdraft
Total Term debts = Rs.24,00,000 – Rs.5,60,000 – Rs.40,000
Total Term debts = Rs. 18,00,000
Below is the Calculation of Shareholder’s Funds:-
Total Assets = Shareholder’s Funds + Total Debts
Total Assets = Rs. 32,00,000 + Rs. 24,00,000
Total Assets = Rs. 56,00,000
Working Note:-
Since Reserve and Surplus are already included in Shareholder’s Fund, they will be overlooked.
Question 35. From the following information, calculate total Assets to Debt Ratio:
| Rs. | Rs. | ||
| 8% Debentures | 30,00,000 | Share Capital | 20,00,000 |
| Loan from Bank | 10,00,000 | Reserve and surplus | 5,00,000 |
| Short term Borrowing | 8,60,000 | Surplus, i.e., Balance in Statement of profit & Loss | 2,20,000 |
Solution 35
Calculation of Debt-Equity Ratio:-
Total Assets to Debt ratio = (total assets )/( Debt (i.e.,Long Term Debts) )
Total Assets = (Rs.73,60,000)/( 40,00,000)
Total Assets = 1.84:1
So, the Debt Equity Ratio is 1.84:1.
Below is the Calculation of Long term Debts:-
Long Term debts = 8% debentures + Loan from Bank
Long Term debts = Rs.30,00,000 – Rs.10,00,000
Long Term debts = Rs. 40,00,000
Below is the Calculation of Total Assets:-
Total Assets = Shareholder’s Funds (i.e., Share Capital + Reserve and Surplus) + Total Debts (i.e., 8% Debentures + Loan from Bank + Short term Borrowings)
Total Assets = Rs. 20,00,000 + Rs. 5,00,000 + Rs. 30,00,000 + Rs. 10,00,000 + Rs. 8,60,000
Total Assets = Rs. 73,60,000
Working Note:-
The surplus, i.e., the balance in the profit and loss statement, would be overlooked since it is already contained in the Reserve ad Surplus.
Question 36. Total debt Rs. 40,00,000; Share Capital/ Rs. 15,00,000; Reserve and Surplus Rs. 8,00,000 ; current Liabilities Rs. 5,00,000 Working Capital Rs. 7,00,000. Calculate total assets to Debt ratio.
Solution 36:
Calculation of Debt-Equity Ratio:-
Total Assets to Debt ratio = (Total assets )/( Debt )
Total Assets to Debt Ratio = 63,00,000/( 35,00,000)
Total Assets to Debt Ratio = 1.8:1
So, the Debt Equity Ratio is 0.57:1.
Below is the Calculation of Long term Debts:-
Total Term debts = Total Debts – current Liabilities
Total Term debts = Rs.40,00,000 – Rs.5,00,000
Total Term debts = Rs. 35,00,000
Below is the Calculation of Total Assets:-
Total Assets = Total debt + Share Capital + Reserve and Surplus
Total Assets = Rs. 40,00,000 + Rs.15,00,000 + Rs. 8,00,000
Total Assets = Rs. 63,00,000
Point in Mind:-
The relationship between long-term debts and shareholder funds is represented by this ratio. It displays the percentage of funds acquired by long-term borrowings as opposed to shareholder funds. This ratio is used to decide a company’s ability to fulfil long-term obligations. A debt-to-equity ratio of 2:1 is commonly regarded as safe.
Question 37. Calculate total Assets to Debt ratio from the following:
| Rs. | Rs. | ||
| Capital Employed | 60,00,000 | Trade Payables | 8,00,00 |
| Share Capital | 20,00,000 | Outstanding expenses | 40,000 |
| Reserve and surplus | 16,00,00 |
Solution37.
Calculation of Total Assets to Debt ratio:-
Total Assets to Debt ratio = (Total assets )/( Debt )
Total Assets to Debt Ratio = 68,40,000/( 24,00,000)
Total Assets to Debt Ratio = 2.85 : 1
So, the Debt Equity Ratio is 2.85 : 1.
Below is the Calculation of Capital Employed:-
Capital Employed = Shareholder’s funds + Long term debts
Rs. 60,00,000 = Rs.20,00,000 + Rs.16,00,000 + Long term debts
Long term debts = Rs. 24,00,000
Below is the Calculation of Total Assets:-
Total Assets = Shareholder’s funds + Long term debts + Current liabilities
Total Assets = Rs. 20,00,000 + Rs.16,00,000 + Rs. 24,00,000 + Rs. 8,00,000 + Rs. 40,000
Total Assets = Rs. 68,40,000
Point in Mind:
Shareholder funds includes = Share Capital + Reserve and Surplus
Current Liabilities includes = Trade Payables + Outstanding Exp.
Shareholders Fund includes = Share Capital + Reserve and Surplus
Question 38. Following particulars are extracted from the books of Bharat Rubber Ltd.
| Rs. | |
| Share Capital | 3,20,000 |
| General Reserve | 1,00,000 |
| Profit & loss Balance | 48,000 |
| 9% Debentures | 1,20,000 |
| Current Liabilities | 3,04,000 |
| Non-Current Assets | 3,60,000 |
| Inventory | 1,76,000 |
| Trade Receivables | 3,28,000 |
| Cash & Cash Equivalents | 28,000 |
You are required to work out the following ratios:-
(i) Debt- Equity Ratio; (ii) Total Assets; (iii) Proprietary Ratio; (iv) Quick Ratio
Solution38
(i) Calculation of Debt-Equity Ratio:-
Debt Equity Ratio = (Long term Debt )/( Shareholder^’ s Funds)
Debt Equity Ratio = (Rs.1,20,000 )/( Rs. 4,68,000 )
Debt Equity Ratio = .26:1.
So, the Debt Equity Ratio is 0.26:1.
Below is the Long term Debts:-
Long Term Debt = 9% Debentures = Rs. 1,20,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Share Capital + General Reserve + Profit & Loss Balance
Shareholder’s Funds = Rs. 3,20,000 + Rs. 1,00,000 + Rs. 48,000
Shareholder’s Funds = Rs. 4,68,000
(ii) Calculation of Total Assets to Debt Ratio:-
Total Assets to Debt Ratio = (Total assets )/( Lonf Term Debt )
Total Assets or Debt Ratio = (Rs.8,92,000 )/( Rs.1,20,000)
Total Assets or Debt Ratio = 7.43:1
So, the Total Assets to Debts Ratio is 0.26:1.
Below is the Calculation of Total Assets:-
Total Assets = Non-Current Assets + Current Assets
Total Assets = Rs. 3,60,000 + Rs. 1,76,000 + Rs. 3,28,000 + Rs. 28,000
Total Assets = Rs. 8,92,000
(iii) Calculation of Proprietary Ratio:-
Proprietary Ratio = (Equity )/( Total assets ) or (Shareholder^’ sFunds )/( Total assets )
Proprietary Ratio = (Rs.4,68,000 )/( Rs.8,92,000 )
Proprietary Ratio =.5247 or 52.47 %
So, the Proprietary Ratio is 0.26:1.
(iv) Calculation of Quick Ratio:-
Quick Ratio = (Liquid Assets )/( Current Liabilities )
Quick Ratio = (RS.3,56,000 )/( Rs.3,04,000)
Quick Ratio = 1.17:1
So, the Quick Ratio is 0.57:1.
Below is the Calculation of Liquid Ratio:-
Liquid Assets = Trade Receivables + Cash & Cash Equivalents
Liquid Assets = Rs. 3,28,000 + Rs. 28,000
Liquid Assets = Rs. 3,56,000
Below is the Calculation of Current Liabilities:-
Current liabilities = Rs. 3,04,000
Question 39. Calculation (i) Debt Equity Ratio, (ii) Proprietary Ratio and (iii) Total Assets to Debt Ratio from the following information:
| Rs. | |
| 5 % Debentures | 15,00,000 |
| Loan from IDBI | 10,00,000 |
| Trade Payables | 11,00,000 |
| Equity Share Capital | 28,00,000 |
| Reserves | 12,00,000 |
| Profit & Loss Balance | 4,00,000 |
| Goodwill | 6,00,000 |
| Other Non-Current Assets | 46,00,000 |
| Current Assets | 28,00,000 |
Solution 39:
(i) Calculation of Debt-Equity Ratio:-
Debt Equity Ratio = (Debt )/( Equity ) or (Long term Debt )/( Shareholder^’ s Funds)
Debt Equity Ratio = 25,00,000/( 44,00,000)
Debt Equity Ratio = 0.568 : 1
So, the Debt Equity Ratio is 0.568:1.
Below is the Calculation of Long term Debts:-
Long Term Debt = 5% Debentures + Loan from IDBI
Long Term Debt = Rs. 15,00,000 + Rs. 10,00,000
Long Term Debt = Rs. 25,00,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Equity Shares Capital + Reserves + P & L Balance
Shareholder’s Funds = Rs. 28,00,000 + Rs. 12,00,000 + Rs. 4,00,000
Shareholder’s Funds = Rs. 44,00,000
(ii) Calculation of Proprietary Ratio:-
Proprietary Ratio = (Shareholder^’ sFunds )/( Total assets )
Proprietary Ratio = (Rs.44,00,000 )/( Rs.80,00,000 )
Proprietary Ratio = .55 or 55%
Below is the Calculation of Total Assets:-
Total Assets = Goodwill + Other Non-Current Assets + Current Assets
Total Assets = Rs. 6,00,000 + Rs. 46,00,000 + Rs. 28,00,000
Total Assets = Rs. 80,00,000
(iii) Calculation of Total Assets to Debt Ratio:-
Total Assets to Debt Ratio = (Total Assets )/( Long Term Debts )
Total Assets to Debt Ratio = (Rs. 80,00,000 )/( Rs. 25,00,000)
Total Assets to Debt Ratio = 3.2:1
So, the Total Assets to Debt Ratio is 0.57:1.
Point in Mind:-
The Other formula for Proprietary ratio is (Equity )/( Total assets )
Question 40. Following particulars are given to you:
| Rs. | |
| Long term Borrowings | 7,00,000 |
| Long Term Provision | 2,25,000 |
| Non- Current Assets | 12,00,000 |
| Current Assets | 5,40,000 |
| Current Liabilities | 1,40,000 |
Calculation (i) Debt Equity Ratio, (ii) Total Assets to Debt Ratio and (iii) proprietary Ratio
Solution 40
(i) Calculation of Debt Equity Ratio:-
Debt Equity Ratio= (Long term Debt )/( Shareholder^’ s Funds)
Debt Equity Ratio = (Rs.9,25,000 )/( Rs.6,75,000 )
Debt Equity Ratio = 1.37
So, the Debt Equity Ratio is 1.37:1.
Below is the Calculation of Long term Debts:-
Long Term Debt = Long term borrowings + Long term provisions
Long Term Debt = Rs. 7,00,000 + Rs. 2,25,000
Long Term Debt = Rs. 9,25,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Non-Current Assets + Working Capital – Non-current Liabilities
Working Capital = Current Assets – Current Liabilities
Working Capital = Rs. 5,40,000 – Rs. 1,40,000
Working Capital = Rs. 4,00,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Rs. 12,00,000 + Rs. 4,00,000 – Rs. 9,25,000
Shareholder’s Funds = Rs. 6,75,000
(ii) Calculation of Total Assets to Debt Ratio:-
Total Assets to Debt Ratio = (Total Assets )/( Debts )
Total Assets to Debt Ratio = (Rs. 17,40,000 )/( Rs. 9,25,000)
Total Assets to Debt Ratio = 1.88:1
So, the total assets to debt ratio is 1.88:1
Calculation of Total Assets:-
Total Assets = Non-Current Assets + Current Assets
Total Assets = Rs. 12,00,000 + Rs. 5,40,000
Total Assets = Rs. 17,40,000
(iii) Calculation of Proprietary Ratio:-
Proprietary Ratio = (Proprietar^’ sFunds )/( total Assets )
Proprietary Ratio = (RS.6,75,000 )/( Rs.17,40,000) × 100
Proprietary Ratio = 38.79 %
So, the Debt Equity Ratio is 38.79%.
Point in Mind:-
The other formula of Debt Equity Ratio is (Debt )/( Equity )
Question 41. Calculate the value of Current Assets of X Ltd. from the following information:
| Rs. | |
| Equity Share Capital | 25,00,000 |
| 6% Preference Share Capital | 5,00,000 |
| General Reserve | 8,00,000 |
| Profit & Loss Balance | (2,00,000) |
| Fixed Assets | 30,00,000 |
| Proprietary Ratio | 0.75:1 |
Solution 41
Calculation of Proprietary Ratio:-
Proprietary Ratio = (shareholder^’ s Funds )/( Total Assets )
0.75 = (25,00,000+5,00,000+8,00,000-2,00,000 )/( Total Assets )
0.75 = 36,00,000/( Total Assets )
Total Assets = 36,00,000/( 0.75 )
Total Assets = Rs. 48,00,000
So, the Value of total assets is 48,00,000.
Below is the Calculation of Current Assets:-
Current Assets = Total Assets – Fixed Assets
Current Assets = Rs. 48,00,000 – Rs. 30,00,000
Current Assets = Rs. 18,00,000
Question 42. The proprietary ratio of m Ltd. is 0.80:1.
State with reasons whether the following transactions will increase, decrease or not change the proprietary ratio:
Obtain a loan from bank Rs. 2,00,000 payable after five years.
Purchased machinery for cash Rs. 75,000.
Redeemed 5% redeemable preference shares Rs. 1,00,000.
Issued equity shares to the vendors of machinery purchased for Rs. 4,00,000.
Solution 42:
The Formula of Proprietary Ratio is (Shareholder^’ s Funds )/( Total Assets )
A higher proprietary ratio is generally treated an indicator of sound financial position from long-term point of view, because it means that a large proportion of total assets is provided by equity and hence the firm is less dependent on external sources.
Question 43. From the following information, calculate interest coverage ratio and give your comments also:
| Rs. | |
| Net Profit after Interest and Tax | 1,20,000 |
| Rate of Income Tax | 50% |
| 15% Debentures | 1,00,000 |
| 12% Mortgage Loan | 1,00,000 |
Solution 43:
Calculation of Interest Coverage Ratio:-
Interest Coverage Ratio = (Net Profit before Interest & tncome Tax )/( Fixed Interest Charges)
Interest Coverage Ratio = (Rs. 2,67,000 )/( Rs. 27,000)
Interest Coverage Ratio = 9.89Times.
So, the Interest Coverage Ratio is 9.89 times.
Working Note:-
Calculation of Interest on Mortgage Loan:
Interest on Mortgage Loan = 1,00,000 × 12%
Interest on Mortgage Loan = 12,000
Calculation of Interest on Debentures:
Interest on Debentures = 1,00,000 × 15%
Interest on Debentures = 15,000
Total Interest = 12,000 + 15,000 = 27,000
Calculation of Tax:-
The net profit after interest and tax is given in the above question, but net profit before interest and tax is required to calculate this ratio.
If the profit after taxes is 50, the profit before taxes must be equal to 100.
If the profit after taxes is 1,20,000, the profit before taxes must be
= (100 )/( 50) × 1,20,000
= Rs. 2,40,000
Calculation of Profit before payment of interest and Tax:-
Profit before payment of interest and Tax = Rs. 2,40,000 + Rs. 27,000
Profit before payment of interest and Tax = Rs. 2,67,000.
Question 44. The following particulars are given to you
| Rs. | |
| Share Capital | 1,00,000 |
| Reserve and Surplus | 1,50,000 |
| Current Liabilities | 4,00,000 |
| Current Assets | 5,50,000 |
| Tangible fixed Assets | 7,00,000 |
| Loan @10 % | 4,00,000 |
| 12 % Debentures | 2,00,000 |
Net Profit for the year after interest and tax was Rs. 96,000. Rate of Income Tax was 50 %.
Calculate (i) Debt Equity Ratio;
(ii) proprietary Ratio;
(iii) Interest Coverage Ratio. Also give your Comments.
Solution 44
(i) Calculation of Debt-Equity Ratio:-
Debt Equity Ratio = (Debt )/( Equity ) or (Long term Debt )/( Shareholder^’ s Funds)
Debt Equity Ratio = (Rs.6,00,000 )/( Rs.2,50,000 )
Debt Equity Ratio = 2.4 :1
So, the Debt Equity Ratio is 2.4 : 1.
Below is the Calculation of Long term Debts:-
Long Term Debt = Loans + Debentures
Long Term Debt = Rs. 1,00,000 + Rs. 1,50,000
Long Term Debt = Rs. 2,50,000
Below is the Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Share Capital + Reserve & Surplus
Shareholder’s Funds = Rs. 1,00,000 + Rs. 1,50,000
Shareholder’s Funds = Rs. 2,50,000
Comment: The Company’s debt-to-equity ratio is unsatisfactory because it exceeds the acceptable norms of 2:1. From a long-term viewpoint, it reveals a risky financial situation.
(ii) Calculation of Proprietary Ratio:-
Proprietary Ratio = (Equity )/( Total Assets ) or (Shareholder^’ s funds)/(Total Assets ) ×100
Proprietary Ratio = (Rs.2,50,000 )/( Rs.12,50,000 ) × 100
Proprietary Ratio = 20 %
So, the Proprietary Ratio is 20%.
Below is the Calculation Total Assets:-
Total Assets = Current Assets + Tangible Fixed Assets
Total Assets = Rs. 5,50,000 + Rs. 7,00,000
Total Assets = Rs. 12,50,000
Comment: The Proprietary Ratio is just 20%, indicating that the company’s long-term financial situation is unsatisfactory since only 20% of the company’s overall assets are financed through equity.
(iii) Calculation of Interest Coverage Ratio:-
Interest Coverage Ratio = (Net Profit before interest and Tax )/(Fixed Interest Charges)
Interest Coverage ratio = (Rs.2,56,000)/( Rs.64,000)
Interest Coverage ratio = 4 times.
So, the Interest Coverage Ratio is 4 times.
Working Note:-
Calculation of Interest:-
Interest on Loan = Rs. 4,00,000 × 10%
Interest on Loan = Rs. 40,000
Interest on Debenture = Rs. 2,00,000 × 12%
Interest on Debenture = Rs. 24,000
Total Interest = Rs. 64,000
Calculation of Net profit before interest and tax is calculated as follows:-
Net profit after interest and Tax = Rs. 96,000
Net profit before interest = Rs.96,000 ×100/( 50)
Net profit before interest = Rs. 1,92,000
Net Profit before Interest and Tax = Rs. 1,92,000 + Fixed Interest Charges
Net Profit before Interest and Tax = Rs. 1,92,000 + Rs. 64,000
Net Profit before Interest and Tax = Rs. 2,56,000
Comment: A reasonable interest-coverage ratio is 6 or 7, but this company’s actual ratio is 4. In the event of a decline in earnings, the corporation will have trouble paying the interest on long-term loans on a regular basis.
Question 45. Calculate inventory turnover ratio from the following:
| Rs. | |
| Opening Inventory | 92,400 |
| Closing Inventory | 67,600 |
| Purchases | 2,75,200 |
| Revenue from operations (Sales ) | 5,00,000 |
| Revenue from Operations Returns (Sales Return) | 20,000 |
Solution 45:
Calculation of Inventory Turnover Ratio:-
Inventory Turnover ratio = (Cost of revenue From Operations )/(Average Inventory)
Inventory Turnover Ratio = (Rs. 3,00,000 )/( Rs. 80,000)
Inventory Turnover Ratio = 3.75 times.
So, the Debt Equity Ratio is 3.75.
Below is the Calculation of Cost of Sales from Operations Activity:-
Cost of Sales from Operations Activity = Rs. 92,400 + Rs. 2,75,200 – Rs. 67,600
Cost of Sales from Operations Activity = Rs. 3,00,000
Below is the Calculation of Average Inventory:-
Average Inventory = (Opening Inventory + Closing Inventory )/2
Average Inventory = (Rs. 92,400 + Rs. 67,600 )/( 2)
Average Inventory = (Rs. 1,60,000 )/( 2)
Average Inventory = Rs. 80,000
Question 46. Calculate Inventory turnover Ratio from the following:
| Rs. | |
| Purchases | 3,46,000 |
| Returns Outwards | 10,000 |
| Carriage Inwards | 15,000 |
| Carriage Outwards | 20,000 |
| Wages | 25,000 |
| Salaries | 40,000 |
| Wages | 36,000 |
| Opening Inventory | 72,000 |
| Closing Inventory | 88,000 |
Solution 46
Calculation of Inventory turnover Ratio:-
Inventory turnover ratio = (Cost of revenue From Operations )/(Average Inventory)
Inventory Turnover Ratio = 3,60,000/80,000
Inventory Turnover Ratio = 4.5 times
So, the Inventory turnover Ratio is 4.5 times.
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Opening Inventory + Net purchases + Carriage Inwards + Wages – Closing Inventory
Cost of revenue from Operations = 72,000 + 3,36,000 + 15,000 + 25,000 – 88,000
Cost of revenue from Operations = Rs. 3,60,000
Below is the Calculation of Average Inventory:-
Average Inventory = (Opening Inventory + Closing Inventory )/2
Average Inventory = (72,000 +88,000 )/2
Average Inventory = Rs. 80,000
Working Note:
When measuring Inventory Turnover Ratio, Carriage outwards, Wages, and Rent would be overlooked.
Question 47. Following is the Statement of Profit & Loss of Triveni Ltd. Calculate Inventory Turnover Ratio:
Solution 47
Calculation of Inventory turnover Ratio:-
Inventory turnover Ratio = (Cost of revenue From Operations )/(Average Inventory)
Inventory Turnover Ratio = (Rs.5,61,000)/(Rs.82,500)
Inventory Turnover Ratio = 6.8 times
So, the Debt Equity Ratio is 6.8 times.
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Purchase of Stock in Trade + Change in Inventory of stock in Trade
Cost of revenue from Operations = Rs. 5,36,000 + Rs. 25,000
Cost of revenue from Operations = Rs. 5,61,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory+Closing Inventory )/2
Average Inventory = (Rs.95,000 + Rs. 70,000 )/2
Average Inventory = Rs. 82,500
Working Note:
When measuring Inventory Turnover Ratio, Carriage outwards, Wages, and Rent would be overlooked.
Question 48. Calculate Inventory Turnover ratio and Average Age of inventory from the following:
Solution 48
Calculation of Inventory turnover Ratio:-
Inventory turnover Ratio = (Cost of revenue From Operations(cost of goods sold))/(Average Inventory)
Inventory turnover Ratio = (Rs.8,40,000)/(Rs. 1,40,000)
Inventory turnover Ratio = 6 times
So, the Inventory turnover Ratio is 0.57:1.
Below is the Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Purchase of Stock in Trade + Change in Inventory of stock in Trade + wages + Manufacturing Exp.
Cost of revenue from Operations = Rs. 6,50,000 – Rs. 30 ,000 + Rs. 1,48,000 + Rs. 72,000
Cost of revenue from Operations = Rs. 8,40,000
Below is the Calculation of Average Inventory:-
Average Inventory =(Opening Inventory+Closing Inventory )/2
Average Inventory = (Rs.1,25,000 +RS. 1,55,000 )/2
Average Inventory = Rs. 1,40,000
(ii) Calculation of Average age of Inventory:-
Average age of Inventory = (Days in a year)/(Inventory Turnover Ratio )
Average age of Inventory = 365/6
Average age of Inventory = 61 Days
Hence, the Average age of Inventory is 61 Days.
Question 49. From the following data, calculate ‘Inventory turnover Ratio’ when gross profit is given 20%:
| Rs. | |
| Cash Sales | 1,50,000 |
| Credit Sales | 2,50,000 |
| Return Inwards | 25,000 |
| Opening Inventory | 25,000 |
| Closing Inventory | 35,000 |
Solution 49
Calculation of Inventory turnover Ratio:-
Inventory turnover ratio = (Cost of revenue From Operations)/(Average Inventory)
Inventory Turnover Ratio = (Rs.3,000,000)/(Rs. 30,000)
Inventory Turnover Ratio = 10 times
So, the Inventory Turnover Ratio is 10 times.
Calculation of Revenue from Operations:-
Revenue from Operations = Cash Sales + Credit Sales – Return Inward
Revenue from Operations = Rs. 1,50,000 + Rs. 2,50,000 – Rs. 25,000
Revenue from Operations = Rs. 3,75,000
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Revenue from Operations (Sales) – Gross Profit
Cost of revenue from Operations = Rs. 3,75,000 – 20% of Rs. 3,75,000
Cost of revenue from Operations = Rs. 3,75,000 – Rs. 75,000
Cost of revenue from Operations = Rs. 3,00,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory+Closing Inventory )/2
Average Inventory = (Rs.25,000 +RS. 35,000 )/2
Average Inventory = Rs. 30,000
Question 50. Calculate the (i) Inventory Turnover Ratio and (II) Average Age of Inventory from the following;-
Opening Inventory Rs. 54,000; Closing Inventory Rs. 66,000; Revenue from Operations (Sales) Rs. 5,00,000; Gross Profit Ratio 40% on Revenue from Operations.
Solution 50:
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio =( Cost of Revenue from Operations )/(Average Inventory)
Inventory Turnover Ratio = (Rs.3,00,000)/(Rs. 60,000)
Inventory Turnover Ratio = 5 times
So, the Inventory Turnover Ratio 5 times.
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Revenue from Operations (Sales) – Gross Profit
Cost of revenue from Operations = Rs. 5,00,000 – 40% of 5,00,000
Cost of revenue from Operations = Rs. 5,00,000 – Rs. 2,00,000
Cost of revenue from Operations = Rs. 3,00,000
Below is the Calculation of Average Inventory:-
Average Inventory = (Opening Inventory + Closing Inventory )/2
Average Inventory = (Rs.54,000 +RS. 66,000 )/2
Average Inventory = Rs. 60,000
(ii) Calculation of Average age of Inventory:-
Average age of Inventory = (Days in a year)/(Inventory Turnover Ratio )
Average age of Inventory = 365/5
Average age of Inventory = 73 Days
So, the Average age of Inventory is 73 Days.
Question 51. Calculate Inventory Turnover Ratio from the following:
Opening Inventory Rs. 42,500; Closing Inventory Rs. 37,500; Revenue from Operations (Sales) Rs. 3,00,000; Gross Profit Ratio 20% on Cost.
Solution 51:
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = ( Cost of Revenue from Operations )/(Average Inventory)
Inventory Turnover Ratio = (Rs.2,50,000)/(Rs. 40,000)
Inventory Turnover Ratio = 6.25 times
So, the Inventory Turnover Ratio is 6.25 times.
Working Note:-
Calculation of Cost of Goods sold:-
It is given that the gross profit is 20% on cost.
If revenue from operations is Rs. 3,00,000,
Cost of goods sold = (100 )/120 × 3,00,000 = Rs. 2,50,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory + Closing Inventory )/2
Average Inventory = (Rs. 42,500 + Rs. 37,500 )/2
Average Inventory = Rs. 40,000
Question 52. From the following information, Calculate Inventory Turnover Ratio:
Purchases Rs. 10,00,000; Revenue from Operations (Sales) Rs. 12,00,000; Direct Expenses Rs. 48,000; Gross Profit Ratio 15% on Revenue from Operations; Closing Inventory Rs. 1,64,000.
Solution 52
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = ( Cost of Revenue from Operations )/(Average Inventory)
Inventory Turnover Ratio = (Rs.10,20,000)/(Rs. 1,50,000)
Inventory Turnover Ratio = 6.8 times
So, the Inventory Turnover Ratio is 6.8 times.
Working Note:-
Calculation of Gross Profit:-
Gross Profit = Revenue from Operations × Rate
Gross Profit = 12,00,000 × 15%
Gross Profit = 1,80,000
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Revenue from Operations – Gross Profit
Cost of revenue from Operations = Rs. 12,00,000 – (15% of 12,00,000)
Cost of revenue from Operations = 10,20,000
Calculation of Opening Inventory:-
Cost of revenue from Operations = Opening Inventory + Purchases + Direct Expenses – Closing Inventory
Rs. 10,20,000 = Opening Inventory + Rs. 10,00,000 + Rs. 48,000 – Rs. 1,64,000
Rs. 10,20,000 = Opening Inventory + Rs. 8,84,000
Opening Inventory = Rs. 1,36,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory + Closing Inventory )/2
Average Inventory = (Rs.1,36,000 +RS. 1,64,000 )/2
Average Inventory = Rs. 1,50,000
Question 53. Calculate Opening Inventory from the following information:
Purchases Rs. 5,70,000; Freight Rs. 20,000; Miscellaneous Expenses Rs. 10,000; Revenue from Operations (Sales) Rs. 5,00,000; Closing Inventory Rs. 70,000; Gross Loss 16% on Revenue from operations.
Solution 53:
Calculation of Opening Inventory:-
Cost of revenue from Operations = Opening Inventory + Purchases + Freight – Closing Inventory
Rs. 5,80,000 = Opening Inventory + Rs. 5,70,000 + Rs. 20,000 – Rs. 70,000
Rs. 5,80,000 = Opening Inventory + Rs. 5,20,000
Opening Inventory = Rs. 60,000
So, the Opening Inventory is Rs. 60,000.
Calculation of Gross Profit:-
Gross Profit = Revenue from Operations × Rate
Gross Profit = 5,00,000 × 16%
Gross Profit = 80,000
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Revenue from Operations + Gross Profit
Cost of revenue from Operations = Rs. 5,00,000 + 80,000
Cost of revenue from Operations = Rs. 5,80,000
Question 54. From the following information, calculate Inventory Turnover Ratio:
Revenue from Operations (Sales) Rs. 4,00,000, Average Inventory: Rs. 55,000. The rate of Gross Loss on Revenue from Operations was 10%.
Solution 54:
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Goods sold)/(Average Inventory)
Inventory Turnover Ratio = (Rs.4,40,000)/(Rs.55,000)
Inventory Turnover Ratio = 8 times.
So, the Inventory Turnover Ratio is 8 times.
Working Note:-
Calculation of Gross Loss:-
Revenue from Operations = Rs. 4,00,000
Gross Loss = Rs. 4,00,000 × 10%
Gross Loss = Rs. 40,000
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Revenue from Operations + Gross Loss
Cost of Revenue from Operations = Rs. 4,00,000 + Rs. 40,000
Cost of Revenue from Operations = 4,40,000
Question 55. Compute Inventory Turnover Ratio from the following:
| Rs. | |
| Cost of Revenue from Operations (Cost of Goods Sold) | 5,60,000 |
| Purchases | 4,40,000 |
| Wages | 1,30,000 |
| Carriage Inwards | 15,000 |
| Opening Inventory | 75,000 |
Solution 55:
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory )
Inventory Turnover Ratio = (Rs.5,60,000 )/(RS.87,500)
Inventory Turnover Ratio = 6.4 times
So, the Inventory Turnover Ratio is 6.4 times.
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Opening Inventory + Purchases + Direct Charges – Closing Inventory
Rs. 5,60,000 = Rs. 75,000 + Rs. 4,40,000 + Rs. 1,30,000 + Rs. 15,000 – Closing Inventory
Closing Inventory = Rs. 6,60,000 – Rs. 5,60,000
Closing inventory = Rs. 1,00,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory+Closing inventory )/2
Average Inventory = (Rs.75,000+ Rs.1,00,000 )/2
Average Inventory = Rs. 87,500
Question 56. From the give information, calculate the Inventory turnover Ratio:
Revenue from Operations (Sales) Rs. 2,00,000; G.P.: 25%; Opening Inventory was 1/4Th of the value of Closing Inventory. Closing Inventory was 40% of Revenue from Operations.
Solution 56:
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory )
Inventory Turnover Ratio = (Rs. 1,50,000 )/(Rs. 50,000)
Inventory Turnover Ratio = 3 times
So, the Inventory Turnover Ratio is 3 times.
Working Note:-
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Revenue from operations – Gross profit
Cost of revenue from Operations = Rs. 2,00,000 – 25% of 2,00,000
Cost of revenue from Operations = Rs. 2,00,000 – Rs. 50,000
Cost of revenue from Operations = Rs. 1,50,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory + Closing Inventory )/2
Average Inventory = (Rs.20,000 + Rs.80,000 )/2
Average Inventory = Rs. 50,000
Closing Inventory = ( 40 )/100 × 2,00,000
Closing Inventory = Rs.80,000
Opening Inventory =(1 )/4× 80,000 = Rs. 20,000
Question 57. Calculate Inventory Turnover Ratio from the following:
| Rs. | |
| Cash Revenue from Operations (Cash Sales) | 6,00,000 |
| Credit Revenue from Operations (Credit Sales) | 4,00,000 |
| Gross Profit | 25% on cost |
| Carriage Inwards | 3 times of opening Inventory |
| Opening Inventory | 10% of cost of revenue from operations. |
Solution 57
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (cost of Revenue from Operations )/(Average Inventory )
Inventory Turnover Ratio =(8,00,000 )/(1,60,000 )
Inventory Turnover Ratio = 5 times
So, the Inventory Turnover Ratio = 5 times.
Calculation of Cost of Revenue from Operations:-
Gross Profit is 25% on cost.
Revenue from Operations = Rs. 10,00,000
Cost of Revenue from Operations = 10,00,000 × (100 )/125
Cost of Revenue from Operations = Rs. 8,00,000
Opening Inventory is 10% of cost of Revenue from Operations
Opening Inventory = 8,00,000 × (10 )/100
Opening Inventory = Rs. 80,000
Closing Inventory = 80,000 × 3 = Rs. 2,40,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory + Closing Inventory )/2
Average Inventory = (80,000 + 2,40,000 )/2
Average Inventory = Rs. 1,60,000
Question 58.
| Revenue from Operations (Sales) | Rs. 7,00,000 |
| Gross Profit | Rs. 1,40,000 |
| Inventory Turnover Ratio | 7 Times |
Find out the value of Closing Inventory, If Closing Inventory is Rs. 16,000 more than the Opening Inventory.
Solution 58:
Calculation of Average Inventory:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory )
7 = (Rs. 5,60,000 )/(Average Inventory )
Average Inventory = (Rs.5,60,000 )/(7 )
Average Inventory = Rs. 80,000
So, the Average Inventory is Rs. 80,000
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Revenue from operations – Gross profit
Cost of revenue from Operations = Rs. 7,00,000 – Rs. 1,40,000
Cost of revenue from Operations = Rs. 5,60,000
It is given that Closing stock is more than opening stock:-
Calculation of Opening Inventory:-
Opening Inventory = Rs. 80,000 + Rs. 16,000 × 1/2
Opening Inventory = Rs. 88,000
Calculation of Closing Inventory:-
Closing Inventory
Closing Inventory = Rs. 10,000 – Rs. 16,000 × 1/2
Closing Inventory = Rs. 72,000
Question 59
| Cash Revenue from Operations (Cash Sales) | Rs. 1,00,000 |
| Credit Revenue from Operations (Credit Sales) | Rs. 5,00,000 |
| Gross Profit | Rs. 1,20,000 |
| Inventory Turnover Ratio | 4 Times |
Inventory Turnover Ratio 4 Times
Calculate the value of opening and closing Inventory in each of the follow alternative cases:
Cast I: If Closing inventory was Rs. 1,00,000 in excess of opening inventory.
Case II: If closing inventory was 2 times that in the beginning.
Case III: If closing inventory was 2 times more than that in the beginning.
Case IV: If Closing inventory was 3 times that in the beginning.
Solution59
Calculation of Average inventory:-
Inventory Turnover Ratio = (cost of Revenue from Operations )/(Average Inventory )
4 = (Rs .4,80,000 )/(Average Inventory )
Average Inventory =(Rs. 4,80,000 )/4
Average Inventory = Rs. 1,20,000
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Cash Revenue from Operations + Credit Revenue from operations – Gross Profit
Cost of Revenue from Operations = Rs. 1,00,000 + Rs. 5,00,000 – Rs. 1,20,000
Cost of Revenue from Operations = Rs. 4,80,000
Case I : If Closing inventory was Rs. 1,00,000 in excess of opening inventory.
Opening Inventory = Rs. 1,20,000 – (1 )/2× Rs.1,00,000
Opening Inventory = Rs. 20,000
Closing Inventory = Rs. 1,20,000 + (1 )/2×Rs.1,00,000
Closing Inventory = Rs. 1,70,000
Case II: If closing inventory was 2 times that in the beginning.
(Average Inventory) × 2 = Opening Inventory + Closing Inventory
1,20,000 × 2 = Opening Inventory + Closing Inventory
Rs. 2,40,000 Opening Inventory + Closing Inventory
Since Closing Inventory was twice as much as Opening Inventory at the start, the ratio between Opening and Closing Inventory would be 1:2.
Opening Inventory = Rs. 2,40,000 × (1 )/3
Opening Inventory = Rs. 80,000
Closing Inventory = Rs. 2,40,000 × (2 )/3
Closing Inventory = Rs. 1,60,000
Case III: If closing inventory was 2 times more than that in the beginning.
Since Closing Inventory was twice as much as Opening Inventory at the start, the ratio between Opening and Closing Inventory would be 1:3.
Opening Inventory = Rs. 2,40,000 × (1 )/4
Opening Inventory = Rs. 60,000
Closing Inventory = Rs. 2,40,000 × (3 )/4
Opening Inventory = Rs. 1,80,000
Case IV: If Closing inventory was 3 times that in the beginning.
Since Closing Inventory was three times that at the start, the ratio between Opening and Closing Inventory would be one-third.
Opening Inventory = Rs. 2,40,000 × (1 )/4
Opening Inventory = Rs. 60,000
Closing Inventory = Rs. 2,40,000 × (3 )/4
Opening Inventory = Rs. 1,80,000
Q60 (A)
Rs. 3,00,000 is the cost of Revenue from Operations (Cost of Goods Sold), Inventory turnover 8 Times; Inventory at the Beginning is 2 times more than that inventory at the end. Calculate the value of opening & Closing Inventory.
Solution 60 (A)
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (cost of Revenue from Operations )/(Average Inventory )
8 times =(RS.3,00,000 (given))/(Average Inventory )
Inventory Turnover Ratio = (Rs.3,00,000 )/(8 )
Average Inventory = Rs. 37,500
So, the Inventory is Rs. 37,500.
Calculation of Average Invemtory:-
Average Inventory × 2 = Opening Inventory + Closing Inventory
Rs. 37,500 × 2 = Opening Inventory + Closing Inventory
Rs. 75,000 = Opening Inventory + Closing Inventory
Since opening inventory is two times that of closing inventory, the ratio between opening and closing inventory would be 3:1.
Opening Inventory = Rs. 75,000 × (3 )/4
Opening Inventory = Rs. 56,250
Closing Inventory = Rs. 75,000 × (1 )/4
Opening Inventory = Rs. 18,750
Question 60 (B)
Rs. 1,50,000 is the cost of Revenue from Operations, Inventory turnover 8 times; Inventory at the beginning is 1.5 times more than the inventory at the end. Calculate the value of Opening & Closing Inventory.
Solution 60 (B)
Calculation of Average Inventory:-
Inventory Turnover Ratio = (cost of Revenue from Operations )/(Average Inventory )
8 Times = (Rs. 1,50,000 )/(Average Inventory )
Average Inventory = (RS.1,50,000 )/(8 )
Average Inventory = Rs. 18,750
Calculation of Closing Inventory and Opening Inventory:-
Opening Inventory + Closing Inventory = Average Inventory × 2
Rs. 18,750 × 2 = Opening Inventory + Closing Inventory
Rs. 37,500 = Opening Inventory + Closing Inventory
Since opening inventory is 1.5 times that of closing inventory, the ratio between opening and closing inventory would be 2.5:1.
Opening Inventory = Rs. 37,500 × (2.5 )/3.5
Opening Inventory = Rs. 26,786
Closing Inventory = Rs. 37,500 × 1/3.5
Closing Inventory = Rs. 10,714
Question 61. Average Inventory carried by a trader is Rs. 60,000; Inventory turnover ratio is 10 times. Goods are sold at a profit of 10% on cost. Find out the profit.
Solution 61
Calculation of Cost of Revenue from Operations:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory )
10 Times = (Cost of Revenue from Operations)/60,000
Cost of Revenue from Operations = Rs. 60,000 × 10
Cost of Revenue from Operations = Rs. 6,00,000
Calculation of Gross Profit:-
It is given that 10% Gross profit on Sale
Selling Price = Rs. 6,00,000 × 110/100
Selling Price = Rs. 6,60,000
Gross Profit = Sale – COGS
Gross Profit = 6,60,000 – 6,00,000
Hence, Gross Profit is Rs. 60,000
Question 62. Determine the amount of Revenue from operations from the following particulars:-
| Opening Inventory | Rs. 40,000 |
| Inventory Turnover Ratio | 6 times |
| Gross Profit 20% of sales |
You are informed that closing inventory is two times in comparison to opening inventories.
Solution 62
Calculation of Cost of Revenue from Operations:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory )
6 times = (Cost of Revenue from Operations )/60,000
Cost of Revenue from Operations = 6 × 60,000
Cost of Revenue from Operations = Rs. 3,60,000
So, the Cost of Revenue from Operations is Rs. 3,60,000
Calculation of Average Inventory:-
Opening Inventory = Rs. 40,000
It is given that Closing Inventory is 2 times of Opening Inventory.
Closing Inventory = 2 × 40,000
Closing Inventory = 80,000
Average Inventory = (Opening Inventory + Closing Inventory )/2
Average Inventory = (Rs. 40,000 + Rs. 80,000 )/2
Average Inventory = Rs. 60,000
Calculation of Revenue from Operations:-
Gross profit is 20% on Sales.
Cost of Revenue from Operations is 3,60,000
Revenue from Operations = 3,60,000 × 100/80
Revenue from Operations = Rs. 4,50,000
Question. 63 A company’s Inventory turnover is 5 Times. Inventory at the end of the year is Rs. 4,000 more than inventory at the beginning of the year. Revenue from Operations during the year (all credit) were Rs. 3,00,000. Rate of Gross Profit is 25% on cost of Revenue from Operations. Current Liabilities at the end of the year were Rs. 50,000. Quick Ratio is 1:1. Calculate:-
(i) Cost of revenue from operations (Cost of Goods Sold)
(ii) Opening Inventory
(iii) Closing Inventory
(iv) Quick Assets.
(v) Current Assets at the end.
Solution 63:
It is given that Gross profit is 25% on cost.
(i) Revenue from Operations = Rs.3,00,000,
Cost of Goods Sold = 3,00,000 × 100/125
Cost of Goods Sold = Rs. 2,40,000
Average Inventory = (Rs.2,40,000)/5=RS.48,000
(ii) Calculation of Opening Inventory:-
Average Inventory = (Rs. 2,40,000)/5
Average Inventory = Rs. 48,000
Opening Inventory = Rs. 48,000 – 4,000 × 1/2
Opening Inventory = Rs. 48,000 – 2,000
Opening Inventory = Rs. 46,000
(iii) Calculation of Closing Inventory:-
Closing Inventory = Rs. 48,000 + 4,000 × 1/2
Closing Inventory = Rs. 48,000 + 2,000
Closing Inventory = Rs. 50,000
(iv) Calculation of Quick Assets:-
Current Liabilities are Rs. 50,000 and Quick Ratio is 1.
Quick Assets = Rs. 50,000 × 1
Quick Assets = Rs. 50,000
(v) Calculation of Current Assets:-
Current Assets = Quick Assets + Closing Inventory
Current Assets = Rs. 50,000 + Rs. 50,000
Current Assets = Rs. 1,00,000
Question 64. Following information is given to you:
On the basis of the information given above, calculate any two of the following ratios:
(i) Liquid Ratio,
(ii) Inventory Turnover Ratio, and
(iii) Debt Equity Ratio.
Solution 64:
(i) Calculation of Liquid Ratio:-
Liquid Ratio = (Liquid Assets)/(Current Liabilities)
Liquid Ratio = (Rs. 2,00,000)/(Rs. 1,60,000)
Liquid Ratio = 1.25:1
Calculation of Liquid Assets:-
Liquid Assets = Trade receivables + Cash & Cash Equivalents
Liquid Assets = Rs. 1,75,000 + Rs. 25,000
Liquid Assets = Rs. 2,00,000
Calculation of Current Liabilities:-
Current Liabilities = Trade payables + Outstanding Expenses
Current Liabilities = Rs. 1,50,000 + Rs. 10,000
Current Liabilities = Rs. 1,60,000
(ii) Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average inventory)
Inventory Turnover Ratio = (RS.6,24,000)/(Rs.52,000)
Inventory Turnover Ratio = 12 Times
So, Inventory Turnover Ratio is 12 Times
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Revenue from operations – Gross Profit
Cost of Revenue from Operations = Rs. 8,00,000 – Rs. 1,76,000
Cost of Revenue from Operations = Rs. 6,24,000
Calculation of Average Inventory:-
Average Inventory =(Opening Inventory+Closing Inventory)/2
Average Inventory = (Rs. 44,000 +Rs. 60,000)/2
Average Inventory = Rs. 52,000
(iii) Calculation of Debt Equity Ratio:-
Debt Equity Ratio = (Long Term Debts)/(Shareholder^’ sFunds)
Debt Equity Ratio = 2,00,000/6,40,000
Debt Equity Ratio = 0.3125 : 1
So, the Debt Equity Ratio is 0.3125 : 1.
It is given that Long Term Debts are (Debentures) = Rs. 2,00,000
Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Share Capital + General Reserve + Profit and Loss Balance
Shareholder’s Funds = Rs. 4,50,000 + Rs. 1,20,000 + Rs. 70,000
Shareholder’s Funds = Rs. 6,40,000
Question 65. Calculate inventory turnover ratio from the following: Opening inventory Rs. 20,000; Purchases Rs. 2,40,000 and Closing Inventory Rs. 60,000. State, giving reason, which of the following transactions will (a) increase (b) decrease or (c) not alter the inventory turnover ratio:
(i) Goods purchased for Rs. 40,000.
(ii) Sale of goods for Rs. 25,000 (Cost Rs. 30,000).
(iii) Decreases in the value of closing inventory by Rs. 20,000.
(iv) Increase in the value of closing inventory by Rs. 10,000.
(v) Goods costing Rs. 5,000 distributed as free sample.
Solution 65
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Inventory Turnover Ratio = (20,000 + 2,40,000 – 60,000 )/40,000
Inventory Turnover Ratio = 2,00,000/40,000
Inventory Turnover Ratio = 5 Times
So, the Inventory Turnover Ratio is 5 times.
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Opening Inventory + Purchases – Closing Inventory
Cost of Revenue from Operations = 20,000 + 2,40,000 – 60,000
Cost of Revenue from Operations = 2,00,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory+Closing Inventory)/2
Average Inventory = (20,000 + 60,000)/2
Average Inventory = 40,000
(i) Goods purchased for Rs. 40,000.
Opening Inventory = Rs. 20,000
Purchase = Rs. 2,40,000 + Rs. 40,000 = Rs. 2,80,000
Closing Inventory = Rs. 60,000 + 40,000 = Rs. 1,00,000
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Inventory turnover ratio = (2,00,000 )/60,000
Inventory turnover ratio = 3.33 times
Calculation of Average Inventory:-
Average Inventory = (20,000+1,00,000 )/2
Average Inventory = Rs. 60,000
Effect of Transaction:- Inventory Turnover Ratio is Decrease.
Reason:- Purchases and Closing Inventory is increases but Cost of revenue from operations will remain unchanged.
(ii) Sale of goods for Rs. 25,000 (Cost Rs. 30,000).
Opening Inventory = Rs. 20,000
Purchase = Rs. 2,40,000
Closing Inventory = Rs. 60,000 – 30,000 = Rs. 30,000
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Inventory turnover ratio = (2,30,000 )/25,000
Inventory turnover ratio = 9.2 times
So, the Inventory turnover ratio is 9.2 times.
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Opening Inventory + Purchases – Closing Inventory
Cost of Revenue from Operations = 20,000 + 2,40,000 – 30,000
Cost of Revenue from Operations = 2,30,000
Calculation of Average Inventory:-
Average Inventory = (20,000+30,000 )/2
Average Inventory = Rs. 25,000
Effect of Transaction:- Inventory Turnover Ratio is Increases.
Reason:- Decrease in closing Inventory by Rs. 30,000 and cost of goods sold is increases.
(iii) Decreases in the value of closing inventory by Rs. 20,000.
Opening Inventory = Rs. 20,000
Purchase = Rs. 2,40,000
Closing Inventory = Rs. 60,000 – 20,000 = Rs. 40,000
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Inventory turnover ratio = (2,20,000 )/30,000
Inventory turnover ratio = 7.33 times
So, the Inventory turnover ratio is 7.33 times.
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Opening Inventory + Purchases – Closing Inventory
Cost of Revenue from Operations = 20,000 + 2,40,000 – 40,000
Cost of Revenue from Operations = 2,20,000
Calculation of Average Inventory:-
Average Inventory = (20,000+40,000 )/2
Average Inventory = Rs. 30,000
Effect of Transaction:- Inventory Turnover Ratio is Increases.
Reason:- If Closing Stock Decrease by Rs. 20,000 then cost of goods sold is increased.
(iv) Increase in the value of closing inventory by Rs. 10,000.
Opening Inventory = Rs. 20,000
Purchase = Rs. 2,40,000
Closing Inventory = Rs. 60,000 + 10,000 = Rs. 70,000
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Inventory turnover ratio = (1,90,000 )/30,000
Inventory turnover ratio = 4.22 times
So, the Inventory turnover ratio is 4.22 times.
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Opening Inventory + Purchases – Closing Inventory
Cost of Revenue from Operations = 20,000 + 2,40,000 – 70,000
Cost of Revenue from Operations = 1,90,000
Calculation of Average Inventory:-
Average Inventory = (20,000 + 70,000 )/2
Average Inventory = Rs. 45,000
Effect of Transaction:- Inventory Turnover Ratio is Decreases.
Reason:- If Closing Stock Increase by Rs. 10,000 then cost of goods sold is Decreased.
(v) Goods costing Rs. 5,000 distributed as free sample.
Opening Inventory = Rs. 20,000
Purchase = Rs. 2,40,000 – Rs. 5,000 = Rs. 2,35,000
Closing Inventory = Rs. 60,000 + 5,000 = Rs. 55,000
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Inventory turnover ratio = (2,00,000 )/37,500
Inventory turnover ratio = 5.33 times
So, the Inventory turnover ratio is 5.33 times.
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Opening Inventory + Purchases – Closing Inventory
Cost of Revenue from Operations = 20,000 + 2,35,000 – 55,000
Cost of Revenue from Operations = 2,00,000
Calculation of Average Inventory:-
Average Inventory = (20,000 + 55,000 )/2
Average Inventory = Rs. 37,500
Effect of Transaction:- Inventory Turnover Ratio is Increases.
Reason:- Decrease in purchase and decrease in closing inventory by Rs. 30,000, Cost of revenue from operations will unchanged.
Question 66. Calculate trade receivables Turnover ratio from the following;-
| Rs. | |
| Cash Revenue from operations | 3,40,000 |
| Credit Revenue from Operations | 6,00,000 |
| Opening Trade Receivables | 75,000 |
| Closing Trade Receivables | 1,25,000 |
Solution66.
Calculation of Trade Receivables Turnover Ratio:-
Trade Receivables Turnover Ratio = (Credit Revenue from Operations)/(Average Trade Receivables)
Trade Receivables Turnover Ratio = (Rs.6,00,000)/(Rs.1,00,000)
Trade Receivables Turnover Ratio = 6 times
So, the Trade Receivables Turnover Ratio is 6 times.
Calculation of Average Trade Receivables:-
Average Trade Receivables = (Opening Trade Receivables +Closing Trade Receivables )/2
Average Trade Receivables = (Rs. 75,000 + Rs. 1,25,000)/2
Average Trade Receivables = Rs. 1,00,000
Question 67. Calculate Trade receivables Turnover Ratio and Average Collection period from the following:
| Rs. | |
| Total Revenue from Operations for the year | 12,00,000 |
| Credit Revenue from Operations: 70% of total Revenue from Operations Revenue from Operations Returns (out of credit Revenue from Operations) | 40,000 |
| Opening Trade Receivables | 73,250 |
| Closing Trade Receivables | 86,750 |
Solution 67
(i) Calculation of Trade Receivable Ratio:-
Trade Receivable Turnover Ratio = (Net Credit Revenue from Operations )/(Average trade receivables )
Trade receivables Turnover Ratio = (RS.8,00,000 )/(RS.80,000)
Trade receivables Turnover Ratio = 10 times
So, the Trade receivables Turnover Ratio is 10 times
(ii) Calculation of Average Collection Period:-
Average Collection Period =(Days in a year )/(Trade receivables Turnover Ratio )
Average Collection Period = (365 )/10
Average Collection Period = 37 days
So, the Average Collection Period is 37 days.
Working Note:-
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = 12,00,000 × 70%
Cost of revenue from Operations = Rs. 8,40,000
Calculation of Net Credit of revenue from Operations:-
Net Credit Revenue from Operations = Credit Revenue from operations – Revenue from operations Returns
Net Credit Revenue from Operations = Rs. 8,40,000 – Rs. 40,000
Net Credit Revenue from Operations = Rs. 8,00,000
Calculation of Average Trade Receivables:-
Average Trade Receivables = (Opening Trade Receivables + Closing Trade Receivables )/2
Average Trade Receivables = (Rs. 73,250 + Rs. 86,750 )/2
Average Trade Receivables = Rs. 80,000
Question 68. Calculate Trade Receivables Turnover and Average Collection period from the following:
| Rs. | |
| Total Revenue from Operations for the year | 4,80,000 |
| Cash Revenue from Operations: being 20% of credit Revenue from Operations trade Receivables | 60,000 |
| Excess of Closing Trade Receivables over Operations Trade Receivables | 30,000 |
Solution 68
Calculation of Average trade Receivables:-
Average Trade Receivables = (Opening Trade Receivables + Closing Trade Receivable s )/2
Average Trade Receivables = (Rs. 60,000 + Rs. 90,000 )/2
Average Trade Receivables = Rs. 75,000
Calculation of Trade receivables Turnover Ratio:-
Trade receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Trade Receivables)
Trade receivables Turnover Ratio = (Rs. 4,00,000 )/(Rs. 75,000)
Trade receivables Turnover Ratio = 5.33 times
Calculation of Average Collection Period:-
Average Collection Period = (Days in a year )/(Trade receivables Turnover Ratio )
Average Collection Period = (365 )/5.33
Average Collection Period = 68.48 days
Rounded of in nearest = 69 days
Working Note:-
Total revenue from operations = 4,80,000,
Credit revenue from operations = (100 )/120 × 4,80,000 = Rs. 4,00,000
Closing Trade Receivables = 60,000 + 30,000 = Rs. 90,000
Question 69. Calculate Trade Receivables Turnover Ratio and Average Collection Period from the following figures:-
| Rs. | |
| Total Revenue from Operations | 10,00,000 |
| Cash Revenue from operations | 1,50,000 |
| Revenue from Operations Return | 10,000 |
| Opening Debtors | 50,000 |
| Opening B/R | 10,000 |
| Closing Debtors | 60,000 |
| Closing B/R | 20,000 |
Solution 69
Calculation of Trade Receivables Turnover Ratio:-
Trade Receivables Turnover Ratio = (Net credit revenue from operations )/(Average debtors & B/R)
Trade receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Trade Receivables)
Trade receivables Turnover Ratio = (Rs. 8,40,000 )/(Rs. 70,000)
Trade receivables Turnover Ratio = 12 times
So, the Trade receivables Turnover Ratio is 12 times
Calculation of Net credit Revenue from Operations:-
Net credit Revenue from Operations = Rs.10,00,000 – Rs.1,50,000 – Rs. 10,000
Net credit Revenue from Operations = Rs.8,40,000
Calculation of Average Debtors and B/P:-
Average Debtors and B/P = (Rs. 50,000 + Rs. 60,000 + Rs. 10,000 + Rs.20,000 )/2
Average Debtors and B/P = Rs. 70,000
Calculation of Average Collection Period:-
Average Collection Period = (Days in a year )/(Trade receivables Turnover Ratio )
Average Collection Period = 365/12
Average Collection Period = 30.42 days
Rounded of in nearest 10 = 31 days
So, the Average Collection Period is 31 days
Question 70. From the following particulars determine the Opening Trade Receivables:-
Solution 70:
Calculation of Closing Receivables:-
Average Trade receivables = (Opening Trade Receivables + Closing Trade Receivables)/2
Rs. 36,000 = (Opening Trade Receivables + Rs. 40,000)/2
Rs. 36,000 × 2 = Opening Trade Receivables + Rs. 40,000
Rs. 72,000 = Opening Trade Receivables + Rs. 40,000
Opening Trade Receivables = Rs. 72,000 – Rs. 40,000
Opening Trade Receivables = Rs. 32,000
So, the Opening trade receivables are Rs. 32,000.
Working Note:-
Calculation of Average Trade Receivables Turnover Ratio:-
Trade Receivables Turnover Ratio = (Net credit revenue from operations )/(Average Trade Receivables )
12 times = (Rs.4,32,000 )/(Average Trade Receivables )
Average Trade Receivables = (Rs. 4,32,000 )/(12 )
Average Trade Receivables = Rs. 36,000
So, the Average trade receivables are Rs. 36,000.
Question 71. Credit Revenue from operations of X Ltd. during the year ended 31st March, 2016 were Rs. 5,64,000. If trade receivables turnover ratio is 6 times, calculate trade receivables in the beginning and at the end of the year. Trade Receivables at the end were Rs. 10,000 more than that at the beginning of the year.
Solution 71
Calculation of Trade Receivables turnover ratio:-
Trade Receivables Turnover Ratio = (Net credit revenue from operations )/(Average Trade Receivables )
6 Times = (Rs. 5,64,000 )/(Average Trade Receivables )
Average Trade Receivables = (Rs. 5,64,000 )/(6 )
Average Trade Receivables = Rs. 94,000
So, the Average Trade Receivables is Rs. 94,000
Calculation of Opening Trade Receivables:-
Opening Trade Receivables = Rs. 94,000 – (Rs. 10,000)/2
Opening Trade Receivables = Rs. 94,000 – Rs. 5,000
Opening Trade Receivables = Rs. 89,000
Calculation of Closing Trade Receivables:-
Closing Trade Receivables = Rs. 94,000 + (Rs. 10,000)/2
Closing Trade Receivables = Rs. 94,000 + Rs. 5,000
Closing Trade Receivables = Rs. 99,000
Question 72 A company made Credit Revenue Credit from Operations of Rs. 8,76,000 during the year ended 31st March, 2016. If Trade Receivables Turnover Ratio is 18.25 rimes calculate:
(1) Average Trade Receivables; and (2) Closing Trade receivables. If closing Trade Receivables are three times in comparison to opening Trade Receivables.
Solution 72
Calculation of Trade Receivables Turnover Ratio:-
Trade Receivables Turnover Ratio = (Net credit revenue from operations )/(Average Trade Receivables )
18.25 Times = (Rs. 8,76,000 )/(Average Trade Receivables )
Average Trade Receivables = (Rs. 8,76,000 )/(Rs.18.25)
Average Trade Receivables = Rs. 48,000
So, the trade receivables turnover ratio is Rs. 48,000
Calculation of Opening Trade Receivables:-
Average Trade receivables = (Opening Trade Receivables + Closing Trade Receivables)/2
Rs. 48,000 = (Opening Trade Receivables + Closing Trade Receivables)/2
Rs. 48,000 × 2 = Opening Trade Receivables + Closing Trade Receivables
Opening Trade Receivables + Closing Trade Receivables = Rs. 72,000
It is given that the Ratio between Opening trade Receivables and Closing Trade Receivables is 1:3
Opening Trade Receivables = Rs. 96,000 × 1/4
Opening Trade Receivables = Rs. 24,000
Closing Trade Receivables = Rs. 96,000 × (3 )/4
Closing Trade Receivables = Rs. 72,000
Question 73. Calculate the amount of Opening Trade Receivables and Closing Trade Receivable from the following particulars:
| Cost of Revenue from Operations | Rs. 9,00,000 |
| Gross Profit on revenue from Operations | 25% |
| Cash Revenue from Operations | 20% of credit Revenue from Operations |
| Trade Receivables Turnover Ratio | 5 Times |
Closing Trade Receivables were 3 times than that in the beginning
Solution 73
Calculation of Trade Receivables Turnover Ratio:-
Trade Receivables Turnover Ratio = (Net credit revenue from operations )/(Average Trade Receivables )
5 Times = (Rs. 10,00,000 )/(Average Trade Receivables )
Average Trade Receivables = (Rs. 10,00,000 )/5
Average Trade Receivables = Rs. 2,00,000
Average Trade Receivables = (Opening Trade receivables+ Closing Trade Receivables)/2
Rs. 2,00,000 = (Opening Trade receivables+ Closing Trade Receivables)/2
Rs. 2,00,000 × 2 = Opening Trade receivables and Closing Trade Receivables
Rs. 4,00,000 = Opening Trade receivables and Closing Trade Receivables
It is given that the Ratio between Opening trade Receivables and Closing Trade Receivables is 1:3.
Calculation of Opening trade receivables:-
Opening Trade Receivables = Rs. 4,00,000 × 1/4
Opening Trade Receivables = Rs. 1,00,000
Calculation of Closing trade receivables:-
Closing Trade Receivables = Rs. 4,00,000 × 3/4
Closing Trade Receivables = Rs. 3,00,000
Working Note:-
Calculation of Revenue from Operations:-
It is given that,
Gross Profit is 25% on Sales
Cost of Revenue From Operations = Rs. 9,00,000
Revenue from Operations = Sales × (100 )/(100 – Rate)
Revenue from Operations = 9,00,000 × (100 )/(100-25)
Revenue from Operations = 9,00,000 × (100 )/75
Revenue from Operations = Rs. 12,00,000
Calculation of Cash revenue from operations:-
Cash revenue from operations = Rs. 12,00,000 × 20/(100+20)
Cash revenue from operations = Rs. 12,00,000 × 20/120
Cash revenue from operations = Rs. 2,00,000
Credit revenue from operations = Total revenue from operations – Cash revenue from operations
Credit revenue from operations = Rs. 12,00,000 – Rs. 2,00,000
Credit revenue from operations = Rs. 10,00,000
Question 74. Calculate closing Trade receivables from the following information:
| Cost of Revenue from Operations | Rs. 16,00,000 |
| Gross Profit on cost | 25% |
| Cash Revenue from Operations | 25% of credit Revenue from Operations |
| Trade Receivables Turnover Ratio | 5 Times |
Closing Trade Receivables were 1.5 times than that in the beginning
Solution 74
Calculation of Closing Trade Receivables:-
Closing Trade Receivables = Rs. 6,40,000 × 1.5/2.5
Closing Trade Receivables = Rs. 3,84,000
So, the Closing Trade Receivables is 3,84,000
Working Note:-
It is given that the Cost of Revenue from Operations Rs. 16,00,000.
Gross Profit = 16,00,000 × 25/100
Gross Profit = Rs. 4,00,000
Total Revenue from Operations = Cost of Revenue from Operations + Gross Profit
Total Revenue from Operations = Rs. 16,00,000 + Rs. 4,00,000
Total Revenue from Operations = Rs. 20,00,000
Calculation of Cash Revenue from Operations:-
Cash Revenue from Operations and Credit Revenue from Operations will be 25:100 or 1:4.
Cash revenue from Operations = 20,00,000 × 25/(100+25)
Cash revenue from Operations = 20,00,000 × 25/125
Cash revenue from Operations = Rs. 4,00,000
Calculation of Credit Revenue from Operations:-
Credit revenue from Operations = Total revenue from Operations – Cash revenue from Operations
Credit revenue from Operations = Rs. 20,00,000 – Rs. 4,00,000
Credit revenue from Operations = Rs. 16,00,000
Trade Receivables Turnover Ratio = (Net credit revenue from operations )/(Average Trade Receivables )
5 Times =(Rs. 16,00,000 )/(Average Trade Receivables )
Average Trade Receivables = (Rs. 16,00,000 )/5
Average Trade Receivables = Rs. 3,20,000
Average Trade Receivables = (Opening Trade receivables+ Closing Trade Receivables)/2
Rs. 3,20,000 × 2 = Opening Trade receivables + Closing Trade Receivables
Rs. 6,40,000 = Opening Trade receivables + Closing Trade Receivables
Closing Trade Receivables are 1.5 time.
Opening trade receivables and closing trade receivables will be 1 : 1.5.
Question 75. Following figures have been obtained from the books of Pawan roadways Ltd:
| 2016 Rs. | 2017 Rs. | |
| Revenue from operations (at Gross profit of 25%) | 36,00,000 | 60,00,000 |
| Trade receivables on 1st January | 5,40,000 | |
| Trade receivables on 31st December | 6,60,000 | 9,40,000 |
| Inventory on 1st January | 6,50,000 | |
| Inventory on 31st December | 7,00,000 | 10,00,000 |
Calculate the Trade Receivables Turnover Ratio. Also Calculate Inventory turnover Ratio. Give necessary Comments.
Solution 75:
1.) Calculation for the Year of 2016:-
Calculation of Average Trade Receivables:-
Average Trade Receivables = (Opening Trade Receivables+Closing Trade Receivables )/2
Average Trade Receivables = (5,40,000 + 6,60,000 )/2
Average Trade Receivables = Rs. 6,00,000
So, the Average Trade Receivables is Rs. 6,00,000.
Working Note:-
Calculation of Trade receivables turnover Ratio:-
Trade receivables turnover Ratio = (Net Credit Revenue from Operations )/(Average Trade Receivables )
Trade receivables turnover Ratio = (36,00,000 )/(6,00,000 )
Trade receivables turnover Ratio = 6 Times
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from operations )/(Average Inventory )
Inventory Turnover Ratio = (27,00,000 )/(6,75,000 )
Inventory Turnover Ratio = 4 Times.
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Rs. 36,00,000 less 25%
Cost of Revenue from Operations = Rs. 36,000 – Rs. 9,00,000
Cost of Revenue from Operations = Rs. 27,00,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory + Closing Inventory )/(2 )
Average Inventory = (Rs. 6,50,000 + Rs. 7,00,000 )/(2 )
Average Inventory = Rs. 6,75,000
2.) Calculation for the Year of 2017:-
Calculation of Trade receivable turnover ratio:-
Trade receivables turnover Ratio = (Net Credit Revenue from Operations )/(Average Trade Receivables )
Trade receivables turnover Ratio =(60,00,000 )/(8,00,000 )
Trade receivables turnover Ratio = 7.5 Times
So, the trade receivables turnover Ratio is 7.5 Times.
Working Note:-
Calculation of Average Trade Receivables:-
Average Trade Receivables = (Opening Trade Receivables + Closing Trade Receivable s )/2
Average Trade Receivables = (6,60,000 +9,40,000 )/2
Average Trade Receivables = Rs. 8,00,000
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from operations )/(Average Inventory )
Inventory Turnover Ratio = (45,00,000 )/(8,50,000 )
Inventory Turnover Ratio = 5.29 Times
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Rs. 60,00,000 less 25%
Cost of Revenue from Operations = Rs. 60,000 – Rs. 15,00,000
Cost of Revenue from Operations = Rs. 45,00,000
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory + Closing Inventory )/(2 )
Average Inventory = (Rs.7,00,000 + Rs.10,00,000 )/(2 )
Average Inventory = Rs. 8,50,000
Comment:
- The Trade Receivables Turnover Ratio rose from 6 to 7.5 times in 2017. It means that the sum due from trade receivables is being obtained faster.
- The Inventory Turnover Ratio rose in 2017. It means that inventory is being converted into revenue from operations at a faster rate. As a result, the management’s sales strategy is very successful.
Question 76. Calculate trade receivables turnover ratio from the following:
| Rs. | |
| Credit Revenue from Operations | 3,80,000 |
| Revenue from operations Return | 20,000 |
| Trade Revenue on 1-04-2017 | 70,000 |
| Trade Revenue on 31-03-2018 1,10,000 | |
| Less: provision for Doubtful debts 10,000 | 1,00,000 |
State given reason, what will be the effect of the following on trade receivables turnover ratio:
(i) Received Rs. 20,000 from a customer.
(ii) sale of goods on credit Rs. 30,000.
(iii) cash revenue from operations Rs. 40,000.
Solution76
Calculation of Trade Receivables Turnover Ratio:-
Trade Receivables Turnover Ratio = (Net Credit Revenue from Operations )/(Average Trade Receivables )
Trade Receivables Turnover Ratio = (3,80,000-20,000 )/(( 1 )/(2 )(70,000+1,10,000) )
Trade Receivables Turnover Ratio = (3,60,000 )/(90,000 )
Trade Receivables Turnover Ratio = 4 times
So, the Trade Receivables Turnover Ratio is 4 times.
Calculation of Average Trade Receivables:-
Average Trade Receivables = ( 70,000+1,10,000 )/(2 )
Average Trade Receivables = ( 1,80,000 )/(2 )
Average Trade Receivables = 90,000
(i) Received Rs. 20,000 from a customer:-
Trade Receivables Turnover Ratio = (Net Credit Revenue from Operations )/(Average Trade Receivables )
Trade Receivables Turnover Ratio = (3,60,000 )/(( 70,000 +90,000 )/(2 ))
Trade Receivables Turnover Ratio = (3,60,000 )/80,000
Trade Receivables Turnover Ratio = 4.5 times
Effect:- Increase
Reason:- The reduction in trade receivables receipts would result in a decrease in the closing trade receivables, resulting in an improvement in the trade receivables turnover ratio.
(ii) Sale of goods on credit Rs. 30,000.
Trade Receivables Turnover Ratio = (Net Credit Revenue from Operations )/(Average Trade Receivables )
Trade Receivables Turnover Ratio = (3,90,000 )/(( 70,000 + 1,40,000 )/(2 ))
Trade Receivables Turnover Ratio = (3,90,000 )/1,05,000
Trade Receivables Turnover Ratio = 3.71 times
Effect:- Decrease
Reason:- Credit income from operations would rise at the same rate as closing trade receivables, lowering the trade receivables turnover ratio.
(iii) Cash revenue from operations Rs. 40,000.
Effect:- Not Alter
Reason:- There was no effect on credit income from operations or trade receivables.
Question 77. Calculate Trade Payable Turnover Ratio and Average Payment period of the following:
| Rs. | |
| Total Purchases | 24,00,000 |
| Cash purchases | 6,40,000 |
| Purchases Return (out of credit purchase) | 60,000 |
| Opening Balance of Creditors | 3,00,000 |
| Opening Balance of Bills Payable | 20,000 |
| Closing Balance of creditors | 3,50,000 |
| Closing Balance of Bills Payable | 10,000 |
Solution 77
Calculation of Trade Receivables Turnover Ratio:-
Trade Receivables Turnover Ratio = (Net credit revenue from operations )/(Average debtors & B/R)
Trade receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Trade Receivables)
Trade receivables Turnover Ratio = (Rs.17,00,000 )/(Rs. 3,400,000)
Trade receivables Turnover Ratio = 5 times
So, the Trade receivables Turnover Ratio is 5 times.
Calculation of Net credit Revenue from Operations:-
Net credit Revenue from Operations = Rs.24,00,000 -Rs.6,40,000-Rs. 60,000
Net credit Revenue from Operations = Rs.17,00,000
Calculation of Average Debtors & B/P:-
Average Debtors & B/P = (Rs. 3,00,000 + Rs. 3,50,000 + Rs. 20,000 + Rs.1,20,000 )/2
Average Debtors & B/P = Rs. 3,40,000
Calculation of Average Payment Period:-
Average Payment Period = (Days in a year )/(Trade receivables Turnover Ratio )
Average Payment Period = (365 )/5
Average Payment Period = 73 days
Question 78. On the basis of the following information calculate (I) trade Receivables Turnover Ratio; (ii) Average Collection period; (iii) trade Payables Turnover Ratio and (iv) Average Payment Period.
| Rs. | |
| Debtors | 54,00,000 |
| Creditors | 20,00,000 |
| Revenue from Operations | 5,25,00,000 |
| Bills Payables | 5,00,000 |
| Bills Receivables | 6,00,000 |
| Purchases | 3,15,00,000 |
Solution 78
Calculation of Trade Receivables Turnover Ratio:-
Trade Receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Debtors+ B/R)
Trade Receivables Turnover Ratio = (Rs. 5,25,00,000 )/(Rs. 54,00,000 + Rs. 6,00,000)
Trade Receivables Turnover Ratio = 8.75 Times
Calculation of Average Collection Period:-
Average Collection Period = (Days in a year )/(Trade receivables Turnover Ratio )
Average Collection Period = (365 )/8.75
Average Collection Period = 41.7 or 42 days
Calculation of Trade Payables Turnover Ratio:-
Trade Payables Turnover Ratio = (Credit Purchases )/(Creditors+Bills Payables)
Trade Payables Turnover Ratio = (Rs. 3,15,00,000 )/(Rs. 20,00,000 + Rs. 5,00,000)
Trade Payables Turnover Ratio = (Rs. 3,15,00,000 )/(Rs. 25,00,000)
Trade Payables Turnover Ratio is 12.6 times.
Calculation of Average Payables Payable:-
Average Payment Period = (Days in a year )/(Trade Payables Turnover Ratio )
Average Payment Period = (365 )/12.6
Average Payment Period = 28.97 days or 29 days
Question 79. Calculate Working Capital Turnover Ratio from the following:
| Rs. | |
| Credit Revenue from Operations | 8,00,000 |
| Cash Revenue from Operations | 12,60,000 |
| Current Assets | 7,20,000 |
| Current Liabilities | 3,24,000 |
| Revenue from Operations Returns | 80,000 |
Solution79.
Calculation of working Capital Turnover Ratio:-
Working Capital Turnover Ratio = (Net Revenue from operations )/(Working Capital )
Working Capital Turnover Ratio = (Rs. 19,80,000 )/(Rs. 3,96,000)
Working Capital Turnover Ratio = 5 times.
So, the Working Capital Turnover Ratio is 5 times.
Calculation of Net Revenue from Operations:-
Net Revenue from Operations = Credit Revenue from Operations + Cash Revenue from operations- Revenue from Operations return
Net Revenue from Operations = Rs. 8,00,000 + Rs. 12,60,000 – Rs. 80,000
Net Revenue from Operations = Rs. 19,80,000
Calculation of Working Capital:-
Working Capital = Current Assets – Current liabilities
Working Capital = Rs. 7,20,000 – Rs. 3,24,000
Working Capital = Rs. 3,96,000
Question 80 . Calculate Working Capital Turnover Ratio from the following:
| Rs. | |
| Inventory | 6,00,000 |
| Trade Receivables | 5,00,000 |
| Cash | 1,00,000 |
| Trade Payables | 2,00,000 |
| Bank Overdraft | 1,20,000 |
| Cost of Revenue from Operations | 52,80,000 |
Solution 80:
Calculation of working Capital Turnover Ratio:-
Working Capital Turnover Ratio = (Net Revenue from operations )/(Working Capital )
Working Capital Turnover Ratio = (Rs. 52,80,000 )/(Rs. 8,80,000)
Working Capital Turnover Ratio = 6 times.
So, the Working Capital Turnover Ratio is 6 times.
Calculation of Current Assets:-
Current Asset = Inventory + Trade receivables + Cash
Current Assets = Rs. 6,00,000 + Rs. 5,00,000 + Rs. 1,00,000
Current Assets = Rs. 12,00,000
Calculation of Current Liabilities-
Current Liabilities = Trade Payables + Bank Overdraft
Current Liabilities = Rs. 2,00,000 + Rs. 1,20,000
Current Liabilities = Rs. 3,20,000
Calculation of Working Capital:-
Working Capital = Current Assets – Current liabilities
Working Capital = Rs. 12,00,000 – Rs. 3,20,000
Working Capital = Rs. 8,80,000
Question 81. Calculate Working Capital Turnover Ratio from the following information:
| Rs. | |
| Current Assets | 8,60,000 |
| Current Liabilities | 3,40,000 |
| Cost of Revenue from Operations | 20,00,000 |
| Gross Profit | 30% of Cost |
Solution 81
Calculation of Working Capital Turnover Ratio:-
Working Capital Turnover Ratio = (Net Revenue from operations )/(Working Capital )
Working Capital Turnover Ratio = (RS.26,00,000 )/(RS.5,20,000)
Working Capital Turnover Ratio = 5 times
So, the Working Capital Turnover Ratio is 5 times.
Working Note:-
Calculation of Gross Profit:-
It is given that the Gross profit is 30% of COGS.
Gross Profit = Rs. 20,00,000 × 30/100
Gross Profit = Rs. 6,00,000
Calculation of Net Revenue from Operations:-
Net Revenue from Operation = Credit Revenue from Operations + Gross profit
Net Revenue from Operations = Rs. 20,00,000 + 6,00,000
Net Revenue from Operations = Rs. 26,00,000
Calculation of Working Capital:-
Working Capital = Current Assets – Current liabilities
Working Capital = Rs. 8,60,000 – Rs. 3,40,000
Working Capital = Rs. 5,20,000
Question 82. Calculate Working Capital turnover Ratio from the following information:
| Rs. | |
| Inventory | 3,10,000 |
| Trade receivables | 20,000 |
| Trade Payables | 60,000 |
| Cost of Revenue from Operations | 30,40,000 |
| G.P. | 24% of Sales |
Solution 82
Calculation of Working Capital Turnover Ratio:-
Working Capital Turnover Ratio = (Net Revenue from operations )/(Working Capital )
Working Capital Turnover Ratio = (Rs. 40,00,000 )/(Rs. 4,00,000)
Working Capital Turnover Ratio = 10 times
So, the Working Capital Turnover Ratio is 10 times
Calculation of Revenue from Operations:-
Net Revenue from Operations = Sales × 100/(100-Rate)
Net Revenue from Operations = 30,40,000 × 100/(100-24)
Net Revenue from Operations = 30,40,000 × 100/76
Net Revenue from Operations = Rs. 40,00,000
Calculation of Working Capital:-
Working Capital = Current Assets – Current liabilities
Working Capital = Rs. 4,60,000 – Rs. 60,000
Working Capital = Rs. 4,00,000
Question 83. Following information is Given to you:
| Trade Receivables on 1st April, 2017 | Rs. 6,80,000 |
| Trade Receivables on 31st March, 2018 | Rs. 8,20,000 |
| Trade Receivables Turnover Ratio | 6 Times |
| Credit Revenue from Operations | 80% of Revenue from Operations |
| Working Capital Turnover Ratio | 9 times |
| Current Ratio | 2.25 |
Calculate:
i. Revenue from operations
ii. Working Capital
iii. Current Assets.
Solution 83
(i) Calculation of Revenue from Operations:-
It is given that the Credit Revenue from Operations are 80% of Revenue from Operations
Revenue from Operations = 45,00,000 × (100 )/(100-Rate)
Revenue from Operations = 45,00,000 × (100 )/(80 )
Revenue from Operations = Rs. 56,25,000
So, the Revenue from Operations are Rs. 56,25,000.
Working Note:-
Calculation of Average trade Receivables:-
Average trade Receivables = (Opening trade receivables + Closing Trade receivables )/2
Average trade Receivables = (Rs. 6,80,000 + Rs. 8,20,000 )/2
Average trade Receivables = Rs. 7,50,000
Calculation of Credit Revenue from operations:-
Trade Receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Trade Receivables )
6 times = (Net Revenue from operations )/7,50,000
Credit Revenue from operations = Rs. 7,50,000 × 6
Credit Revenue from operations = Rs. 45,00,000
(ii) Calculation of Working Capital Turnover Ratio:-
Working Capital Turnover Ratio = (Revenue from operations )/(Working Capital )
9 Times = (Rs. 56,25,000 )/(Working Capital )
Working capital = (RS.56,25,000 )/9
Working capital = Rs. 6,25,000
So, the Working capital is Rs. 6,25,000.
(iii) Calculation of Capital Assets:-
Capital Ratio of the Company is 2.25 : 1
Current Ratio the Working Capital is 2.25 – 1=1.25
Working Capital is 1.25, Current Assets = 2.25
Working Capital is 6,25,000,
Current Assets = 6,25,000 × 2.25/1.25
Current Assets = Rs. 11,25,000
So, the Current Assets is Rs. 11,25,000.
Question 84. Calculate Working Capital Turnover Ratio from the following:
| Rs. | |
| Revenue from Operations | 39,20,000 |
| Non-Current Assets | 21,00,000 |
| Total Assets | 36,00,000 |
| Shareholder’s Funds | 18,00,000 |
| Non-Current Liabilities | 10,00,000 |
Solution 84
Calculation of Working Capital Turnover Ratio:-
Working Capital Turnover Ratio = (Net Revenue from operations )/(Working Capital )
Working Capital Turnover Ratio = (Rs. 39,20,000 )/(Rs. 7,00,000)
Working Capital Turnover Ratio = 5.6 times
So, the Working Capital Turnover Ratio is 5.6 times.
Working Note:-
Net Revenue from Operations = Rs. 39,20,000
Calculation of Working Capital:-
Working Capital = Current Assets – Current liabilities
Working capital = Rs. 15,00,000 – Rs. 8,00,000
Working capital = Rs. 7,00,000
Calculation of Current Assets:-
Current Assets = Total Assets – Non- Current Assets
Current Assets = Rs. 36,00,000 – Rs. 21,00,000 = Rs. 15,00,000
Calculation of Current Liabilities:-
Current Liabilities = Total Assets – shareholder’s Funds – Non-Current Liabilities
Current Liabilities = Rs. 36,00,000 – Rs. 18,00,000 – Rs. 10,00,000
Current Liabilities = Rs. 8,00,000
Question 85.(A)
Calculate Gross profit Ratio from the following figures: –
| Rs. | |
| Gross Profit | 90,000 |
| Revenue from Operations | 3,20,000 |
| Revenue from operations Returns | 20,000 |
Solution 85(A)
Calculation of Gross Profit Ratio:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit Ratio = (Rs.90,000 )/(Rs.3,00,000) × 100
Gross Profit Ratio = 30%
So, the Gross Profit Ratio is 30%.
Working Note:-
Calculation of Net Revenue from Operations:-
Net Revenue from Operations = Revenue from Operations- Revenue from Operations Return
Net Revenue from Operations = Rs. 3,20,000 – Rs. 20,000
Net Revenue from Operations = Rs. 3,00,000
Question 85. (B)
The following figures have been taken from the published accounts of G. Associates for the successive years:
| 31st March 2015 Rs. | 31st March 2016 Rs. | |
| Revenue from Operations | 2,10,000 | 4,20,000 |
| Gross Profit | 52,500 | 84,000 |
Comment upon the profitability for the two years.
Solution 85 (B)
Calculation of Gross Profit for the year 2015:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit Ratio = (Rs. 52,500 )/(Rs. 2,10,000) × 100
Gross Profit Ratio = 25%
So, the gross profit ratio for the year 2015 is 25%
Calculation of Gross Profit for the year 2016:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit Ratio = (Rs. 84,000 )/(Rs. 4,20,000) × 100
Gross Profit Ratio = 20%
So, the gross profit ratio for the year 2016 is 20%
Comment:
The Gross Profit Ratio has dropped significantly, indicating that while the cost of materials, wages, and other direct costs may have increased, the cost of sales may not have increased in the same proportion.
Question 86(A)
Calculate Gross Profit Ratio from the following figures: –
Opening Inventory Rs. 40,000; Closing Inventory Rs. 60,000; Purchases Rs. 7,10,000; Return Outwards Rs. 10,000; Wages Rs. 80,000; Cash revenue from Operations Rs. 3,45,000; Credit Revenue from operations Rs. 6,30,000; return Inward Rs. 25,000.
Solution 86 (A)
Calculation of Gross Profit Ratio:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit = (Rs.1,90,000 )/(Rs.9,50,000) × 100
Gross Profit = 20%
So, the Gross Profit is 20%.
Working Note:-
Calculation of Gross Profit:-
Gross Profit = Net Revenue from Operations – Cost of Revenue from Operations
Gross Profit = Rs. 9,50,000 – Rs. 7,60,000
Gross Profit = Rs. 1,90,000
Net Revenue from Operations = Rs. 3,45,000 + Rs. 6,30,000 – Rs. 25,000
Net Revenue from Operations = Rs. 9,50,000
Cost of Revenue from Operations = Rs. 40,000 + Rs. 7,10,000 – Rs. 10,000 + Rs. 80,000 – Rs. 60,000
Cost of Revenue from Operations = Rs. 7,60,000
Question 86 (B)
Calculate Gross profit Ratio from the following figures: –
Cash Revenue from Operations Rs. 4,20,000; Credit Revenue from Operations Rs. 6,00,000; Revenue from Operations Returns Rs. 20,000; Cost of Revenue from Operations Rs. 7,50,000.
Solution 86 (B)
Calculation of Gross Profit Ratio:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit Ratio = (Rs.2,50,000 )/(Rs.10,00,000) × 100
Gross Profit Ratio = 25%
So, the Gross Profit is 25%.
Working Notes:-
Calculation of Gross Profit:-
Gross Profit = Net Revenue from Operations – Cost of Revenue from Operations
Gross Profit = Rs. 10,00,000 – Rs. 7,50,000
Gross Profit = Rs. 2,50,000
Net Revenue from Operations = Rs. 4,20,000 + Rs. 6,00,000 – Rs. 20,000
Net Revenue from Operations = Rs. 10,00,000
Question 87. Calculate G.P. ratio from the following: –
Net profit Rs. 40,000; Office Expenses Rs. 20,000; Selling Expenses Rs. 36,000; Net Revenue from Operations Rs. 6,00,000.
Solution 87
Calculation of Gross Profit Ratio:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit Ratio = (Rs. 96,000 )/(Rs.6,00,000) × 100
Gross Profit Ratio = 16%
So, the Gross Profit Ratio is 16%.
Working Note:-
Calculation of Gross Profit:-
Gross Profit = Net Profit + Operating Expenses
Gross Profit = Rs. 40,000 + Rs. 20,000 + Rs. 36,000
Gross Profit = Rs. 96,000
Question 88. Calculate G.P. Ratio from the following: –
| Rs. | |
| Credit Revenue from Operations | 2,40,000 |
| Cash Revenue from Operations (being 20% of total revenue from operations) | |
| Purchases | 2,20,000 |
| Excess of opening inventory over closing inventory | 14,000 |
Solution88.
Calculation of Gross Profit:-
Gross profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross profit Ratio = (Rs.66,000 )/(Rs.3,00,000) × 100
Gross profit Ratio = 22%
So, the Gross profit Ratio is 22%
Working Note:-
Calculation of Cost of Revenue from operations:-
Cost of Revenue from operations = Purchases + Excess of Opening Inventory over Closing Inventory
Cost of Revenue from operations = Rs. 2,20,000 + Rs. 14,000
Cost of Revenue from operations = Rs. 2,34,000
Calculation of Gross Profit:-
Gross Profit = Total Revenue from Operations – Cost of Revenue from Operations
Gross Profit = Rs. 3,00,000 – Rs. 2,34,000
Gross Profit = Rs. 66,000
Calculation of Total Revenue from Operations:-
Revenue from operations = 2,40,000 × (100 )/80
Revenue from operations = Rs. 3,00,000
Question 89. Calculate G.P. Ratio from the following: –
Credit Revenue from operations were (1 )/4 th of Total Revenue from Operations. Credit Revenue from Operations were Rs. 1,20,000. Credit Purchases were (1 )/5 th of cash Purchases. Credit Purchases were Rs. 40,000. Opening Inventory Rs. 70,000. It was Rs. 20,000 more than Closing Inventory; Carriage Rs. 15,000, Wages Rs. 45,000.
Solution89
Calculation of Gross Profit Ratio:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit Ratio = (Rs.1,60,000 )/(Rs.4,80,000) × 100
Gross Profit Ratio = 33.33%
So, the Gross Profit Ratio is 33.33%
Working Note:-
Calculation of Total Revenue from Operations:-
It is given that the Credit Revenue from Operations is 1/4th of Total Revenue from Operations.
Total revenue from Operations is Rs. 4
Total Revenue from Operations = Rs. 1,20,000 × 4
Total Revenue from Operations = Rs. 4,80,000
Calculation of Total Purchases:-
It is given that credit Purchases were (1 )/5 th of cash purchases.
Here,
Credit Purchases is Rs. 1
Cash purchase is Rs. 5
Total Purchases = 1 + 5 = Rs. 6.
Credit Purchase is Rs. 40,000,
Total Purchases = Rs. 40,000 × 6
Total Purchases = Rs. 2,40,000
Cost of Revenue from Operations = Opening Inventory + Purchase + Carriage + Wages – Closing Inventory
Cost of Revenue from Operations = Rs. 70,000 + Rs. 2,40,000 + Rs. 15,000 + Rs. 45,000 – Rs. 50,000
Cost of Revenue from Operations = Rs. 3,20,000
Calculation of Gross Profit:-
Gross profit = Total Revenue from Operation – Cost of Revenue from Operations
Gross profit = Rs. 4,80,000 – Rs. 3,20,000
Gross profit =1,60,000
Question 90. Compute the Gross Profit Ratio from the following:
Revenue from Operations (Sales) Rs. 5,60,000; Gross Profit 40% on cost.
Solution 90
Calculation of Gross Profit Ratio:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit Ratio = (Rs.1,60,000 )/(Rs.5,60,000) × 100
Gross Profit Ratio = 28.57%
So, the gross profit ratio is 28.57%
Working Note:-
Gross Profit is 40% of Cost
Revenue from operations are Rs. 5,60,000
Gross Profit = Sales × Rate/(100+Rate)
Gross Profit = 5,60,000 × (40 )/(100+40)
Gross Profit = 5,60,000 × (40 )/140
Gross Profit = Rs. 1,60,000
Question 91 (A)
A company earns a gross profit of 25% on cost. Its credit revenue from operations are twice its cash revenue from operations. If the credit revenue from operations ae Rs. 8,00,000, calculate the gross profit ratio of the company.
Solution 91(A)
Calculation of gross profit ratio:-
Gross profit Ratio =(Gross Profit )/(Net Revenue from Operations) × 100
Gross profit Ratio = (Rs.2,40,000 )/(Rs.12,00,000) × 100
Gross profit Ratio = 22%
So, the Gross profit Ratio is 22%
Working Note:-
Total Revenue from Operations = Credit of Revenue from operations + Cash Revenue from Operations
Total Revenue from Operations = Rs. 8,00,000 + Rs. 4,00,000
Total Revenue from Operations = Rs. 12,00,000
It is given that the,
Gross profit is 25% of Cost of Revenue from Operations.
Revenue from Operations = Rs. 12,00,000
Gross Profit = Revenue from Operations × (Rate )/( 100+Rate)
Gross Profit = Rs. 12,00,000 × ( 25 )/( 100+25)
Gross Profit = Rs. 12,00,000 × ( 25 )/( 125)
Gross Profit = Rs. 2,40,000
Question 91 (B)
Gross Profit of a Company is 20% of Cost of revenue from operations. Its Cash Revenue from Operations are 1/3rd of its Credit revenue from operations. Calculate the G.P. Ratio if the Cash Revenue from Operations are Rs. 3,00,000.
Solution 91(B)
Calculation of Gross profit Ratio:-
Gross profit Ratio =(Gross Profit )/(Net Revenue from Operations) × 100
Gross profit Ratio = (2,00,000 )/( 12,00,000) × 100
Gross profit Ratio = 16.67%
So, the Gross profit Ratio is 16.67%.
Working Note:-
Gross profit is 20% of Cost of Revenue from Operations.
Revenue from Operations are Rs. 12,00,000
Gross Profit = Revenue from Operations × (Rate )/( 100+Rate)
Gross Profit = Rs. 12,00,000 × ( 20)/( 100+20)
Gross Profit = Rs. 12,00,000 × 20/( 120)
Gross Profit = Rs. 2,00,000
Working Note:-
Total Revenue from Operations = Cash of Revenue from operations + Credit Revenue from Operations
Total Revenue from Operations = Rs. 3,00,000 + Rs. 9,00,000
Total Revenue from Operations = Rs. 12,00,000
Question 92. Following information is available for the year ending 31st March, 2018. Calculate gross profit ratio:
| Rs. | |
| Cash revenue from Operations | 25,000 |
| Credit Revenue from Operations | 75,000 |
| Purchases: Cash | 15,000 |
| Credit | 60,000 |
| Carriage Inwards | 2,000 |
| Salaries | 25,000 |
| Decrease in Inventory | 10,000 |
| Return Outwards | 2,000 |
| Wages | 5,000 |
Solution 92
Calculation of Gross profit Ratio:-
Gross profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross profit Ratio = (Rs.10,000 )/(Rs.1,00,000) × 100
Gross profit Ratio = 10%
So, the Gross profit Ratio is 10%
Working Note:-
Calculation of Net Revenue from operations:-
Net Revenue from operations = Cash revenue from operations + Credit Revenue from Operations
Net Revenue from operations = Rs. 25,000 + Rs. 75,000
Net Revenue from operations = Rs. 1,00,000
Calculation of Net Purchases:-
Net Purchases = Cash Purchases + Credit Purchases – Return Outwards
Net Purchases = Rs. 15,000 + Rs. 60,000 – Rs. 2,000
Net Purchases = Rs. 73,000
Calculation of Cost of Revenue from operations:-
Cost of Revenue from operations = (Opening Stock– Closing Inventory) + Purchases + Direct expenses
Cost of Revenue from operations = Rs. 10,000 + Rs. 73,000 + Rs. 2,000 + Rs. 5,000
Cost of Revenue from operations = Rs. 90,000
Calculation of Gross Profit:-
Gross profit = Revenue from Operations – Cost of Revenue from operations
Gross profit = Rs. 1,00,000 – Rs. 90,000
Gross profit = Rs. 10,000
Question 93. Average Inventory Rs. 60,000; Inventory Turnover Ratio 5 Times; Selling price 40% above cost. Calculate Gross Profit Ratio.
Solution 93
Calculation of Gross Profit Ratio:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit Ratio = (Rs.1,20,000 )/(Rs.4,20,000) × 100
Gross Profit Ratio = 28.57%
So, the Gross Profit Ratio is 28.57%
Working Note:-
Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from operations )/(Average Inventory )
5 Times = (Cost of Revenue from operations )/(Rs.60,000)
Cost of Revenue from Operations = Rs. 60,000 × 5
Cost of Revenue from Operations = Rs. 3,00,000
Calculation of Gross Profit:-
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
Gross Profit = Rs. 4,20,000 – Rs. 3,00,000
Gross Profit = Rs. 1,20,000
Question 94. Given the following information:
| Rs. | |
| Revenue from Operations | 3,40,000 |
| Cost of revenue from operation | 1,20,000 |
| Selling expenses | 80,000 |
| Administrative Expenses | 40,000 |
Calculate Gross profit Ratio and Operating Ratio.
Solution 94
Calculation of Gross Profit Ratio:-
Gross Profit Ratio = (Gross Profit )/(Net Revenue from Operations) × 100
Gross Profit Ratio = (Rs.2 ,20,000 )/(Rs.3,40,000) × 100
Gross Profit Ratio = 64.71%
So, the gross Profit Ratio is 64.71%.
Working Note:-
Calculation of Gross Profit-
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
Gross Profit = Rs. 3,40,000 – Rs. 1,20,000
Gross Profit = Rs. 2,20,000
Calculation of Operating Expenses:-
Operating Expenses = Selling Expenses + Administrative Expenses
Operating Expenses = Rs. 80,000 + Rs. 40,000
Operating Expenses = Rs. 1,20,000
Calculation of Operating Ratio:-
Operating Ratio = (Cost of Revenue from Operations + Opening expenses)/(Net Revenue from Operations)× 100
Operating Ratio = (Rs.1,20,000+Rs.1,20,000)/(Rs.3,40,000) × 100
Operating Ratio = 70.59%
Question 95. From the following information, calculate Operating Ratio:
| Rs. | |
| Credit Revenue from Operations | 4,00,000 |
| Cash Revenue from Operation | 3,00,000 |
| Administrative Expenses | 60,000 |
| Selling and Distribution Expenses | 42,000 |
| Rate of Gross Profit on Cost | 40% |
Solution 95:
Calculation of Operating Ratio:-
Operating Ratio = (Cost of Revenue from Operations+Opening expenses)/(Revenue from Operations)
Operating Ratio = (Rs.5,00,000+Rs.1,02,000)/(Rs.7,00,000)
Operating Ratio = 86%
So, the Operating Ratio is 86%
Working Note:-
Calculation of Cost Revenue from Operations:-
Revenue from Operations = Rs. 4,00,000 + Rs. 3,00,000
Revenue from Operations = Rs. 7,00,000
Cost of Revenue from Operations = Rs. 7,00,000 × 100/140
Cost of Revenue from Operations = Rs. 5,00,000
Calculation of Operating Expenses:-
Operating Expenses = Selling and Distribution Expenses + Administrative Expenses
Operating Expenses = Rs. 42,000 + Rs. 60,000
Operating Expenses = Rs. 1,02,000
Question 96. Calculate operating ratio from the following;
| Rs. | |
| Net Revenue from Operations | 12,00,000 |
| Credit Revenue from Operation | 8,00,000 |
| Gross Profit | 3,00,000 |
| Office Expenses | 80,000 |
| Selling expenses | 40,000 |
| Loss by Fire | 20,000 |
Solution 96:
Calculation of Operating Ratio:-
Operating Ratio = (Cost of Revenue from Operations+Opening expenses)/(Revenue from Operations) ×100
Operating Ratio = (Rs.9,00,000+Rs.1,20,000)/(Rs.12,00,000)
Operating Ratio = 85%
So, the Operating Ratio is 85%
Working Note:-
Calculation of Cost of Revenue from Operation:-
Cost of Revenue from Operations = Net Revenue from Operations – Gross profit
Cost of Revenue from Operations = Rs. 12,00,000 – Rs. 3,00,000
Cost of Revenue from Operations = Rs. 9,00,000
Calculation of Operating Expenses:-
Operating Expenses = Office Expenses + Selling Expenses
Operating Expenses = Rs. 80,000 + Rs. 40,000
Operating Expenses = Rs. 1,20,000
Question 97. Compute operating Ratio from the following Statement of Profit and Loss of X Ltd. for the year ended 31st March, 2018:
Solution 97:
Calculation of Operating Ratio:-
Operating Ratio = (Cost of Revenue from Operations+Opening expenses)/(Revenue from Operations) ×100
Operating Ratio = (Rs. 13,80,000 + Rs. 3,96,000)/(Rs. 24,00,000) ×100
Operating Ratio = 74%
So, the Operating Ratio is 74%
Calculation of Cost of Revenue from Operations:-
Cost of Revenue from Operations = Cost of Materials consumed + Change in Inventories of finished Goods and work in Progress
Cost of Revenue from Operations = Rs. 14,10,000 – Rs. 30,000
Cost of Revenue from Operations = Rs. 13,80,000
Calculation of Operating Expenses:-
Operating Expenses = Employee Benefit Exp. + depreciation and Amortization Exp. + Other Exp.
Operating Expenses = Rs. 2,82,000 + Rs. 60,000 + Rs. 54,000
Operating Expenses = Rs. 3,96,000
Question 98. Calculate Cost of Goods Sold from the following information:
| Rs. | |
| Operating Ratio | 90% |
| Office Expenses | 30,000 |
| Selling Expenses | 20,000 |
| Revenue from Operations (Sales) | 7,00,000 |
| Revenue from Operations Return (sales Return) | 40,000 |
Solution 98:
Calculation of Operating Ratio:-
Operating Ratio = (Cost of Revenue from Operations+Opening expenses)/(Net Revenue from Operations) ×100
90% = (Cost of Revenue from Operations + 50,000)/6,60,000
90% × 6,60,000 = Cost of Revenue from Operations + 50,000
5,94,000 = Cost of Revenue from Operations + 50,000
5,94,000 – 50,000 = Cost of Revenue from Operations
5,44,000 = Cost of Revenue from Operations
So, the Cost of Revenue from Operations is 5,44,000
Working Note:-
Calculation of Operating Expenses:-
Operating Expenses = Rs. 30,000 + Rs. 20,000
Operating Expenses = Rs. 50,000
Calculation of Net Revenue from Operating:-
Net Revenue from Operating = Revenue from operations – Revenue from Operations Return
Net Revenue from Operating = Rs. 7,00,000 – Rs. 40,000
Net Revenue from Operating = Rs. 6,60,000
Question 99. Calculate Operating Ratio Profit ratio in the following cases;
| (i) Revenue from Operations (Sales) Rs. 7,50,000; operating profit Rs. 3,00,000. | |
| (ii) Revenue from Operations (Sales) | Rs. 15,00,000 |
| Cost of revenue from Operations | Rs. 12,40,000 |
| Operating expenses | Rs. 35,000 |
| (ii) Revenue from Operations (Sales) | Rs. 12,00,000 |
| Gross Profit | 20% on Sales |
| Operating Expenses | Rs. 30,000 |
Solution 99
Case (i)
Calculation of Operating Profit Ratio:-
Operating Profit Ratio = (Operating Profit )/(Revenue from Operations) ×100
Operating Profit Ratio = (Rs.3,00,000)/(Rs.7,50,000) × 100
Operating Profit Ratio = 40%
Case (ii)
Calculation of Operating Profit Ratio:-
Operating Profit Ratio = (Operating Profit )/(Revenue from Operations) ×100
Operating Profit Ratio = (Rs.2,25,000)/(Rs.15,00,000) × 100
Operating Profit Ratio = 15%
Calculation of Operating Profit:-
Operating Profit = Gross Profit – Operating Expenses
Operating Profit = Rs. 15,00,000 – (Rs. 12,40,000 + Rs. 35,000)
Operating Profit = Rs. 15,00,000 – Rs. 12,75,000
Operating Profit = Rs. 2,25,000
Case (iii)
Calculation of Operating Profit Ratio:-
Operating Profit Ratio = (Operating Profit )/(Revenue from Operations) ×100
Operating Profit Ratio = (Rs. 2,10,000)/(Rs. 12,00,000) × 100 = 17.5%
Operating Profit Ratio = 17.5%
Calculation of Gross Profit:-
Gross Profit = Rs. 12,00,000 × 20%
Gross Profit = Rs. 12,00,000 × 20%
Gross Profit = Rs. 2,40,000
Calculation of Operating Profit:-
Operating Profit = Gross Profit – Operating Expenses
Operating Profit = 2,40,000 – Rs. 30,000
Operating Profit = Rs. 2,10,000
Question 100. Calculate Operating Profit Ratio from the following:
| Revenue from Operations | Rs. 7,00,000 |
| Gross profit | 40% on Cost |
| Office and Administrative Expenses | Rs. 30,000 |
| Selling expenses | Rs. 16,000 |
| Interest on debentures | Rs. 8,000 |
Solution 100
Calculation of Operating Profit Ratio:-
Operating Profit Ratio = (Operating Profit)/(Revenue from Operations (Salse)×100)
Operating Profit Ratio =(Rs.1,54,000)/(Rs.7,00,000)
Operating Profit Ratio = 22%
So, the Operating Profit Ratio is 22%
Working Note:-
Calculation of Gross Profit:-
Gross Profit is 40% on Cost
Revenue from Operations = Rs. 7,00,000,
Gross Profit = Rs. 7,00,000 × 40/140
Gross Profit = Rs. 2,00,000
Calculation of Operating Expenses:-
Operating Expenses = Office and Administrative Expenses + Selling Expenses
Operating Expenses = Rs. 30,000 + Rs. 16,000
Operating Expenses = Rs. 46,000
Calculation of Operating Profit:-
Operating Profit = Gross Profit – Operating Expenses
Operating Profit = Rs. 2,00,000 – Rs. 46,000
Operating Profit = Rs. 1,54,000
Question 101. From the following information calculate operating profit Ratio?
Opening Stock Rs. 10,000; Purchases Rs. 1,20,000; revenue from Operations Rs. 4,00,000; Purchase Return Rs. 5,000; return from Reserve from operations Rs. 15,000; Selling expenses Rs. 70,000; Administrative expenses Rs. 40,000; Closing Stock Rs. 60,000.
Solution 101
Calculation of Operating Profit Ratio:-
Operating Profit Ratio = (Operating Profit)/(Revenue from Operations ) ×100
Operating Profit Ratio = (Rs.2,10,000)/(Rs.3,85,000)
Operating Profit Ratio = 54.55%
So, the Operating Profit Ratio is 54.55%
Working Note:-
Calculation of Net Revenue from Operations:-
Net Revenue from Operations = Rs. 4,00,000 – Rs. 15,000
Net Revenue from Operations = Rs. 3,85,000
Calculation of Cost of revenue from Operations:-
Cost of revenue from Operations = Opening Stock + Purchases – Purchases returns – Closing Stock
Cost of revenue from Operations = Rs. 10,000 + Rs. 1,20,000 – Rs. 5,000 – Rs. 60,000
Cost of revenue from Operations = Rs. 65,000
Calculation of Gross Profit:-
Gross Profit = Net Revenue from operations – Cost of Revenue from operations
Gross Profit = Rs. 70,000 – Rs. 40,000
Gross Profit = Rs. 1,10,000
Calculation of Operating Expenses:-
Operating Expenses = Selling Expenses + Administrative Expenses
Operating Expenses = Rs. 70,000 + Rs. 40,000
Operating Expenses = Rs. 1,10,000
Calculation of Operating Profit:-
Operating Profit = Gross Profit – Operating Expenses
Operating Profit = Rs. 3,20,000 – Rs. 1,10,000
Operating Profit = Rs. 2,10,000
Question 102. Calculate (i) operating profit Ratio and (ii) Net profit Ratio from the following:-
| Rs. | |
| Revenue from Operations | 8,30,000 |
| Return Inwards | 30,000 |
| Cost of Revenue from Operations | 5,00,000 |
| Office Expenses | 40,000 |
| Selling Expenses | 18,000 |
| Interest on debentures | 12,000 |
| Loss by Accident | 24,000 |
| Interest Received on Investment | 10,000 |
Solution 102
(i) Calculation of Operating Profit Ratio:-
Operating Profit Ratio = (Operating Profit)/(Revenue from Operations ) ×100
Operating Profit Ratio = (Rs. 2,42,000)/(Rs. 8,00,000) ×100
Operating Profit Ratio = 30.25%
So, the Operating Profit Ratio is 30.25%
Working Note:-
Calculation of Operating profit:-
Operating profit = Gross profit – Other Operating Expenses
Operating profit = Rs. 3,00,000 – Rs. 58,000
Operating profit = Rs. 2,42,000
Calculation of Gross Profit:-
Gross Profit = Revenue from Operations – Returns Inwards – Cost of Revenue from Operations
Gross Profit = Rs. 8,30,000 – Rs. 30,000 – Rs. 5,00,000
Gross Profit = Rs. 3,00,000
Calculation of Other Operating Expenses:-
Other Operating Expenses = Office Expenses + Selling Expenses
Other Operating Expenses = Rs. 40,000 + Rs. 18,000
Other Operating Expenses = Rs. 58,000
(ii) Calculation of Net Profit Ratio:-
Net Profit Ratio = (Net Profit)/(Revenue from Operations ) ×100
Net Profit Ratio = 2,16,000/(Rs. 8,00,000) ×100
Net Profit Ratio = 27%
Calculation of Net Profit:-
Net Profit = Gross Profit – Indirect Expenses + Other Incomes
Net Profit = Rs. 3,00,000 – Rs. 40,000 – Rs. 18,000 – Rs. 12,000 – Rs. 24,000 + Rs. 10,000
Net Profit = Rs. 2,16,000
Question 103. Calculate (i) Gross Profit Ratio, (ii) Operating Ratio, (iii) Operating profit Ratio, (iv) Inventory Turnover Ratio and (v) Working Capital Turnover Ratio from the following figures:
| Rs. | |
| Purchases | 18,30,000 |
| Direct Expenses | 4,10,000 |
| Opening Inventory | 3,60,000 |
| Closing Inventory | 4,40,000 |
| Operating Expenses | 5% of Sales |
| Revenue from Operations | 30,00,000 |
| Current Assets (Including Inventory) | 7,00,000 |
| Current Liabilities | 2,00,000 |
Solution 103.
(i) Calculation of Gross Profit Ratio:-
Gross Profit Ratio = (Gross Profit)/(Net Revenue from Operations ) ×100
Gross Profit Ratio = (Rs.8,40,000)/(Rs.30,00,000) ×100
Gross Profit Ratio = 28%
So, the Gross Profit Ratio is 28%
Working Note:-
Calculation of Gross Profit:-
Gross Profit = Net Revenue from operations – Cost of Revenue from operations
Gross Profit = Rs. 30,00,000 – Rs. 21,60,000
Gross Profit = Rs. 8,40,000
Calculation of Cost of Revenue from operations:-
Cost of Revenue from operations = Opening Inventory + Purchases + Direct expenses – Closing inventory
Cost of Revenue from operations = Rs. 3,60,000 + Rs. 18,30,000 + Rs. 4,10,000 – Rs. 4,40,000
Cost of Revenue from operations = Rs. 21,60,000
(ii) Calculation of Operating Ratio:-
Operating Ratio = (Cost of Revenue from Operations+Operating Expenses )/(Net Revenue from Operations ) ×100
Operating Profit Ratio = (Rs.21,60,000 + Rs.1,50,000)/(Rs.30,00,000) ×100
Operating Profit Ratio = 77%
So, the Operating Profit Ratio is 77%
Calculation of Operating Expenses:-
Operating Expenses = 5% of Revenue from Operations
Operating Expenses = 5% of Rs. 30,00,000
Operating Expenses = Rs. 1,50,000
(iii) Calculation of Operating Ratio:-
Operating Profit Ratio = (Operating profit )/(Net Revenue from Operations )×100
Operating Profit Ratio = (Rs.6,90,000)/(Rs.30,00,000)×100
Operating Profit Ratio = 23%
So, the Operating Profit Ratio is 23%
Calculation of Operating Profit:-
Operating Profit = Gross Profit – Operating expenses
Operating Profit = Rs. 8,40,000 – Rs. 1,50,000
Operating Profit = Rs. 6,90,000
(iv) Calculation of Inventory Turnover Ratio:-
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Inventory Turnover Ratio = (Rs. 21,60,000 )/(Rs. 4,00,000)
Inventory Turnover Ratio = 5.4 Times
So, the Inventory Turnover Ratio is 5.4 times.
Calculation of Average Inventory:-
Average Inventory = (Opening Inventory+Closing Inventory )/(2 )
Average Inventory = (Rs.3,60,000+Rs.4,40,000 )/(2 ) = (Rs.8,00,000 )/(2 )
Average Inventory = Rs. 4,00,000
(v) Calculation of Working Capital Turnover ratio:-
Working Capital Turnover Ratio = (Net Revenue from Operations )/(Working Capital )
Working capital Turnover Ratio = (Rs.30,00,000 )/(Rs.5,00,000)
Working capital Turnover Ratio = 6 Times
So, the Working capital Turnover Ratio is 6 Times.
Calculation of Working Capital:-
Working Capital = Current Assets – Current Liabilities
Working Capital = Rs. 7,00,000 – Rs. 2,00,000
Working Capital = Rs. 5,00,000
Question 104. Gross Profit Ratio of a Company was 25%. Its cash revenue from operations were Rs. 5,00,000 and its credit revenue from operations were 90% of the total revenue from operations. If the indirect expenses of the company were Rs. 1,50,000, calculate its net profit ratio.
Solution 104
Calculation of Net Profit:-
Net Profit Ratio = (Net Profit )/(Net Revenue from Operations) ×100
Net Profit Ratio = (11,00,000 )/50,00,000 ×100
Net Profit Ratio = 22%
So, the Net Profit Ratio is 22%
Working Note:-
Calculation of Total revenue from operations:-
Cash revenue from operations were 10% of total revenue from operations.
Cash revenue from operations were Rs. 5,00,000.
Total revenue from operations = 5,00,000 × (100 )/10
Total revenue from operations = Rs. 50,00,000
Calculation of Gross Profit:-
Gross Profit = (25 )/100 × Rs. 50,00,000
Gross Profit = Rs. 12,50,000
Calculation of Net Profit:-
Net Profit = Gross Profit – Indirect Expenses
Net Profit = Rs. 12,50,000 – Rs. 1,50,000
Net Profit = Rs. 11,00,000
Question 105. Calculate Net Profit ratio from the following information:
Revenue from Operations Rs. 25,00,000; Operating Ratio 90%; Loss on Sale of Fixed Assets Rs. 25,000; Interest on Long term Borrowings Rs. 30,000; Income from Investments Rs. 40,000.
Solution 105
Calculation of Net Profit Ratio:-
Net Profit Ratio = (Net Profit)/(Revenue from Operations ) ×100
Net profit Ratio = (Rs.2,35,000)/(Rs.25,00,000) ×100
Net profit Ratio = 9.4%
So, the Net profit Ratio is 9.4%
Working Note:-
Calculation of Operating Profit Ratio:-
Operating Profit Ratio = 100 – Operating Ratio
Operating Profit Ratio = 100 – 90
Operating Profit Ratio = 10%
Calculation of Operating Profit:-
Operating Profit = Rs. 25,00,000 ×(10 )/100
Operating Profit = Rs. 2,50,000
Calculation of Net Profit:-
Net Profit = Operating Profit – Non Operating Expenses + Non-operating Income
Net Profit = Rs. 2,50,000 – Rs. 25,000 – Rs. 30,000 + Rs. 40,000
Net Profit = Rs. 2,35,000
Question 106. Following is the Balance Sheet of Ganesh Ltd. as at 31st March, 2018:
Solution 106.
Calculation of Return on Capital Employed:-
Return on Capital Employed = (Net Profit before Interest & Tax)/(Capital Employed) ×100
Return on Capital Employed = (Rs. 12,00,000)/(Rs. 75,00,000) ×100
Return on Capital Employed = 16%
So, the Return on Capital Employed is 16%
Working Note:-
Interest on Loan = Rs. 10,00,000 × 8%
Interest on Loan = Rs. 80,000
Interest on Debentures = Rs. 12,00,000 × 10%
Interest on Debentures = Rs. 1,20,000
Calculation of Net Profit before interest & Tax:-
Net Profit before Interest & Tax = Profit as stated in the Balance Sheet + Interest on Loan + Interest on Debentures
Net Profit before Interest & Tax = Rs. 10,00,000 + Rs. 80,000 + Rs. 1,20,000
Net Profit before Interest & Tax = Rs. 12,00,000
Calculation of Capital Employed:-
Capital Employed = Share Capital + Reserves + 8% Loan + 10% Debentures + Profit for the year
Capital Employed = Rs. 30,00,000 + Rs. 13,00,000 + Rs. 10,00,000 + Rs. 12,00,000 + Rs. 10,00,000
Capital Employed = Rs. 75,00,000
Point in Mind:-
We can calculate capital employed by this method also.
Calculation of Capital Employed:-
Capital Employed = Non-Current Assets + Current Assets – Current Liabilities
Capital Employed = Fixed Assets + Inventory + Trade Receivables + Cash and Cash Equivalents – Trade Payables
Capital Employed = 55,00,000 + 12,00,000 + 9,00,000 + 3,00,000 – 4,00,000
Capital Employed = 79,00,000 – 4,00,000
Capital Employed = 75,00,000
Question 107. Calculate Return on Capital Employed from the following:
| Rs. | |
| Share Capital | 7,20,000 |
| Reserve & Surplus | 6,50,000 |
| Current Liabilities | 7,50,000 |
| Non-Current Assets | 15,00,000 |
| Inventory | 5,00,000 |
| Trade Receivables | 6,00,000 |
| Cash & Cash Equivalents | 1,00,0000 |
| 10% Long term Borrowings | 5,00,000 |
| Long term Provision | 80,000 |
Net Profit before tax Rs. 2,50,000.
Solution 107
Calculation of Return on Capital Employed:-
Return on Capital Employed = (Net Profit before Interest & Tax)/(Capital Employed) ×100
Return on Capital Employed = (Rs.3,00,000)/(Rs.19,50,000) ×100
Return on Capital Employed = 15.38%
So, the Return on Capital Employed is 15.38%.
Working Note:-
Interest = Rs. 5,00,000 × 10%
Interest = 50,000
Calculation of Net Profit before Interest & Tax:
Net Profit before interest & tax = Net Profit before tax + Interest
Net Profit before interest & tax = Rs. 2,50,000 + 50,000
Net Profit before interest & tax = Rs. 3,00,000
Calculation of Capital Employed:-
Capital Employed = Share Capital + Reserves + Long term Borrowings + Long Term Provisions
Capital Employed = Rs. 7,20,000 + Rs. 6,50,000 + Rs. 5,00,000 + Rs. 80,000
Capital Employed = Rs. 19,50,000
Question 108. Net Profit after Interest but before Tax Rs. 65,000; Shareholder’s Funds Rs. 3,00,000; 15 % Long Term Debt Rs. 1,00,000. Calculate Return on Investment.
Solution 108
Calculation of Return on Investment:-
Return on Investment = (Net Profit before Interest & Tax)/(Capital Employed) × 100
Return on Investment =(Rs.80,000)/(Rs.4,00,000) ×100
Return on Investment = 20%
So, the Return on Investment is 20%
Working Note:-
Interest = Rs. 1,00,000 × 15%
Interest = 15,000
Calculation of Net Profit before interest & tax:-
Net Profit before interest & tax = Profit after interest but before tax + Interest
Net Profit before interest & tax = 65,000 + 15,000
Net Profit before interest & tax = 80,000
Calculation of Capital Employed:-
Capital Employed = Shareholder’s Fund + Long term Debts
Capital Employed = Rs. 3,00,000 + Rs. 1,00,000
Capital Employed = Rs. 4,00,000
Question 109. Net Profit after interest and tax Rs. 4,20,000, Current Assets Rs. 12,00,000; Current Liabilities Rs. 4,00,000; Tax Rate 30%; Fixed Assets Rs. 22,00,000; 9% Long Term debt Rs. 5,00,000.
Solution 109
Calculation of Return on Investment:-
Return on Investment = (Net Profit before Interest & Tax)/(Capital Employed) ×100
Return on Investment = (Rs.6,45,000)/(Rs.30,00,000) ×100
Return on Investment = 21.5%
So, the Return on Investment is 21.5%
Working Note:-
It is given that the Net Profit After Tax is Rs. 4,20,000.
Net Profit before Tax = 4,20,000 ×100/(Rs.70)
Net Profit before Tax = Rs. 6,00,000
Net Profit before Interest and tax = Rs. 6,00,000 + Rs. 45,000
Net Profit before Interest and tax = Rs. 6,45,000
Calculation of Capital Employed:-
Capital Employed = Non-Current Assets + Current Assets – Current Liabilities
Capital Employed = Fixed Assets + Current Assets – Current Liabilities
Capital Employed = Rs. 22,00,000 + Rs. 12,00,000 – Rs. 4,00,000
Capital Employed = Rs. 30,00,000
Question 110. Calculate ‘Return on capital Employed’ from the following details:
Gross Profit Rs. 2,70,000; Administration Expenses Rs. 60,000; Selling Expenses Rs. 30,000; 12% Long Term Debts Rs. 2,00,000; Tax Rate 40%; Non- Current Assets Rs. 6,00,000; Current Assets Rs. 2,00,000; and Current Liabilities Rs. 50,000.
Solution 110:
Calculation of Return on Capital Employed:-
Return on Capital Employed = (Net Profit before Interest & Tax)/(Capital Employed) ×100
Return on Capital employed = (Rs. 1,80,000)/(Rs. 7,50,000) ×100
Return on Capital employed = 24%
So, the Return on Capital employed is 24%
Working Note:-
Calculation of Net Profit before Interest & Tax:
Net Profit before Interest & Tax = Gross Profit – Administration Expenses – Selling Expenses
Net Profit before Interest & Tax = Rs. 2,70,000 – Rs. 60,000 – Rs. 30,000
Net Profit before Interest & Tax = Rs. 1,80,000
Calculation of Capital Employed:-
Capital Employed = Non-Current Assets + Current Assets – Current Liabilities
Capital Employed = Rs. 6,00,000 + Rs. 2,00,000 – Rs. 50,000
Capital Employed = Rs. 7,50,000
Question 111. Calculate return on Investment from the following:-
| Rs. | |
| Non-Current Assets | 2,00,000 |
| Current Assets | 1,50,000 |
| Current Liabilities | 50,000 |
| Opening Inventory | 40,000 |
| Closing Inventory | 60,000 |
| Purchases | 6,00,000 |
| Carriage Inwards | 15,0000 |
| Revenue from Operations | 7,00,000 |
| Office Expenses | 30,000 |
| Interest on debentures | 12,000 |
| Tax | 7,000 |
Solution 111:
Calculation of Return on Capital Employed:-
Return on Capital Employed = (Net Profit before Interest & Tax)/(Capital Employed) ×100
Return on Capital employed = (Rs.75,000)/(Rs.3,00,000) ×100
Return on Capital employed = 25%
So, the Return on Capital employed is 25%
Calculation of Cost of revenue from operations:-
Cost of revenue from operations = Opening Inventory + purchases + Carriage Inwards – Closing Inventory
Cost of revenue from operations = Rs. 40,000 + Rs. 6,00,000 + Rs. 15,000 – Rs. 60,000
Cost of revenue from operations = Rs. 5,95,000
Calculation of Gross profit:-
Gross Profit = Revenue from Operations – Cost of Revenue from Operations
Gross profit = Rs. 7,00,000 – Rs. 5,95,000
Gross profit = Rs. 1,05,000
Calculation of Net Profit before Interest:-
Net Profit before Interest = Gross profit- Indirect Expenses
Net profit before interest = Gross profit – Office Expenses
Net profit before interest = Rs. 1,05,000 – Rs. 30,000
Net profit before interest = Rs. 75,000
Calculation of Capital Employed:-
Capital Employed = Non- Capital Assets + Current Assets – Current Liabilities
Capital Employed = Rs. 2,00,000 + Rs. 1,50,000 – RS, 50,000
Capital Employed = Rs. 3,00,000
Question 112. Calculate Return on Investment from the following details:-
| Rs. | |
| Equity Share Capital | 5,00,000 |
| 12% Preference Share Capital | 1,00,000 |
| Reserve | 1,44,000 |
| 15% loans | 2,40,000 |
| 10% debentures | 1,20,000 |
| Current Liabilities | 75,000 |
| Net Profit (after interest and income tax) | 96,000 |
| Rate of Income Tax | 50% |
Solution 112:
Calculation of Return on Capital Employed:-
Return on Capital Employed = (Net Profit before Interest & Tax)/(Capital Employed) ×100
Return on Capital employed =(Rs.2,40,000)/(Rs.12,00,000) ×100
Return on Capital Employed = 20%
So, the Return on Capital Employed is 20%
Working Note:-
Calculation of Net Profit before Interest and Tax:-
Net Profit Tax = Rs. 96,000
Net Profit before Interest and Tax = Rs. 96,000 × 100/50
Net Profit before Tax = Rs. 1,92,000
Interest on Loan = Rs. 36,000
Interest on Debentures = Rs. 12,000
Net Profit before Interest and Tax = Rs. 1,92,000 + Rs. 36,000 + Rs. 12,000
Net Profit before Interest and Tax = Rs. 2,40,000
Calculation of Capital Employed:-
Capital Employed = Shareholder’s Funds + Non- Current Liabilities
Capital Employed = Equity Capital + Pref. Capital + Reserve + Current Year’s Profit + 15% Loans + 10% Debentures
Capital Employed = Rs. 5,00,000 + Rs. 1,00,000 – RS, 1,44,000 + Rs. 96,000 + Rs. 2,40,000 + Rs. 1,20,000
Capital Employed = Rs. 12,00,000
Question 113. A Company has a loan of Rs. 30,0,000 as Part of its capital employed. Interest payable on the loan is 12% and the R.O.I. of the company is 25%. The rate of income tax is 49%. What is the gain to shareholders due to the loan raised by the company?
Solution 113
Calculation of Return on Investment:-
Return on Investment = (Net Profit before Interest & Tax)/(Capital Employed) × 100
25% = (Net Profit before Interest & Tax)/30,00,000 × 100
25% × Rs. 30,00,000 = Net Profit before Interest & Tax
Rs. 7,50,000 = Net Profit before Interest & Tax
So, the Net Profit before interest and Tax is Rs. 7,50,000.
Working Note:-
Calculation of Net Gain to Shareholders:-
Interest Paid = 30,00,000 × 12%
Interest Paid = 3,60,000
Tax Paid = Rs. 3,90,000 × 40%
Tax Paid Rate of Tax = Rs. 1,56,000
Net gain to shareholders = Net Profit before Interest and Tax – Interest Paid – Tax Paid
Net gain to shareholders = Rs. 7,50,000 – Rs. 3,60,000 – Rs. 1,56,000
Net gain to shareholders = 2,34,000
Question 114. Following particulars are obtained from the books of Assam Tea Ltd. as at 31st march, 2018:-
| Rs. | |
| Equity Share Capital | 2,30,000 |
| 10% Preference Share Capital | 2,00,000 |
| Reserve and Surplus | 1,70,000 |
| 15% long term loans | 80,000 |
| Current Liabilities | 3,60,000 |
Net Profit after Interest and Tax = Rs. 1,80,000.
Tax Rate = 40%
Calculate Return on Investment.
Solution 114:
Calculation of Return on Capital Employed:-
Return on Capital Employed = (Net Profit before Interest & Tax)/(Capital Employed) ×100
Return on Investment =(Rs.3,12,000)/(Rs.6,80,000) ×100
Return on Investment = 45.88%
So, the Return on Investment is 45.88%.
Working Note:-
Calculation of Capital Employed:-
Capital Employed = Equity Share Capital + Preference Share Capital + Reserves + Long Term Loans
Capital Employed = Rs. 2,30,000 + Rs. 2,00,000 + Rs. 1,70,000 + Rs. 80,000
Capital Employed = Rs. 6,80,000
Calculation of Net Profit before Tax:-
Net profit before tax = Rs. 1,80,000 × 100/60
Net profit before tax = Rs. 3,00,000
Question 115. On the basis of the following information calculate (i) Liquid Ratio, (ii) Gross Profit Ratio and (iii) Operating Ratio:
| Rs. | |
| Net Working Capital | 1,76,00,000 |
| Current Assets | 3,96,00,000 |
| Inventory | 2,31,00,000 |
| Revenue from Operations | 15,00,00,000 |
| Cost of revenue from Operations | 10,20,00,000 |
| Operating Expenses | 1,80,00,000 |
Solution 115:
(i) Calculation of Liquid Ratio:-
Liquid Ratio = (Liquid Assets )/(Current Liabilities)
Liquid Ratio = (Rs.1,65,00,000)/(Rs.2,20,00,000)
Liquid Ratio = 0.75 : 1
So, the Liquid Ratio is 0.75 : 1.
Calculation of Liquid Assets:-
Liquid Assets = Current Assets – Inventories
Liquid Assets = Rs. 3,96,00,000 – Rs. 2,31,00,000
Liquid Assets = Rs. 1,65,00,000
Calculation of Liquid Liabilities:-
Current Liabilities = Current Assets – Net Working Capital
Current Liabilities = Rs3,96,00,000 – Rs. 1,76,00,000
Current Liabilities = Rs. 2,20,00,000
(ii) Calculation of Gross Profit:-
Gross Profit Ratio = (Gross Profit)/(Revenue from Operations) ×100
Gross Profit Ratio =(Rs.4,80,00,000)/(Rs.15,00,00,000)×100
Gross Profit Ratio = 32%
Calculation of Gross Profit:-
Gross Profit = Rs. 15,00,00,000 – Rs. 10,20,00,000
Gross Profit = Rs. 4,80,00,000
(iii) Calculation of Gross Profit:-
Gross Profit Ratio = (Gross Profit)/(Revenue from Operations) ×100
Gross Profit Ratio = (Rs.10,20,00,000+Rs.1,80,00,000)/(Rs.15,00,00,000) ×100
Gross Profit Ratio = (Rs.12,00,00,000)/(Rs.15,00,00,000) × 100
Gross Profit Ratio = 80%
Gross Profit Ratio = 32%
Question 116. Calculate any three of the following ratios with the help of the following information:
(i) Operating Ratio, (ii) Current Ratio, (iii) gross Profit Ratio, (iv) inventory Turnover Ratio; and (v) Debt Equity Ratio.
Information: Equity Share Capital Rs. 5,00,000; 12% Debentures RS. 6,00,000; 9% Preference Share Capital Rs. 3,00,000; General reserve Rs. 1,00,000; Reserve from Operations RS. 10,00,000; Opening Inventory RS. 80,000; Purchases Rs. 6,00,000; Wages Rs. 1,00,000; Closing Inventory RS. 1,00,000; Selling and Distribution expenses Rs. 20,000; Other current assets Rs. 5,00,000 and Current liabilities RS. 3,00,000.
Solution 116:
(i) Calculation of Operating Ratio:-
Operating Ratio = (Cost of Revenue from Operations+Operating expenses)/(Net Revenuue from Operations)×100
Operating Ratio = (Rs.6,80,000+Rs.20,000)/(Rs.10,00,000) ×100
Operating Ratio = 70%
So, the Operating Ratio is 70%.
(2) Calculation of Current Ratio;
Formula of Current Ratio is
Current Ratio = (Current Assets )/(Current Liabilities)
Current Ratio =(Rs.6,00,000)/(Rs.3,00,000)
Current Ratio = 2:1
Current Assets = Closing Inventory + other Current Assets
Current Assets = RS. 1,00,000 + Rs. 5,00,000 = Rs. 6,00,000
So, the Current Ratio is 2:1.
(3) Calculation of Gross Profit Ratio;
Formula of Gross Profit Ratio is
Gross Profit Ratio = (Gross Profit)/(Revenue from Operations) ×100
Gross Profit Ratio = (Rs.3,20,000)/(Rs.10,00,000) × 100
Gross Profit Ratio = 32%
So, the Gross Profit Ratio is 32%
Calculation of Gross Profit:-
Gross Profit = Sales from Operations – Cost of Sales from Operations
Gross Profit = Rs. 10,00,000 – Rs. 6,80,000
Gross Profit = Rs. 3,20,000
(4) Calculation of Inventory Turnover Ratio;
Formula of Inventory Turnover Ratio is
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Average Inventory = (Opening Inventory+Closing Inventory )/2
Average Inventory =( Rs.80,000+Rs.1,00,000)/( 2)
Average Inventory = Rs. 90,000
So, the Inventory Turnover Ratio is Rs. 90,000.
(4) Calculation of Debt Equity Ratio;
Formula of Debt Equity Ratio is
Debt Equity Ratio = (Debt )/(Equity ) Or (Long term Loans )/(Shareholder^’ sFunds)
Debt Equity Ratio = (Rs.6,00,000 )/(RS.9,00,000)
Debt Equity Ratio = .67:1
Calculation of Shareholder’s Funds:-
Shareholder’s Funds = Equity Share Capital + Preference Share Capital + General Reserve
Shareholder’s Funds = Rs. 5,00,000 + Rs. 3,00,000 + Rs. 1,00,000
Shareholder’s Funds = Rs. 9,00,000
So, the Debt Equity Ratio : .67:1
Question 117. Calculate Current Ratio and Quick Ratio from the following Balance Sheet: –
Solution117
Calculate the Current Ratio and Quick Ratio:-
Current Ratio = (Current Assets )/(Current Liabilities)
Current Ratio = (Rs.11,52,000)/(Rs.4,80,000)
Current Ratio = 2.4 : 1
So, the Current Ratio is 2.4 :1.
Calculation of Quick Ratio:-
Quick Ratio = (Liquid Assets )/(Current Liabilities)
Quick Ratio = (Rs.7,20,000)/(Rs.4,80,000)
Quick Ratio = 1.5:1
So, the Quick Ratio is 1.5:1.
Working Note:-
Calculation of Current Assets:-
Current Assets = Inventory + Trade Receivables + cash & Cash Equivalents + Prepaid exp.
Current Assets = Rs. 4,20,000 – Rs. 6,30,000 + Rs. 90,000 – Rs. 12,000
Current Assets = Rs. 11,52,000
Calculation of Current Liabilities:-
Current Liabilities = Trade Payables + Outstanding Expenses + Income Tax Provision
Current Liabilities = Rs. 4,10,000 + Rs. 20,000 + Rs. 50,000
Current Liabilities = Rs.4,80,000
Calculation of Current Assets:-
Liquid Assets = Trade Receivables + Cash & Cash Equivalents
Liquid Assets = RS. 6,30,000 + Rs. 90,000
Liquid Assets = Rs. 7,20,000
Question 118. Following is the Balance Sheet of Vikas Ltd. as at 31st March, 2018:
Throw light on the short term financial position of the Company with the help of suitable ratios.
Solution118
Liquidity Ratios can be used to determine a company’s short-term financial status.
The following two ratios are included in the Liquidity Ratio:
(a) Current Ratio and (b) Quick Ratio
(a) Calculation of Current Ratio:-
Current Ratio = (Current Assets )/(Current Liabilities)
Current Ratio = (Rs.18,00,000)/(Rs.6,00,000)
Current Ratio = 3 : 1
So, the Current Ratio is 3:1
(b) Calculation of Quick Ratio:-
Quick Ratio = (Liquid Assets )/(Current Liabilities)
Quick Ratio = (Rs.10,20,000)/(Rs.6,00,000)
Quick Ratio = 1.7:1
So, the Quick Ratio is 1.7:1.
Comments:
The company’s short-term financial situation is strong since its current ratio is 3:1, which is higher than the optimal ratio of 2:1. In the same way, the fast ratio is 1.7:1, which is higher than the optimal 1:1 ratio.
Working Note:-
Calculation of Current Assets:-
Current Assets = Inventory + Trade Receivables + cash & Cash Equivalents + Expenses paid in Advance
Current Assets = Rs. 7,60,000 – Rs. 8,10,000 + Rs. 2,10,000 – Rs. 20,000
Current Assets = Rs. 18,00,000
Calculation of Current Liabilities:-
Current Liabilities = 11% Debentures + Bank Overdraft + Trade Payables + Provision for Taxation
Current Liabilities = Rs. 1,50,000 + Rs. 60,000 + Rs. 3,20,000 + Rs. 70,000
Current Liabilities = Rs.6,00,000
Calculation of Liquid Assets:-
Liquid Assets = Trade Receivables + Cash & Cash Equivalents
Liquid Assets = RS. 8,10,000 + Rs. 2,10,000
Liquid Assets = Rs. 10,20,000
Question 119. Comment upon the short-term financial position of the basis of the following:
Goodwill Rs. 1,00,000; Sundry Debtors Rs. 2,50,000; Machinery Rs. 4,00,000; Inventory RS. 5,00,000; Bills Payable RS. 30,000; Sundry Creditors Rs. 4,20,000; Prepaid Expenses Rs. 25,000; Cash Rs. 40,000; Marketable Securities Rs. 80,000; Bills Receivables Rs. 30,000; Debentures Rs. 1,00,000; Expenses Payable Rs. 10,000; Lice Stock Rs. 50,000; Patents RS. 20,000; Provision for Taxation Rs. 40,000.
Solution119
Liquidity Ratios can be used to assess a company’s short-term financial situation. The following two ratios are examples of liquidity ratios: (a)Current Ratio and (b) Quick Ratio
Comments:
The company’s short-term financial situation is unsatisfactory due to its Current Ratio of 1.85:1, which is less than the optimal ratio of 2:1. Similarly, the quick ratio is.8:1, which is higher than the optimal 1:1 ratio.
Question 120. Current Liabilities of a Company were Rs. 80,000 and its Current Ratio was 2.5:1. After this,, it purchased goods for Rs. 40,000 on Credit. Calculate the revised Current Ratio.
Solution 120
Calculate the revised current ratio:
Current Ratio = (Current Assets )/(Current Liabilities)
2.5 Times = (Current Assets )/(Rs.80,000 (Given))
Current Assets = Rs. 80,000 × 2.5
Current Assets = Rs. 2,00,000
Purchases made on credit result in a rise in inventory, which raises Current Assets. However, it will result in a rise in trade payables, which is a component of current liabilities. As a result, after purchasing products on credit for Rs. 40,000:
Revised Current Ratio = (Rs.2,40,000 )/(Rs.1,20,000 )
Revised Current Ratio = 2:1
So, the Revised Current Ratio is 2:1.
Working Note:-
Current Ratio = Rs. 2,00,000 + Rs. 40,000
Current Ratio = Rs. 2,40,000
Current Liabilities = Rs. 80,000 + Rs. 40,000
Current Liabilities = Rs. 1,20,000
Question 121. Current Assets of a Company are Rs. 3,06,000 and its Current ratio is 1.8. Afterwards, it issued new equity shares of RS. 1,00,000. Calculate the revised current ratio.
Solution 121:
Calculate the revised current ratio:
Current Ratio = (Current Assets )/(Current Liabilities)
1.8 Times = (Rs.3,06,000 (Given ))/(Current Liabilities)
Current Liabilities = (Rs.3,06,000)/1.8
Current Liabilities = Rs. 1,70,000.
The issuance of new equity shares increases the bank’s assets, which leads to a rise in current assets. As a result, following the issuance of new equity shares worth Rs. 1,00,00
Current Assets = Rs. 3,06,000 + Rs. 1,00,000
Current Assets = Rs. 4,06,000
Revised Current Ratio = (Rs.4,06,000 )/(Rs.1,70,000 )
Revised Current Ratio = 2.388:1
So, the Revised Current Ratio is 2.388:1.
Question 122. The Current Ratio of a Company is 0.8:1. State giving reasons which of the following transactions would (i) Improve (ii) Reduce; (iii) Not Change; the Current Ratio:
(a) Payment of Outstanding liabilities
(b) Purchase of goods on Credit.
(c) Sale of furniture costing RS. 10,000 at a loss of RS. 2,000.
(d) Sale of goods costing RS. 15,000 at a profit of RS. 1,000.
(e) Payment of dividend payable.
Solution122
Question 123. The Quick ratio of a company is 0.8:1. State with reason whether the following transactions will increase, decrease or not change the quick ratio:
Purchase of loose tools Rs. 2,000.
Insurance premium paid in advance Rs. 500.
Sale of goods on Credit Rs. 3,000.
Honoured a bills payable of Rs. 5,000 on maturity.
Solution123.
Question 124. The quick ratio of a company is 1:1. State giving reasons, which of the following would improve, reduce or not change the ratio?
Purchase of machinery for cash
Purchase of goods on Credit
Sale of furniture at cost
Sale of goods at a profit
Redemption of debentures
Cash received from Debtors.
Solution124
Question 125. Current Assets Rs. 5,00,000; Working Capital RS. 3,00,000. Calculate Current Ratio.
Solution125
Calculation of Current ratio
Current Ratio = (Current Assets )/(Current Liabilities)
Current Ratio = (Rs.1,00,000)/(Rs.20,000)
Current Ratio = 5:1
So, the Current Ratio is 5:1.
Working Note:-
Working Capital = Current Assets – Current Liabilities
Rs. 3,00,000 = Rs. 5,00,000 – Current Liabilities
Current Assets = Rs. 80,000 – Rs. 20,000
Current Assets = Rs. 1,00,000
Question 126. Current Liabilities RS. 20,000; Working Capital Rs. 80,000. Calculate Current Ratio.
Solution126
Calculation of Current ratio:-
Current Ratio = (Current Assets )/(Current Liabilities)
Current Ratio = (Rs.5,00,000)/(Rs.2,00,000)
Current Ratio = 2.5:1
So, the Current ratio is 2.5:1
Working Note:-
Working Capital = Current Assets – Current Liabilities
Rs. 80,000 (Given) = Current Assets – Rs. 20,000
Current Liabilities = Rs. 5,00,000 – Rs. 3,00,000
Current Liabilities = Rs. 2,00,000
So, the Current Ratio is 2.5:1.
Question 127. Current Ratio 3:1; Current Assets Rs. 60,000. Calculate Current Liabilities.
Solution 127
Calculation of Current Liabilities:-
Current Ratio = (Current Assets )/(Current Liabilities)
3 = (Rs.60,000 )/(Current Liabilities)
Current Liabilities = (Rs.60,000 )/3
Current Liabilities = Rs. 20,000
So, the Current Liabilities are Rs. 20,000.
Question 128. Current Ratio 4.2:1; Current Liabilities Rs. 2,00,000. Calculate Current assets.
Solution128
Calculation of Current Assets
By given information:
Current Ratio = (Current Assets )/(Current Liabilities)
4.2 (Given) = (Current Assets )/(Rs.2,00,000 (Given))
Current Assets = Rs. 2,00,000 ×4.2
= Rs. 8,40,000
So, the Current Assets is Rs. 8,40,000.
Question 129. Quick Ratio 2:1; Current Liabilities RS. 2,00,000; Inventory Rs. 1,60,000.
Calculate Current Ratio.
Solution129
Calculation of Current Ratio
By given information:
Quick Ratio = (Liquid Assets )/(Current Liabilities)
2 = (Liquid Assets )/(Rs.2,00,000 )
Liquid Assets =Rs.2,00,000 ×2
= Rs. 4,00,000
Current Ratio = (Current Assets )/(Current Liabilities)
Current Assets = Liquid Assets + Inventory
= RS. 4,00,000 + RS. 1,60,000
= Rs. 5,60,000
Current Ratio =(Rs.5,60,000 )/(Rs.2,00,000 )= 2.8:1
So, the Current Ratio is 2.8:1.
Question 130. Liquid Ratio 7:3; Current Liabilities Rs. 75,000; Inventory Rs. 25,000. Calculate Current Ratio.
Solution 130
Calculate the Current Ratio.
By using the formula of Liquid Assets.
Liquid Ratio = (Liquid Assets )/(Current Liabilities)
Liquid Ratio = 7.3
It is given that the Current Liabilities is 3 and Liquid Assets is 7.
It is given that the Current Liabilities are RS. 75,000
Liquid Assets = (7 )/3 × RS. 75,000
Liquid Assets = Rs. 1,75,000
Current Ratio = (Current Assets )/(Current Liabilities)
Current Ratio = (Rs.2,00,000 )/(Rs.75,000 )
Current Ratio = 2.67:1
So the Current ratio is: 2.67:1.
Working Note:-
Calculation of Current Assets:-
Current Assets = Liquid Assets + Inventory
Current Assets = Rs. 1,75,000 + Rs. 25,000
Current Assets = Rs. 2,00,000
Question 131. Quick ratio 1.6:1; Liquid Assets Rs. 4,80,000; Inventory RS. 1,50,000. Calculate Current Ratio.
Solution131
Calculate the Current Ratio.
By using the Formula of Quick Ratio
Quick Ratio = (Liquid Assets )/(Current Liabilities)
1.6 = (Rs.4,80,000 )/(Current Liabilities)
Current Liabilities =(Rs.4,80,000)/1.6 = Rs. 3,00,000
Current Ratio = (Current Assets )/(Current Liabilities)
Current Ratio =(Rs.6,30,000 )/(Rs.3,00,000 )
Current Ratio = 2.1:1
So, the Current Ratio is 2.1:1.
Working Note:-
Calculation of Current Assets:-
Current Assets = Liquid Assets + Inventory
Current Assets = Rs. 4,80,000 + Rs. 1,50,000
Current Assets = Rs. 6,30,000
Question 132. Quick ratio 3; Current Assets Rs. 2,50,000; Inventory RS. 40,000. Calculate Current Liabilities.
Solution132
Calculate the Current Liabilities:
Quick Ratio = (Liquid Assets )/(Current Liabilities)
3 = (Rs.2,10,000 )/(Current Liabilities)
Current Liabilities =(Rs.2,10,000)/3 = Rs. 70,000
So, the Current Liabilities are Rs. 70,000.
Working Note:-
Liquid Assets = Current Assets – Inventory
Liquid Assets = Rs. 2,50,000 -Rs. 40,000
Liquid Assets = Rs. 2,10,000
Question 133. Quick ratio 2.2; Current Liabilities Rs. 40,000; Inventory RS. 32,000. Calculate Current Assets.
Solution133
Calculate the Current Assets:
Quick Ratio = (Liquid Assets )/(Current Liabilities)
2.2 (Given) = (Liquid Assets )/(Rs. 40,000 )
Liquid assets = Rs. 40,000 × 2.2 = Rs. 88,000
Current Assets = Liquid Assets + Inventory
= RS. 88,000 + RS. 32,000
= Rs. 1,20,000
So, the Current Assets is Rs. 1,20,000
Question 134. Current Assets RS. 1,00,000; Inventory RS. 55,000; Working Capital Rs. 70,000. Calculate Quick Ratio.
Solution134.
Calculate the Quick Ratio:
Quick Ratio = (Liquid Assets )/(Current Liabilities)
Quick Ratio = (Current Assets )/(Current Liabilities)
Quick Ratio =(RS.45,000 )/(RS.30,000) = 1.5:1
So, the Quick Ratio is 1.5:1.
Working Note:-
Calculation of Liquid Assets:-
Liquid Assets = Current Assets – Inventory
Liquid Assets = Rs. 1,00,000- Rs. 55,000
Liquid Assets = Rs. 45,000
Calculation of Current Liabilities:-
Current Liabilities = Current Assets-working Capital
Current Liabilities = Rs. 1,00,000 – Rs. 70,000
Current Liabilities = Rs. 30,000
Question 135. Current Liabilities Rs. 80,000; Working Capital Rs. 1,70,000; Inventory Rs. 85,000; Prepaid Expenses RS. 5,000. Calculate Quick Ratio.
Solution135
Calculate the Quick Ratio:
Quick Ratio = (Liquid Assets )/(Current Liabilities)
Quick Ratio = (Current Assets )/(Current Liabilities)
Quick Ratio = (RS.1,60,000 )/(RS.80,000)
Quick Ratio = 2:1
So, the Quick Ratio is 2:1.
Calculation of Liquid Assets:-
Liquid Assets = Current Assets – Inventory- Prepaid Expenses
Liquid Assets = Rs. 2,50,000- Rs. 85,000- Rs. 5,000
Liquid Assets = Rs. 1,60,000
Calculation of Current Assets:-
Current Assets = Current Liabilities + Working Capital
Current Assets = Rs. 80,000 + Rs. 1,70,000
Current Assets = Rs. 2,50,000
Question 136. Current Ratio 3:1; working Capital Rs. 4,00,000; Inventory Rs. 2,50,000. Calculate Current Assets, Current Liabilities, Quick Ratio.
Solution136
Calculate the Current Assets, Current Liabilities, Quick Ratio.
Working Capital is 4,00,000,
Current Assets = 3/2 × Rs. 4,00,000
Current Assets = Rs. 6,00,000
So, the Current Assets is Rs. 6,00,000
Calculation of Current Liabilities:-
Current Liabilities = Current Assets – Working Capital
Current Liabilities = Rs. 6,00,000 – Rs. 4,00,000
Current Liabilities = Rs. 2,00,000
Quick Ratio = (Liquid Assets )/(Current Liabilities)
Liquid Assets = Current Assets – Inventory
Liquid Assets = Rs. 6,00,000 – Rs. 2,50,000
Liquid Assets = Rs. 3,50,000
Quick Ratio = (Rs.3,50,000 )/(Rs.2,00,000)
Quick Ratio = 1.75:1
So, the Current Assets: Rs. 6,00,000;
Current Liabilities Rs. 2,00,000
Quick Ratio is 1.75:1.
Question 137. Current Ratio 3.6:1; working Capital RS. 84,000; inventory RS. 50,000. Calculate Current Assets, Current Liabilities; Quick Ratio.
Solution137.
Calculate the Current Assets, Current Liabilities; Quick Ratio.
Working Capital = Current Assets – Current Liabilities
Current Ratio = 3.6:1 Hence, based on current ratio the working capital is
3.6 – 1=2.6
If Working Capital is 2.6, Current Assets =3.6
If working Capital is 1, Current Assets = 3.6/2.6
It is given that working Capital is 84,500,
Current Assets = 3.6/2.6 × Rs. 84,500
Current Assets = Rs. 1,17,000
Current Liabilities = Current Assets – Working Capital
Current Liabilities = Rs. 1,17,000 – Rs.84,000
Current Liabilities =Rs. 32,500
Quick Ratio = (Liquid Assets )/(Current Liabilities)
Liquid Assets = Current Assets – Inventory
= Rs. 1,17,000 – Rs. 50,000
= Rs. 3,50,000
Quick Ratio = (Rs.67,000 )/(Rs.32,500) = 2.06:1
So, the Current Assets is Rs. 1,17,000
Current Liabilities is Rs. 32,500;
Quick Ratio is 2.06:1.
Question 138. Current Ratio 5:2; Quick Ratio 2:1; Current Liabilities Rs. 5,60,000. Calculate the value of inventory
Solution 138
Calculate the Inventory’s value
Current Ratio = 3:1, therefore,
If Current Liabilities are 2, Current Assets =5
If Current Liabilities are 1, Current Assets = 5/2
If working Capital is 5,60,000,
Current Assets = 5/2×Rs.5,60,000
Current Assets = Rs. 14,00,000
Quick Ratio = 2:1, therefore,
If Current Liabilities are 1, Liquid Assets =5
If Current Liabilities are Rs. 55,60,000, Liquid Assets = 5/2 ×Rs.5,60,000
= Rs. 11,20,000
Inventory = Current Assets – Liquid Assets
= Rs. 14,00,000 – Rs. 11,20,000
= Rs. 2,80,000
So, the answer is Rs. 2,80,000 as Inventory
Question 139. Current Ratio 3:1; Acid Test Ratio 0.9:1; Current Liabilities Rs. 1,20,000.
Calculate Current Assets; Liquid Assets and Inventory.
Solution139
Calculate the Current Assets, Liquid Assets and Inventory:
Current Ratio = (Current Assets )/(Current Liabilities)
3 (Given) = (Current Assets )/(Rs.1,20,000 (Given))
Current Assets Rs. 1,20,000 × 3 = Rs. 3,60,000
Acid Test Ratio = (Liquid Assets )/(Current Liabilities)
Liquid Assets = Rs. 1,20,000 × 0.9 = Rs. 1,08,000
Inventory = Current Assets – liquid Assets
= Rs. 3,60,000 – Rs. 1,08,000
= Rs. 2,52,000
So, the Current Assets Rs. 3,60,000
, Liquid Assets is Rs. 1,08,000
And Inventories is RS. 2,52,000.
Question 140. Current Ratio 2.5:1; Quick Ratio 1:1; Current Assets RS. 5,00,000. Calculate Current Liabilities; Liquid Assets and Inventory.
Solution140
Calculate the Current Liabilities, Liquid Assets and Inventory:
Current Ratio = (Current Assets )/(Current Liabilities)
2.5 = (Rs. 5,00,000 )/(Current Liabilities)
Current Liabilities =(Rs. 5,00,000 )/2.5
= Rs. 2,00,000
Quick Ratio = (Liquid Assets )/(Current Liabilities)
1 = (Liquid Assets )/(Rs.2,00,000)
Liquid Assets = Rs.2,00,000 × 1 = Rs. 2,00,000
Inventory = Current Assets – liquid Assets
= Rs. 5,00,000 – Rs. 2,00,000
= Rs. 3,00,000
So, the Current Liabilities Rs. 2,00,000
, Liquid Assets is Rs. 2,00,000
And Inventories is RS. 3,00,000
Question 141. Current Ratio 3:1; Quick Ratio 1.2:1; Working Capital Rs. 1,50,000. Calculate Current Assets, Current Liabilities and Inventory.
Solution141
Calculate the Current Assets, Current Liabilities and Inventory:
Working Capital = Current Assets – Current Liabilities
Current Ratio = 3:1 Hence, based on current ratio the working capital is 3-1=2
If Working Capital is 2, Current Assets =3
If working Capital is 1, Current Assets = 3/2
If working Capital is 1,50,000,
Current Assets = 3/2×Rs.1,50,000
= Rs. 2,25,000
Current Liabilities = Current Assets – Working Capital
= Rs. 2,25,000 – Rs.1,50,000
=Rs. 75,000
Quick Ratio = (Liquid Assets )/(Current Liabilities)
1.2 = (Liquid Assets )/(Rs.75,000)
Liquid Assets = Rs.75,000 ×1.2
Rs. 90,000
Inventory = Current Assets – liquid Assets
= Rs. 2,25,000 – Rs. 90,000
= Rs. 1,35,000
So, the Current Assets is Rs. 2,25,000
Current Liabilities Rs. 75,000
and Inventory is Rs. 1,35,000
Question 142. Current Ratio 2.2:1; Acid Test Ratio .95:1; Working Capital Rs. 36,000. Calculate Current Assets, Current Liabilities and Inventory.
Solution142:
Calculate the Current Assets, Current Liabilities and Inventory
By the help of given value of working capital= RS. 36,000 and Current Ratio is 2.2:1 we find current Assets Value and then current liabilities
Working Capital = Current Assets – Current Liabilities
Current Ratio = 2.2:1, therefore, based on current ratio the working capital is 2.2-1=1.2
If Working Capital is 1.2, Current Assets =2.2
If working Capital is 1, Current Assets = 2.2/1.2
If working Capital is 36,000,
Current Assets = 2.2/1.2×Rs.36,000
= Rs. 66,000
Current Liabilities = Current Assets – Working Capital
= Rs. 66,000 – Rs.36,000
=Rs. 30,000
Acid Test Ratio = (Liquid Assets )/(Current Liabilities)
.95 (Given) = (Liquid Assets )/(Rs.30,000)
Liquid Assets = Rs.30,000 ×.95
Rs. 28,500
Inventory = Current Assets – liquid Assets
= Rs. 66,000 – Rs. 28,500
= Rs. 37,500
So, the Current Assets is Rs. 66,000
Current Liabilities Rs. 30,000 and Inventory is Rs. 37,500
Question 143. Current Ratio 3.5:1; Quick Ratio 2:1; Inventory Rs. 24,000. Calculate Current Assets; Current Liabilities and Quick Assets.
Solution143
Calculation of Current Assets; Current Liabilities and quick Assets:
The given information: Current Ratio is 3.5
Quick Ratio is 2.
Difference between Current ratio and Quick Ratio is inventories.
Hence, Inventories is 3.5 – 2=1.5
If Inventory is 1.5, Current Assets =3.5
If Inventory is 1, Current Assets = 3.5/1.5
If Inventory is 24,000, Current Assets = 3.5/1.5×Rs.24,000
= Rs. 56,000
Current Ratio = (Current Assets )/(Current Liabilities)
3.5 = (Rs.56,000 )/(Current Liabilities) = Rs. 16,000
Current Liabilities = (Rs.56,000 )/3.5 = Rs. 16,000
Quick Assets = Current Assets – Inventory
= Rs. 56,000 – Rs. 24,000
= Rs. 32,000
So, the Current Assets is Rs, 56,000
Current Liabilities is Rs. 16,000
and Quick Assets is Rs. 32,000.
Question 144. Current Ratio 2.8:1; Liquid Ratio 1.6:1; Inventory Rs. 48,000. Calculate Current Assets; Current Liabilities and Liquid Assets.
Solution144
Calculation of Current Assets; Current Liabilities and Liquid Assets:
The given information: Current Ratio= 2.8
Liquid Ratio = 1.6.
Difference between Current ratio and Liquid Ratio is inventory.
Hence, Inventories is 2.8 – 1.6 = 1.2.
If Inventory is 2, Current Assets =2.8
If Inventory is 1, Current Assets = 2.8/1.2
If Inventory is 48,000,
Current Assets = 2.8/1.2×Rs.48,000
= Rs. 1,12,000
Current Ratio = (Current Assets )/(Current Liabilities)
2.8 = (Rs. 1,12,000)/(Current Liabilities) = Rs. 16,000
Current Liabilities = (Rs.1,12,000 )/2.8 = Rs. 40,000
Liquid Assets = Current Assets – Inventory
= Rs. 1,12,000 – Rs. 48,000
= Rs. 64,000
So, the Current Assets is Rs, 1,12,000
Current Liabilities is Rs. 40,000
and Liquid Assets is Rs. 64,000.
Question 145. Current Ratio 2.6:1; Current Assets Rs. 1,95,000; Inventory Rs. 90,000. Calculate Acid Test Ratio.
Solution145:
Calculation of Acid test ratio:
By using formula Current Ratio
Current Ratio = (Current Assets )/(Current Liabilities)
2.6 = (Rs. 1,95,000 )/(Current Liabilities) = Rs. 16,000
Current Liabilities = (Rs.1,95,000 )/2.6 = Rs. 75,000
Liquid Assets = Current Assets – Inventory
= Rs. 1,95,000 – Rs. 90,000
= Rs. 1,05,000
Acid Test Ratio = (Liquid Assets )/(Current Liabilities)
= (Rs.1,05,000)/(Rs.75,000)= 1.4:1
So, the Acid test Ratio is 1.4:1.
Question 146. The ratio of Current Assets (Rs. 9,00,000) to Current Liabilities is 1.5:1. The accountant of this firm is interested in maintaining a Current Ratio of 2:1 by Paying some part of Current Liabilities. You are required to suggest him the amount of Current Liabilities which must be paid for this purpose.
Solution146
To find the amount of current liability we use formula of:
Current Ratio = (Current Assets )/(Current Liabilities)
1.5 = (Rs. 9,00,000 )/(Current Liabilities) = Rs. 16,000
Current Liabilities = (Rs.9,00,000 )/1.5 = Rs. 6,00,000
Current Liabilities must be charged in order to raise the Current Ratio. Payment of Existing Liabilities, on the other hand, would result in an equal decrease of both current assets and current liabilities. Assume that the payment amount is x. Following the payment of Rs. x in Current Liabilities.
Current Liabilities =Rs. 6,00,000 – x
Current Assets = Rs. 9,00,000 – x
Current Ratio = (Current Assets )/(Current Liabilities)
2 (Ratio to be maintained) = (Rs.9,00,000-x)/(Rs.6,00,000-x)
Rs. 12,00,000 – 2x = Rs. 9,00,000 – x
x = Rs. 3,00,000
Hence, Rs. 3,00,000 of Current Liabilities, must be paid maintain the Current Ratio of 2:1.
Question 147. From the following, calculate the Debt- Equity Ratio and Current Ratio: –
Solution 147
Calculation of the Debt-Equity Ratio
Debt- Equity Ratio = (Debt )/( Equity ) or (Long term Debt )/( Shareholder^’ s Funds)
Shareholder’s Fund =Equity Share Capital + General Reserve + Profit & Loss Balance
= RS. 1,00,000 + RS. 45,000 + Rs. 30,000
=Rs. 1,75,000
=(Rs.75,000)/( Rs.1,75,000)= 0.43:1
So, the Debt- Equity Ratio is 0.43:1
Question 148. From the following information, calculate the Debt- Equity Ratio and Current Ratio: –
| RS. | |
| Equity Share Capital (10,000 Equity Shares of RS. 10 each ) | 1,00,000 |
| General reserve | 45,000 |
| Profit & Loss Balance | 30,000 |
| Debenture | 75,000 |
| Trade Payables | 40,000 |
| Outstanding Expenses | 10,000 |
Solution148
Calculation of the Debt-Equity Ratio
Debt- Equity Ratio = (Debt )/( Equity ) or (Long term Debt )/( Shareholder^’ s Funds)
Long Term Debts =12% debentures + Long Term Loans
= RS. 2,80,000 + RS. 1,10,000
=Rs. 3,90,000
Shareholder’s funds = Share Capital + General Reserve
= RS. 2,50,000 + Rs. 25,000
= Rs. 2,75,000
=(Rs.3,90,000)/( Rs.2,75,000)= 1.42:1
So, the Debt- Equity Ratio is 1.42:1
Calculation of the Current ratio:
Current Ratio = (Current Assets )/( Curremt Liabilities)
Current Assets = Trade Receivables + Cash & Cash Equivalents
=RS. 60,000 + RS. 30,000
= RS. 90,000
Current Ratio = (RS.90,000)/( RS.60,000)= 1.5:1
So, the current ratio is 1.5:1.
Question 149. From the following, ascertain Debt- Equity Ratio and Proprietary Ratio:-
| RS. | |
| Equity Share Capital | 20,00,000 |
| General reserve | 10,00,000 |
| Securities Premium Reserve | 6,00,000 |
| Profit & Loss Balance | (1,00,000) |
| 10% Debentures | 3,00,000 |
| Loan from industries Development Bank of India (I.D.B.I) | 12,00,000 |
| Current Liabilities | 10,00,000 |
| Fixed Assets | 40,00,000 |
| Current Assets | 20,00,000 |
Solution149.
Calculation of the Debt-Equity Ratio
Debt- Equity Ratio = (Debt )/( Equity ) or (Long term Debt )/( Shareholder^’ s Funds)
Long Term Debts =10% debentures + Loan from IDBI
= RS. 3,00,000 + RS. 12,00,000
=Rs. 15,00,000
Shareholder’s funds = Equity Share Capital + General Reserve + Securities Premium Reserve – Profit & Loss Balance
= RS. 20,00,000 + Rs. 10,00,000 + Rs. 6,00,000 – Rs. 1,00,000
= Rs. 35,00,000
Debt- Equity Ratio =(Rs.15,00,000)/( Rs.35,00,000)= 0.43:1
So, the Debt- Equity Ratio is 0.43:1
Calculation of the Proprietary ratio:
Proprietary Ratio = (Shareholder^’ sFunds)/( Total Assets )×100
Total Assets = Fixed Assets + Current Assets
= Rs. 40,00,000 + RS. 20,00,000
= Rs. 60,00,000
Proprietary Ratio = (RS.35,00,000)/( RS.60,00,000)×100= 58.33%
So, the Proprietary Ratio is 58.33%
Question 150. Calculate Current Ratio, Quick Ratio, Debt- Equity Ratio and the Proprietary Ratio from the figure given below:-
| RS. | |
| Inventory | 30,000 |
| Prepaid Expenses | 2,000 |
| Other Current Assets | 50,000 |
| Current Liabilities | 40,000 |
| 12% Debentures | 30,000 |
| Profit & Loss Balance | 10,000 |
| Equity Share Capital | 1,00,000 |
| Long term Investments | 15,000 |
| Fixed Assets | 83,000 |
Solution 150.
Calculation of the Current ratio:
Current Ratio = (current Assets )/(Current Liabilities)
Current Assets = Inventory + Prepaid Expenses + Other Current Assets
= RS. 30,000 + RS. 2,000 + RS. 50,000
= RS. 82,000
Current Ratio = (Rs.82,000)/(Rs.40,000)= 2.05:1
So, the Current Ratio is 2.05:1
Calculation of the Quick Ratio:
Quick Ratio = (Liquid Assets )/(Current Liabilities)
=(other current Assets )/(Current Liabilities)
=(RS.50,000 )/(RS.40,000) = 1.25:1
So, the Quick Ratio is 1.25:1
Calculation of the Debt-Equity Ratio
Debt- Equity Ratio = (Debt )/( Equity ) or (Long term Debt )/( Shareholder^’ s Funds)
Long Term Debts =12% debentures = RS. 30,000
Shareholder’s funds = Equity Share Capital + Profit & Loss Balance
= RS. 10,000 + Rs. 1,00,000
= Rs. 1,10,000
Debt- Equity Ratio =(Rs.30,000)/( Rs.1,10,000)= 0.27:1
So, the Debt- Equity Ratio is 0.27:1
Calculation of the Proprietary ratio:
Proprietary Ratio = (Shareholder^’ sFunds)/( Total Assets )×100
Total Assets = Current Assets + Fixed Assets + Long Term Investments
= Rs. 82,000 + RS. 83,000 Rs. 15,000
= Rs. 1,80,000
Proprietary Ratio = (RS.1,10,000)/( RS.1,80,000)×100= 61.11%
So, the Proprietary Ratio is 61.11%
Question 151. The following balance are extracted from thr books of Rajhans Products Ltd.as at 31st March, 2018: –
| RS. | |
| Share Capital | 2,40,000 |
| Reserve & Surplus (Include current year’s profit) | 1,40,000 |
| 15% Mortgage Loan | 1,60,000 |
| Trade Payables | 1,20,000 |
| Bank Overdraft | 60,000 |
| Tangible Fixed Assets | 4,20,000 |
| Intangible Fixed assets | 50,000 |
| Inventory | 90,000 |
| Cash & Cash Equivalents | 1,20,000 |
| Short term Investments | 40,000 |
Net Profit after Payment of interest and income tax amounted to Rs. 60,000. Rate of Income Tax 50%.
Calculate the following ratios and give your comments: –
i. Current Ratio;
ii. Proprietary Ratio;
iii. Total Assets to Debt Ratio;
iv. Interest Coverage Ratio.
Solution 151
(1) Calculation of Current Ratio:
Formula for Current Ratio:
Current Ratio = (current Assets )/(Current Liabilities)
Current Assets = Inventory + cash & Cash Equivalents + Short term Investments
Current Assets = Rs. 90,000 + Rs. 1,20,000 + Rs. 40,000
Current Assets = Rs. 2,50,000
Current Liabilities
Current Liabilities = Trade payables + Bank Overdraft
= Rs. 1,20,000 + Rs. 60,000 = Rs. 1,80,000
Current Ratio = (Rs.2,50,000)/(Rs.1,80,000)= 1.39:1
Comment: The ideal ratio 2:1. Current ratio of the company is below the ideal ratio so the position of the company by short term financial is not satisfactory.
So, the current ratio is 1.39:1.
(2) Calculation of Proprietary Ratio:
Formula for Proprietary Ratio:
Proprietary Ratio = (Shareholder^’ sFunds)/( Total Assets )×100
Shareholder’s Funds = Share Capital + Reserve & Surplus
= Rs. 2,40,000 + Rs. 1,40,000
= Rs. 3,80,000.
Total Assets = Non- Current Assets + Current Assets
= Tangible Fixed Assets + Intangible Fixed Assets + Inventory + Cash & Cash Equivalents + Short term Investments
= Rs. 4,20,000 + RS. 50,000 + Rs. 90,000 + Rs. 1,20,000 + Rs. 40,000
= Rs. 7,20,000
Proprietary Ratio = (RS.3,80,000)/( RS.7,20,000)×100= 52.78%
Comment:
The position of the company by short term financial is satisfactory because total assets are 52.78% of the acquired by the company equity.
So, the Proprietary Ratio is 52.78%
(3) Calculation of Total Assets to debt Ratio:
Formula for Total Assets to debt Ratio:
Total Assets to debt Ratio =(Total Assets )/( Debt)
Long Term debts = 15% Mortgage Loan = Rs. 1,60,000
Total Assets to debt Ratio =(RS.7,20,000 )/( Rs.1,60,000)=4.5:1
Comment:
Long-term debts are 4.5 times the company’s overall assets, indicating that the company is using lower debts in financing assets, implying a broad safety buffer for lenders.
So, the Total Assets to debt Ratio is 4.5:1.
(4) Calculation of Interest Coverage Ratio:
Formula for Interest Coverage Ratio:
Interest Coverage Ratio =(Net Profit before Interest and Tax )/( Fixed Interest Charges)
Net Profit after interest and tax = Rs. 60,000
Net Profit before Payment of Tax = Rs. 60,000 ×(100 )/50= RS. 1,20,000
Net Profit before interest and tax =1,20,000 + Fixed Interest Charges
= 1,20,000 + 24,000 = Rs. 1,44,000
Interest Coverage Ratio = (RS.1,44,000 )/( Rs.24,,000)= 6 Times
Comment:
The interest coverage ratio is equal to the suitable interest coverage ratio of 6 or 7 times, that is why Interest coverage ratio of the company is satisfactory
So, the Interest Coverage Ratio is 6 times.
Question 152. Assuming that Debt to Equity Ratio is 0.5:1, state, giving reasons, whether this ratio will increase or decrease or will have no change in each one of the following cases:
(i) Issue of preference Share for Cash.
(ii) Issue of Debentures for Cash.
(iii) Issue of bonus Shares.
(iv) Redemption of debentures for cash.
(v) Conversion of Debentures into Equity Shares.
(vi) Purchase of a fixed assets for cash.
(vii) Purchase of a fixed assets by taking long term loan.
(viii) sale of fixed assets (Book value Rs. 5,00,000) for Rs. 4,00,000.
(ix) Sale of Fixed assets (Book value Rs. 2,00,000 ) at a profit of Rs. 50,000.
Solution152
| Tr. No. | Result on Debt Equity Ratio | Reason |
| 1. | Decrease | Equity Shareholder assets are raised Long-term loans are unchanged |
| 2. | Increase | Equity remains unchanged long-term debts are raised |
| 3. | No Change | Long-term loans keep the same, Equity shareholder assets raised. |
| 4. | Decrease | Equity shareholder’s funds are keep unchanged Long-term debts are reduced. |
| 5. | Decrease | Shareholder’s funds are raised Long-term debts are decreased by the same amount. |
| 6. | No Change | Neither the Long -term Debts nor the equity are affected. |
| 7. | Increase | Equity Shareholders keep unchanged Long-term debts are raised. |
| 8. | Increase | Equity shareholder funds are reduced by the amount of loss —Long-term debts keep unchanged. |
| 9. | Decrease | Shareholder’s funds are raised by the amount of profit Long-term debts are keep unchanged. |
Question 153. The net profit after interest and tax of a company was Rs. 1,20,000; Rate of income tax is 40%. The company has 10% debentures of Rs. 1,00,000. Calculate interest coverage ratio.
Solution153
Calculate Inventory Coverage Ratio
Formula of Inventory Coverage ratio:
Question 154. Following is the Balance Sheet of Vikas Ltd. as at 31st March, 2018:
Solution 154:
(1) Calculate Inventory Turnover Ratio
Formula of Inventory Turnover ratio:
Inventory Turnover Ratio = (Cost of sales from Operations )/Inventory
Below is the calculation of Gross profit:
Gross profit = 20% on Sales from Operations
= Rs. 8,00,000 × 20/( 100 )
= RS. 1,60,000
Cost of Sales from Operations = Net Sales from Operations – Gross Profit
= Rs. 8,00,000 – Rs. 1,60,000
= Rs. 6,40,000
Inventory Turnover Ratio =(Rs.6,40,000 )/(Rs.1,20,000)=5.33 times
(b) Calculate Trade Receivables Turnover ratio
Formula of Trade Receivables Turnover ratio :
Trade Receivables Turnover ratio =(Credit Revenue from Operations)/(Trade Receivables)
= (Rs.8,00,000)/( Rs.36,000)=22.22 times
So, the Trade Receivables Turnover ratio 22.22times
(3) Calculation of Working Capital Turnover Ratio
Formula for find working capital Turnover Ratio
Working Capital Turnover Ratio =(Net Revenue from Operations )/( Working Capital)
Below is the calculation of Working capital
Working Capital = Inventory + Trade Receivables + Cash & Cash Equivalents – Trade Payables – Bank Overdraft
= Rs. 1,20,000 + Rs. 36,000 + Rs. 14,000 – RS. 50,000 – RS. 20,000
= RS. 1,00,000
Working Capital Turnover Ratio = = (Rs.8,00,000)/( Rs.1,00,000 ) = 8 Times
So, the Working Capital Turnover Ratio 8 times
Question 155. Calculate (i) Inventory Turnover Ratio; (ii) Average Age of Inventory and (iii) Working Capital Turnover Ratio from the following details: –
| Particulars | RS. |
| Sales from Operations (Sales) | 8,00,000 |
| Less: Purchases 4,00,000 | |
| Change in Inventories (Opening Inventory – Closing Inventory) | |
| (40,000 – 80,000) (-)40,000 | |
| Carriage 30,000 | |
| Direct Expenses 2,10,000 | 6,00,000 |
| Gross Profit | 2,00,000 |
Solution155.
(1) Calculate Inventory Turnover Ratio
Formula of Inventory Turnover ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Cost of Revenue from Operations = Sales from Operations – Gross Profit
= Rs. 8,00,000 – Rs. 2,00,000
= Rs. 6,00,000
Average Inventory = (Opening Inventory+Closing Inventory )/2
=(Rs.40,000+Rs.80,000 )/2
=(1,20,000 )/2
=Rs. 60,000
Inventory Turnover Ratio = (Rs. 6,00,000 )/(Rs.60,000)= 10 Times
So, the Inventory Turnover ratio: 10 times
(2) Calculate Average Age of Inventory
Formula of Average Age of Inventory:
Average Age of Inventory =(Days in a year)/(Inventory Turnover Ratio)
= (365 )/( 10 times)=37 days
So, the Inventory Turnover ratio: 37 days.
(3) Calculate Working Capital Turnover Ratio
Formula of Working Capital Turnover Ratio:
Working Capital Turnover Ratio =(Net Revenue from Operations )/( Working Capital)
Working Capital = Current Assets – Current Liabilities
Below is the calculation of current Assets:
Current Assets = Trade Receivables + Closing Inventory + Cash & Cash Equivalents
= RS. 1,15,000 + Rs. 80,000 + Rs. 1,00,000
= Rs. 2,95,000
Below is the calculation of Current Liabilities:
Current Liabilities = Trade Payables + Outstanding Expenses
= Rs. 75,000 + Rs. 20,000 = Rs. 95,000
Working Capital = Rs. 2,95,000 – Rs. 95,000
= Rs. 2,00,000
Working Capital Turnover Ratio =(Rs.8,00,000 )/( Rs.2,00,000)=4 times
So, the Working Capital Turnover Ratio: 4 times.
Question 156. From the following details, calculate Inventory Turnover Ratio: –
| RS. | |
| Annual Sales from Operations | 2,00,000 |
| Gross Profit Rate | 25% on Sales from operations |
| Inventory: Opening | 38,500 |
| Closing | 41,500 |
Solution156:
Calculation of Inventory Turnover Ratio
Formula of Inventory Turnover Ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Cost of Revenue from Operations = Sales from Operations – Gross Profit
= Rs. 2,00,000 – 25% of 2,00,000
= Rs. 1,50,000
Average Inventory = (Opening Inventory+Closing Inventory )/2
=(Rs.38,500+Rs.41,500 )/2
=(Rs.80,000 )/2
=Rs. 40,000
Inventory Turnover Ratio = (Rs. 1,50,000 )/(Rs.40,000)= 3.75 Times
So, the Inventory Turnover Ratio is 3.75 times.
Question 157. From the following details, calculate Inventory Turnover Ratio:-
| RS. | |
| Annual Sales from Operations | 2,00,000 |
| Gross Profit Rate | 25% on cost |
| Inventory: Opening | 38,500 |
| Closing | 41,500 |
Solution157
Calculation of Inventory Turnover Ratio
Formula of Inventory Turnover Ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Gross Profit ratio 25% of Cost
Therefore, goods sold of RS. 100 is sold for Rs. 125
If Sales from operations are Rs. 125, Cost is RS. 100
If Sales from Operations are Rs. 2,00,000 Cost is (100 )/125× Rs. 2,00,000
=Rs. 1,60,000
Average Inventory = (Opening Inventory+Closing Inventory )/2
=(Rs.38,500+Rs.41,500 )/2
=(Rs.80,000 )/2 =Rs. 40,000
Inventory Turnover Ratio = (Rs. 1,60,000 )/(Rs.40,000)= 4 Times
So, the Inventory Turnover Ratio is 4 times.
Question 158. Opening Inventory Rs. 19,000; Closing Inventory Rs. 21,000; Sales from Operations Rs. 2,00,000; Gross Profit Ratio 25%. Calculate Inventory Turnover Ratio.
Solution158
Calculation of Inventory Turnover Ratio
Formula of Inventory Turnover Ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Cost of Sales from Operations = Sales from Operations – Gross Profit
= Rs. 2,00,000 – 25% of 2,00,000
= Rs. 1,50,000
Average Inventory = (Opening Inventory+Closing Inventory )/2
=(Rs.19,000+Rs.21,000 )/2
=(Rs.40,000 )/2 =Rs.20,000
Inventory Turnover Ratio= (Rs. 1,50,000 )/(Rs.20,000)= 7.5 Times
So, the Inventory Turnover Ratio is 10 times.
Question 159. Opening inventory Rs. 28,000; Closing inventory Rs. 52,000; Sales from Operations Rs. 6,00,000; Gross profit 331/3% on Sales from operations. Calculate Inventory Turnover Ratio.
Solution159
Calculation of Inventory Turnover Ratio
Formula of Inventory Turnover Ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Cost of Revenue from Operations = Sales from Operations – Gross Profit
= Rs. 2,00,000 – 331/3% of 6,00,000
= Rs. 6,00,000 – Rs. 2,00,000
= Rs. 4,00,000
Average Inventory = (Opening Inventory+Closing Inventory )/2
=(Rs.28,000+Rs.52,000 )/2
=(Rs.80,000 )/2 =Rs. 40,000
Inventory Turnover Ratio = (Rs. 4,00,000 )/(Rs.40,000) = 10 Times
So, the Inventory Turnover Ratio is 10 times.
Question 160. Opening Inventory Rs. 28,000; Closing Inventory Rs. 52,000; Sales from Operations Rs. 6,00,000; Gross Profit 331/3% on cost. Calculate Inventory Turnover Ratio.
Solution160
Calculation of Inventory Turnover Ratio
Formula of Inventory Turnover Ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
G. P. Ratio is 331/3% on cost.
Hence, Costing of goods Rs. 100 is sold for Rs. 1331/3
If Sales from Operations are Rs. 1331/3,
Cost of Sales from operations is RS. 100
If Sales from Operations are Rs. 6,00,000,
Cost of Revenue from Operations = (100 )/(133 1/3) × Rs. 6,00,000
= 100×3/400 × Rs. 6,00,000
Average Inventory = (Opening Inventory+Closing Inventory )/2
=(Rs.28,000+Rs.52,000 )/2
=(Rs.80,000 )/2
=Rs. 40,000
Inventory Turnover Ratio = (Rs. 4,50,000 )/(Rs.40,000)= 11.25 Times
So, the Inventory Turnover Ratio is 8 times.
Question 161. Opening Inventory Rs. 29,000; Purchases Rs. 2,42,000; Sales from Operations Rs. 3,20,000; Gross profit Ratio is 255 on Sales from Operations. Calculate Inventory Turnover ratio.
Solution161
Calculation of Inventory Turnover Ratio
Formula of Inventory Turnover Ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Cost of Revenue from Operations = Sales from Operations – Gross Profit
= Rs. 3,20,000 – 25% of 3,20,000
= Rs. 3,20,000 – Rs. 80,000
= Rs. 2,40,000
Calculation of Closing Inventory:
Cost of Sales from operations = Opening Inventory + Purchases – Closing Inventory
Hence, Closing Inventory = Opening Inventory + Purchases – Cost Of Sales from Operations
= RS. 29,000 + Rs. 2,42,000 – Rs. 2,40,000
=Rs. 31,000
Average Inventory = (Opening Inventory+Closing Inventory )/2
=(Rs.29,000+Rs.31,000 )/2 =(Rs.60,000 )/2
=Rs. 30,000
Inventory Turnover Ratio = (Rs. 2,40,000 )/(Rs.30,000)= 8 Times
So, the Inventory Turnover Ratio is 8 times.
Question 162. Closing Inventory Rs. 22,000; Purchases Rs. 1,48,000; Purchase Return Rs. 8,000; Carriage Rs. 4,000; Sales from Operations (Sales) Rs. 1,90,000; Sales from Operations Return (Sales Return) Rs. 10,000; Gross Profit 20% on cost. Calculate Inventory Turnover Ratio.
Solution162
Calculate the Inventory turnover Ratio:
Formula of Inventory Turnover Ratio is:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Cost of Revenue from Operations = Sales from Operations – Gross Profit
Net Sales from Operations
Net Sales from Operations
Net Sales from Operations = Sales from Operations – Sales from Operations Return
= Rs. 1,90,000 – Rs. 10,000
= Rs. 1,80,000
Gross Profit = 20% on Cost
Therefore, goods costing Rs. 100 is sold for Rs. 120
Sales from Operations is Rs. 120, Gross Profit is Rs. 20
Sales from operations is Rs. 1,80,000, Gross Profit is Rs. ( 20 )/120×Rs. 1,80,000
= RS. 30,000
Cost of Sales from operations =Rs. 1,80,000- Rs. 30,000
=Rs. 1,50,000
Average Inventory = (Opening Inventory+Closing Inventory )/2
= (Rs.28,000+Rs.22,000 )/2
=(Rs.50,000 )/2
=Rs. 25,000
Cost of Sales from operations = Opening Inventory + Purchases – Carriage- Closing Inventory
Opening Inventory = Cost of reserve from Operations – Purchases – Carriage + closing Inventory
Opening Inventory = Rs. 1,50,000 – Rs. 1,40,000 – 4,000 + 22,000
Opening Inventory =Rs. 28,000
Inventory Turnover Ratio = (Rs. 1,50,000 )/(Rs.25,000)= 6 Times
So, the Inventory Turnover Ratio is 6 times.
Question 163. From the following data, calculate Inventory turnover ratio: –
Total Sales from Operations (Total sales) Rs. 4,00,000; Sales from Operations Return (Sales Returns) Rs. 34,000; Gross Profit Rs. 80,000; Closing Inventory Rs. 52,000; Excess of closing Inventory over Opening Inventory Rs. 16,000.
Solution 163
Calculate Inventory Turnover Ratio
Formula of Inventory Turnover Ratio is :
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Cost of Revenue from Operations = Sales from Operations – Gross Profit
= Rs. 4,00,000 – Rs. 34,000- Rs. 80,000
= Rs. 2,86,000
Average Inventory = (Opening Inventory+Closing Inventory )/2
= (Rs.52,000+Rs.36,000 )/2
= (Rs.88,000 )/2
= Rs. 44,000
Inventory Turnover Ratio = (Rs. 2,86,000 )/(Rs.44,000)= 6.5 Times
So, the Inventory Turnover Ratio is Rs. 6.5 times
Question 164. Find out the value of opening inventory from the following particulars: –
| Total Sales from Operations | Rs. 2,00,000 |
| Inventory Turnover Ratio | 5 times |
| Gross Profit | 25% on Sales from Operations |
You are informed that closing inventory is Rs. 8,000 more than the opening inventory.
Solution164
Calculate Closing Inventory and Opening Inventory
Given Inventory turnover ratio = 5
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
5 = (Revenue from Operations-gross profit )/(Average Inventory)
5 = ((Rs.2,00,000-25% of Rs.2,00,000))/(Average Inventory)
5 = ((Rs.2,00,000-Rs.50,000) )/(Average Inventory)
Or Average Inventory = (Rs. 1,50,000 )/5 = Rs. 30,000
Opening Inventory = Rs. 30,000- (1 )/2 of Rs. 8,000
= Rs. 30,000 – Rs. 4,000 = RS. 26,000
So, the opening inventory is Rs. 26,000
Question 165. From the following details, calculate (i) Opening Inventory; (ii) Closing Inventory: Inventory Turnover Ratio 6 times; Gross Profit 20% on Sales from Operations; Sales from Operations Rs. 1,80,000; Closing Inventory is RS. 15,000 in excess of Opening Inventory.
Solution 165:
Calculate Closing Inventory and Opening Inventory
Given Inventory turnover ratio = 6
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
6 =(Revenue from Operations-gross profit )/(Average Inventory)
6 = ((Rs.1,80,000-20% of Rs.1,80,000))/(Average Inventory)
6 = ((Rs.1,80,000-Rs.36,000) )/(Average Inventory)
Or Average Inventory =(Rs. 1,44,000 )/6 = Rs. 24,000
Opening Inventory =Rs. 24,000- (1 )/2 of Rs. 15,000
= Rs. 24,000 – Rs. 7,500 = RS. 16,500
Closing Inventory = Rs. 24,000 + (1 )/2 of Rs. 15,000
= RS. 24,000 + Rs. 7.500
= RS. 31,500
So, the opening inventory is Rs. 16,500
And the Closing Inventory is RS. 31,500
Question 166. Rs. 6,30,000 is the cost of Sales from operations of a firm for the year 2018. If inventory turnover ratio is 7 times, calculate inventory at the end of the year. Inventory at the end is twice than that in the beginning.
Solution166.
Calculate Inventory at the end of the year
Formula for inventory turnover ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Given:
Inventory in starting : 7 times
Cost od revenue from operations: Rs. 6,30,000
7 =(Rs.6,30,000)/(Average Inventory)
Average Inventory =(Rs. 6,30,000 )/7 = Rs. 90,000
Total of Opening and Closing Inventory = Rs. 90,000 × 2 =Rs. 1,80,000
Ratio of Opening Inventory to Close Inventories =1:2
So, Closing Inventory = Rs. 1,80,000 × ( 2 )/3= Rs. 1,20,000
So the Closing Inventory is : RS. 1,20,000
Question 167. Rs. 1,50,000 is the cost of Sales from operations of a firm for the year 2014. If inventory turnover ratio is 6 times, calculate inventory at the end of the year. Inventory at the end is 1.5 times than that in the beginning.
Solution167
Calculate Inventory at the end of the year
Formula for inventory turnover ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Given:
Inventory in starting : 6 times
Cost od revenue from operations: Rs. 1,50,000
6 =(Rs.1,50,000)/(Average Inventory)
Average Inventory =(Rs. 1,50,000 )/6 = Rs. 25,000
Total of Opening and Closing Inventory = Rs. 25,000 × 2= Rs. 50,000
Ratio of Opening Inventory to Close Inventories =1:1.5
So, Closing Inventory = Rs. 50,000 × ( 1.5 )/2.5= Rs. 30,000
So the Closing Inventory is : RS. 30,000
Question 168. Following figures have been extracted from Shivalik Mills Ltd.: –
| Inventory in the beginning of the year | Rs. 60,000 |
| Inventory at the end of the year | Rs. 1,00,000 |
| Inventory turnover ratio | 8 times |
| Sales from Operations | 25% above cost |
Compute the amount of gross profit and Sales from operations.
Solution168
Calculate the gross profit and Sales from operations:
Given : Inventory Turnover Ratio: 8 times
Average Inventory = (Opening Inventory+Closing Inventory )/2
=(Rs.60,000+Rs.1,00,000 )/2 =(Rs.1,60,000 )/2
=Rs. 80,000
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
8 =(Cost of Revenue from Operations )/(Rs.80,000)
Cost of Revenue from Operations = Rs. 80,000 × 8
= Rs. 6,40,000
Gross Profit = Cost of Sales from Operations 25% :
6,40,000 × 25% = Rs. 1,60,000
Sales from Operations = Cost of Sales from Operations + Gross Profit
= Rs. 6,40,000 + Rs. 1,60,000
= Rs. 8,00,000
So, the Gross Profit is Rs. 1,60,000
And the Sales from Operations is Rs. 8,00,000
Question 169. Calculate current assets of a company from the following information:
Inventory turnover 4 times.
Inventory in the end is Rs. 20,000 more than inventory in the beginning.
Sales from Operations Rs. 3,00,000.
Gross profit ratio 20%.
Current Liabilities Rs. 40,000
Quick ratio 0.75.
Solution169
Calculate the current Assets of the company:
Current Assets = Liquid Assets + Closing inventory
By using Quick Ratio, we find liquid assets :
Given :
Quick ratio = 0.75
Quick ratio = (Liquid assets )/(Current Liabilities)
0.75 = (Liquid assets )/(Rs.40,000)
Or Liquid Assets = Rs. 40,000 × 0.75 = RS. 30,000
By using Inventory Turnover Ratio, we can find closing Inventory:
Given : Inventory Turnover Ratio = 4
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
4 =(Cost of Revenue from Operations-gross profit )/(Average Inventory)
Average Inventory = (Rs.3,00,000-20% of Rs.3,00,000 )/4
Average Inventory = (Rs.2,40,000 )/4= RS. 60,000
Closing Inventory = Rs. 60,000 + ( 1 )/2= Rs. 20,000
= Rs. 60,000 + Rs. 10,000
= RS. 70,000
Current Assets = Liquid Assets + Inventory
= RS. 30,000 + Rs. 70,000
= Rs. 1,00,000
So, the Current Assets is RS. 1,00,000.
Question 170. Following are the details available: –
| Rs. | |
| Current Assets | 1,00,000 |
| Current Liabilities | 70,000 |
| Total Sales from Operations | 2,00,000 |
| Cost of Sales from operations | 1,50,000 |
| Operating Expenses | 20,000 |
| Inventory Turnover | 5 times |
If the closing inventory is more by Rs. 4,000 than opening inventory, determine the following: –
(i) Opening Inventory (ii) Liquid Ratio
Solution170
(1) calculate Inventory Turnover Ratio
Formula for Find Inventory Turnover Ratio is :
Inventory Turnover Ratio = (Cost of Revenue from Operations )/(Average Inventory)
Given :
Inventory Turnover: 5 times
Cost Of revenue from Operations: Rs. 1,50,000
5 =(Rs.1,50,000 )/(Average Inventory)
Average Inventory = (Rs.1,50,000 )/5= Rs. 30,000
Opening Inventory = Rs. 30,000 – ( 1 )/2 of Rs. 4,000= Rs. 28,000
Closing Inventory = Rs. 30,000 + ( 1 )/2 of Rs.4,000= Rs. 32,000
So, the Inventory Turnover Ratio is Rs. 32,000.
Calculate Liquid Ratio
Formula for Find Liquid Ratio is :
Liquid Ratio = (Liquid Assets )/(Current Liabilities)
Liquid Assets = Current Assets – Closing Inventory
=Rs. 1,00,000 – Rs. 32,000
=Rs. 68,000
Liquid Ratio =(Rs.68,000 )/(Rs.70,000)= .97:1
So, the Liquid Ratio is . 97:1.
Question 171. From the following information, calculate Trade Receivables Turnover Ratio : –
| Rs. | |
| Opening Trade Receivables | 37,000 |
| Closing Trade Receivables | 43,000 |
| Sales from Operations (sales) | 6,00,000 |
| Cash Sales from Operations (cash Sales) | 80,000 |
Solution171
Calculate Trade Receivables Turnover Ratio
Formula for Trade Receivables Turnover Ratio is :
Trade Receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Trade Receivables)
Credit Sales from Operations = Sales from Operations – cash Sales from Operations
= Rs. 6,00,000 – Rs. 80,000
= RS. 5,20,000
Average Trade Receivables = (Opening Trade Receivables+Closing Trade Receivables )/2
=(Rs.37,000+Rs.43,000 )/2
=(Rs.80,000 )/2= Rs. 40,000
Trade Receivables Turnover Ratio =(Rs.5,20,000 )/(rs.40,000)= 13 times
So the Trade Receivables Turnover Ratio is 13 times.
Question 172. From the following information, calculate trade receivables turnover ratio and average collection period: –
| Rs. | |
| Credit Sales | 14,80,000 |
| Sales Return | 20,000 |
| Debtors | 2,50,000 |
| Bills receivables | 42,000 |
| Provision for doubtful debts | 1,500 |
Solution172
Calculate trade receivables turnover ratio
Formula for trade receivables turnover ratio:
Trade Receivables Turnover Ratio = (Net Credit Sales )/( Trade Receivables)
Net Credit Sales = Credit Sales – Sales Return
= Rs. 14,80,000 – Rs. 20,000
= RS. 14,60,000
Trade Receivables = Debtors + B/R = RS. 2,92,000
Trade Receivables Turnover Ratio =(Rs.14,60,000 )/(Rs.2,92,000) = 5 times
Formula For Average Collection Period =(Days in a year)/(trade Receivables Turnover Artio)
=(365 days )/(5 times)= 73 days
So, the calculations of trade receivables turnover ratio is 5 time
And the Average collection period is 73 days
Question 173. Calculate Trade Receivables turnover ratio from the following: –
Credit Sales from operations for the year RS. 60,000, Debtors Rs. 5,000, Bill Receivables RS. 5,000
Solution173
The Calculation of Trade Receivables Turnover Ratio:
Trade Receivables Turnover Ratio =(Rs.1460,000 )/(Rs.2,92,000) = 5 times
=(Rs.60,000)/(Rs.5,000+Rs.5,000)
=(Rs.60,000 )/(Rs.10,000)= 6 times
So, the Trade Receivables Turnover Ratio: 6 times
Question 174. Closing Trade Receivables RS. 4,00,000; Cash Sales from Operations being 25% of credit Sales from Operations. Excess of Closing Trade Receivables over Opening Trade Receivables Rs. 2,00,000. Total Sales from Operations Rs. 15,00,000. Calculate Trade Receivables Turnover Ratio.
Solution174
The Calculation of Trade Receivables Turnover Ratio:
Trade Receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Trade Receivables)
Total Sales from Operations = Rs. 15,00,000
Ratio of Cash to credit Sales from Operations 1:4
Credit Sales from Operation activities = Rs. 15,00,000 × ( 4 )/5= Rs. 12,00,000
Given: Closing Trade Receivables =Rs. 4,00,000
Opening Trade Receivables =Rs. 4,00,000 – Rs. 2,00,000
= Rs. 2,00,000
Average Trade Receivables = (Opening Trade Receivables+Closing Trade Receivables )/2
=(Rs.2,00,000+Rs.4,00,000 )/2
=(Rs.6,00,000 )/2= Rs. 3,00,000
Trade Receivables Turnover Ratio =(Rs.12,00,000 )/(rs.3,00,000)= 4 times
So, the trade Receivables Turnover Ratio is 4 times.
Question 175. Opening Trade Receivables Rs. 3,60,000; Cash Sales from Operations being 20% of Credit Sales from Operations. Excess of Closing Trade Receivables over Opening Trade Receivables Rs. 60,000. Cost of Sales from Operations Rs. 18,00,000; Gross Profit Rs. 5,40,000. Calculate Trade Receivables Turnover Ratio.
Solution175
To Calculate Trade Receivables turnover Ratio;
Trade Receivables Turnover Ratio = (Credit Revenue from Operations )/( Trade Receivables)
Sales from Operation activities = Cost of Sales from Operations + Gross Profit
= Rs. 18,00,000 + Rs. 5,40,000
= Rs. 23,40,000
Share of Cash to credit Sales from Operations 1:5
Credit Sales from Operation activities = Rs. 23,40,000 × ( 5 )/6= Rs. 19,50,000
Closing Trade Receivables =Opening Trade Receivables +Rs. 60,000
=Rs. 3,60,000 – Rs. 60,000
= Rs. 4,20,000
Average Trade Receivables = (Opening Trade Receivables+Closing Trade Receivables )/2
=(Rs.3,60,000+Rs.4,20,000 )/2
=(Rs.7,80,000 )/2= Rs. 3,90,000
Trade Receivables Turnover Ratio =(Rs.19,50,000 )/(rs.3,90,000)= 5 times
So, the Trade Receivables Turnover Ratio is 5 times.
Question 176. Opening Trade Receivables Rs. 10,000; Total Sales from Operations (Total Sales) Rs. 4,00,000; Cash Sales from Operations being 2/5th of total Sales from operations; Sales from Operations Return (Sales Return) Rs. 60,000 (1/3rd out of cash Sales from Operations); Closing Trade Receivables were four times than that in the beginning. Calculate Trade Receivables Turnover Ratio and Average Collection period.
Solution176
To Calculate Trade Receivables Ratio and Average Collection period.
Trade Receivables Turnover Ratio = (Net Credit Revenue from Operations )/(Average Trade Receivables)
Net Credit Sales from Operations = Credit Sales from Operations + Credit Sales from Operations Returns
Since Cash Sales from Operations is 2/5th pf total Sales from Operations, 1:5
Credit Sales from Operations =(3 )/5 of Total Revenue from Operations
= (3 )/5 of Rs.4,00,000
= Rs. 2,40,000
Since Cash Sales from Operations return (1 )/3 rd of total Revenue from Operations Return,
Credit Sales from Operations = (2 )/3 of Total Revenue from Operation Return
=(2 )/3 Of Rs.60,000 = Rs. 40,0000
Net Credit Sales from Operations = Rs. 2,40,000 – Rs. 40,000 = Rs. 2,00,000
Closing Trade Receivables =4 times of opening Trade Receivables
= 4 times of Rs. 10,000 = Rs. 40,000
Average Trade Receivables = (Opening Trade Receivables+Closing Trade Receivables )/2
=(Rs.10,000+Rs.40,000 )/2
=(Rs.50,000 )/2= Rs. 250,000
Trade Receivables Turnover Ratio =(Rs.2,00,000 )/(Rs.25,000) = 8 times
Average Collection Period =(Days in a year)/(trade Receivables Turnover Artio)
=(365 days )/(8 times)= 46 days
So, the Trade Receivables Turnover Ratio: 8 times
The Average Collection Period: 46 days.
Question 177. Credit Sales from Operations RS. 5,60,000; Trade Receivables Turnover Ratio 7 times; Closing Trade Receivables were three times than that in the beginning. Calculate opening and closing trade receivables.
Solution177
For Calculate Opening and Closing trade receivables
Trade Receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Trade Receivables)
Given:
Trade Receivables Turnover Ratio: 7 times
Credit revenue from operations: Rs. 5,60,000
7 time = (Rs.5,60,000 )/(Average Trade Receivables)
Average Trade Receivables =(Rs.5,60,000 )/2= Rs. 80,000
Opening Trade Receivables + closing Trade Receivables =Rs. 80,000 × 2
= 1,60,000
Ratio of Opening Trade Receivables to Closing Receivables = 1:3
Opening Trade Receivables = Rs. 1,60,000 × ( 1 )/4
= Rs. 40,000
Closing Trade Receivables = Rs. 1,60,000 × ( 1 )/4
= Rs. 1,20,000
So, the Opening Trade Receivables: Rs. 40,000
The Closing Trade Receivables: Rs. 1,20,000.
Question 178. Credit Sales from Operations RS. 6,00,000; Trade Receivables Turnover Ratio 8 times; Closing Trade Receivables were 1.5 times than that in the beginning. Calculate opening and closing trade receivables.
Solution178
For Calculate Opening and Closing trade receivables
Trade Receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Trade Receivables)
Given:
Trade Receivables Turnover Ratio: 8 times
Credit revenue from operations: Rs. 6,00,000
8 times = (Rs.6,00,000 )/(Average Trade Receivables)
Average Trade Receivables =(Rs.6,00,000 )/8= Rs. 75,000
Opening Trade Receivables + closing Trade Receivables =Rs. 75,000 × 2
= 1,50,000
Ratio of Opening Trade Receivables to Closing Receivables = 1:1.5
Opening Trade Receivables = Rs. 1,50,000 × ( 1 )/2.5
= Rs. 60,000
Closing Trade Receivables = Rs. 1,50,000 × ( 1 )/2.5
= Rs. 90,000
So, the Opening Trade Receivables: Rs. 60,000
The Closing Trade Receivables: Rs. 90,000.
Question 179. Calculate the amount of opening Trade Receivables and Closing Trade Receivables from the following: –
Trade Receivables Turnover Ratio 10 times
Cost of Sales from Operations Rs. 7,00,000
G.P. Ratio 30% of Sales from Operations
You are informed that closing trade receivables were three times than that in the beginning. Cash Sales from Operations being 25% of Credit Sales from Operations.
Solution179.
Calculation of Opening Trade Receivables and Closing Trade Receivables
G. P. Ratio 30% of Sales from Operations
It means if the Sales from operations is = Rs. 100
Then the Gross Profit is = Rs. 30
& the Cost of Sales from Operations is = Rs. 70
If Cost of Sales from Operations is Rs. 70, Sales from Operations is Rs. 100
If cost of Sales from Operations is Rs. 7,00,000
Sales from Operations is ( 100 )/70 ×Rs 7,00,000 = Rs. 10,00,000
Due to the fact that cash sales from operations account for 25% of credit sales from operations, the ratio of cash sales from operations to credit sales from operations is 25%.
= 25:100
Credit Sales from Operations =Rs. 10,00,000 × ( 100 )/125 = Rs. 8,00,000
Trade Receivables Turnover Ratio = (Credit Revenue from Operations )/(Average Trade Receivables)
Given:
Trade Receivables Turnover Ratio: 10 Times
Credit Revenue from Operations: Rs. 8,00,000
10 Time = (Rs.8,00,000 )/(Average Trade Receivables)
Average Trade Receivables =(Rs.8,00,000 )/10= Rs. 80,000
Opening Trade Receivables + closing Trade Receivables =Rs. 80,000 × 2
= 1,60,000
Ratio of Opening Trade Receivables to Closing Receivables = 1:3
Opening Trade Receivables = Rs. 1,60,000 × ( 1 )/4
= Rs. 40,000
Closing Trade Receivables = Rs. 1,60,000 × ( 3 )/4
= Rs. 1,20,000
So, the opening Trade Receivables is RS. 40,000 and Closing Trade Receivables Rs. 1,20,000
Question 180. From the following particulars determine the Closing Debtors: –
| Rs. | |
| Total Sales from Operations | 24,00,000 |
| Cash Sales from Operations | 4,60,000 |
| Sales from Operations Returns (out of credit Sales from Operations) | 20,000 |
| Trade Sales from Operations | 6 times |
| Opening debtors | 2,50,000 |
| Opening B/R | 14,000 |
| Closing B/R | 12,000 |
Solution180:
Calculation of Closing Debtors
It is given that trade Sales from Operations: 6 time
Trade Receivables Turnover Ratio = (Credit Revenue from Operations )/(Average debtort & B/R)
Trade Sales from Operations:-
(Total Revenue from Operations-Cash Revenue from Operations-Credit Revenue from Operations return )/(Average debtort & B/R)
6 Times =(Rs.24,00,000-Rs.4,60,000-Rs.20,000)/(Average debtort & B/R)
Average Trade Receivables =(Rs.19,20,000 )/6= Rs. 3,20,000
Total of opening Debtors & B/R and Closing Debtors & B/R = Rs. 3,20,000 × 2 = Rs. 6,40,000
Opening Debtors + Opening B/R + Closing Debtors + Closing B/R
Rs. 2,50,000 + Rs. 14,000 + Closing Debtors + Rs. 12,000 = R. 6,40,000
Closing debtors
Closing debtors =Rs. 6,40,000 – Rs. 2,50,000 – Rs. 14,000 – Rs. 12,000
= Rs. 3,64,000
So, the Closing Debtors is Rs. 3,64,000.
Question 181. From the following Balance Sheet and other information, calculate any three of the following ratio:-
i. Debt – Equity Ratio,
ii. Proprietary Ratio,
iii. Total Assets to Debt Ratio,
iv. Working Capital Turnover Ratio,
v. Trade Receivables Turnover Ratio.
Solution181
(I)Calculation of the Debt Equity Ratio:
Formula of the Debt Equity Ratio
Debt Equity Ratio = (Debt )/( Equity ) or (Long term Debt )/( Shareholder^’ s Funds)
Long Term Debt = Loan @ 15%
= Rs. 1,20,000
Shareholder’s Funds = Share Capital + General Reserve + P & L Balance
= Rs. 1,00,000 + Rs. 40,000 + Rs. 50,000
= Rs. 1,90,000
Debt equity Ratio =(Rs.1,20,000 )/( Rs.1,90,000 ) = 0.63:1.
So, the Debt Equity Ratio is 0.63:1.
(II)Calculation of the Proprietary Ratio:
Formula of the Proprietary Ratio
Proprietary Ratio = (Shareholder^’ s Funds )/( Total Assets)
Total Assets = Fixed Assets + Inventory + Trade Receivables + Cash & Cash Equivalents
= Rs. 1,80,000 + Rs. 40,000 + Rs. 90,000 + Rs. 50,000
= Rs. 3,60,000
Proprietary Ratio = (Rs.1,90,000 )/( Rs.3,60,000 ) = .5278 or 52.78%
So, the Proprietary ratio is 52.78%.
(III)Calculation of the Total Assets to Debt Ratio:
Formula of the Total Assets to Debt Ratio
Total Assets to Debt Ratio = (Total Assets )/( Long term Debts)
=(Rs.3,60,000)/( Rs.1,20,000)=3:1
So, the Total Assets to Debt Ratio is 3:1.
(IV)Calculation of the Working Capital Turnover Ratio:
Formula of the Working Capital Turnover Ratio
Working Capital Turnover Ratio = (Revenue from Operatins )/( Working Capital )
Working Capital = Current Assets – Current Liabilities
Current Assets = Inventory + Trade Receivables + Cash & Cash Equivalents
= Rs. 40,000 + Rs. 90,000 + Rs. 50,000
= Rs. 1,80,000
Current Liabilities = Trade Payables = Rs. 50,000
Working Capital = Rs. 1,80,000 – Rs. 50,000
=Rs. = 1,30,000
Working Capital Turnover Ratio = (Rs.1,80,000)/( Rs.1,30,000) = 1.38 times
So, the working capital turnover ratio is 1.38 times.
(V)Calculation of the Trade Receivables Turnover Ratio:
Formula of the Trade Receivables Turnover Ratio
Trade Receivables Turnover Ratio =(Revenue from operations)/( trade Receivables)
=(Rs.1,80,000)/( Rs.90,000) = 2 times
So, the Trade Receivables Turnover Ratio is 1.38 times.
Question 182. Following Particulars are obtained from the books of A Ltd. as on 31.3.2018: –
| Rs. | |
| Share Capital | 3,00,000 |
| Reserve & Surplus | 1,00,000 |
| Long- Term Borrowings | 1,00,000 |
| Trade Payables | 60,000 |
| Bank Overdraft | 20,000 |
| Inventory | 44,000 |
| Trade Receivables | 1,20,00 |
| Cash | 36,000 |
You are required to calculate: –
Working Capital Ratio (b) Debt equity Ratio and (c) Trade Receivables Turnover Ratio if Credit Sales from Operations are Rs. 7,20,000.
Solution182:
(A) Calculation of the Working Capital Ratio:
Formula of the Working Capital Ratio
Working Capital Ratio = (Current Assets )/(Current Liabilities)
Current Assets = Inventory + Trade Receivables + Cash
= Rs. 44,000 + Rs. 1,20,000 + Rs. 36,000
= Rs. 2,00,000
Current Liabilities = Trade Payables + Bank Overdraft
= Rs. 60,000 + Rs. 20,000
= Rs.80,000
Working Capital Ratio =(Rs.2,00,000)/(Rs.80,000) =2.5 : 1
So, the working capital Ratio is 2.5:1.
(B) Calculation of the Debt Equity Ratio:
Formula of the Debt Equity Ratio
Debt Equity Ratio = (Debt )/( Equity ) or (Long term Debt )/( Shareholder^’ s Funds)
= (Rs.1,00,000 )/( Rs.3,00,000 +Rs.1,00,000 )
=(Rs.1,00,000 )/( Rs.4,00,000 )= .25:1
So, the Debt Equity Ratio is .25:1.
(C) Calculation of the Trade Receivables Turnover Ratio:
Formula of the Trade Receivables Turnover Ratio
Trade Receivables Turnover Ratio =(Credit Revenue From Operations )/( Trade Receivables )
=(Rs.7,20,000)/( Rs.1,20,000 )=Rs.6 Times
So, the Trade Receivables Turnover Ratio is 6 times.
Question 183. Calculate Gross profit Ratio from the following: –
Opening Inventory Rs. 30,000; Closing Inventory Rs. 25,000; Purchases Rs. 3,05,000;
Return Outwards Rs. 20,000; wages Rs. 32,000; Cash Sales from Operations Rs. 1,40,000; Return Inwards Rs. 10,000; credit Sales from Operations Rs. 3,30,000.
Solution183
To calculate Gross profit Ratio
Formula for calculate the gross profit ratio is:
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Gross Profit = Net Sales from Operations – Cost of Sales from Operations
Net Sales from Operations = Cash Sales from Operations + Credit Sales from Operations – Return Inwards
= Rs. 30,000 + Rs. 3,05,000 – Rs. 20,000 + Rs. 32,000 – Rs. 25,000
= Rs. 3,22,000
Gross Profit = RS. 4,60,000 – Rs. 3,22,000 =Rs. 1,38,000
=(Rs.1,38,000)/(Rs.4,60,000) ×100 = 30%
So, the Gros Profit Ratio is 30%.
Question 184. Calculate Gross Profit Ratio from the following: –
Cash Sales from Operations Rs. 1,70,000; Credit Sales from Operations Rs. 3,50,000; Sales from Operations Returns (Sales Returns) Rs. 20,000; Cash of Sales from Operations Rs. 4,00,000.
Solution184
To calculate Gross profit Ratio
Formula for calculate the gross profit ratio is:
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Gross Profit = Net Sales from Operations – Cost of Sales from Operations
Net Sales from Operation Activity = Cash Sales from Operations + Credit Sales from Operations – Sales from operations Return
= Rs. 1,70,000 + Rs. 3,50,000 – Rs. 20,000
= Rs. 5,00,000
Gross Profit = RS. 5,00,000 – Rs. 4,00,000
= Rs. 1,00,000
=(Rs.1,00,000)/(Rs.5,00,000) ×100 = 20%
So, the Gross Profit is 20%
Question 185. Calculate G.P. Ratio from the following: –
| Rs. | |
| Credit Sales from operations | 6,00,000 |
| Cash Sales from Operations (Being 25% of total Sales from Operations) | |
| Purchases | 6,90,000 |
| Excess of Closing Inventory over Opening Inventory | 50,000 |
Solution185
If Total Sales from Operations is Rs. 100, cash Sales from Operations will be RS. 25 and Credit Sales from Operations RS. 75
Hence, If Credit Sales from Operations is Rs. 75
Total Sales from operation activities will be RS. 100
If Credit Sales from Operations is RS. 6,00,000
Total Sales from Operations will be = 1,00/75 ×RS.6,00,000
= Rs. 8,00,000
Cost of Sales from Operation activities = Purchases – Excess of Closing Inventory over Opening Inventory
= RS. 6,90,000 – Rs. 50,000
= Rs. 6,40,000
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Gross Profit = Total Sales from Operations – Cost of Sales from Operations
= Rs. 8,00,000 – RS. 6,40,000
=RS. 1,60,000
=(Rs.1,60,000)/(Rs.8,00,000) ×100 = 20%
So, the Gross Profit Ratio is 20%.
Question 186. Calculate Gross Profit ratio from the following data :-
| Rs. | |
| Credit Sales from operations | 2,00,000 |
| Cash Sales from Operations (Being 33 % of total Sales from Operations) | |
| Purchases | 2,25,000 |
| Carriage Inwards | 25,000 |
| Excess of Closing Inventory over Opening Inventory | 10,000 |
Solution186
Total Sales from Operations is Rs. 100
Cash Sales from Operations will be RS. 331/3
Credit Sales from Operations = (100 – 331/3 )
Credit Sales from Operations = RS. 662/3
Total Sales from operations will be RS. 100
If Credit Sales from Operations is RS. 2,00,000
Total Sales from Operations will be = 1,00/(66 2/3) ×RS.2,00,000
= 100 ×3/200×2,00,000= Rs. 3,00,000
Cost of Sales from Operations = Purchases + Carriage Inwards – excess of Closing Inventory over Opening Inventory
= RS. 2,25,000 + Rs. 25,000 – Rs. 10,000
= Rs. 2,40,000
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Gross Profit = Total Sales from Operations – Cost of Sales from Operations
= Rs. 3,00,000 – RS. 2,40,000
=RS. 60,000
=(Rs.60,000)/(Rs.3,00,000) ×100 = 20%
So, the Gross Profit Ratio is 20%.
Question 187. Calculate Gross Profit ratio from the following data :
Cash Sales from Operations are 1/3 rd of Total Sales from Operations, Cash Sales from Operations were Rs. 6,00,000; Credit Purchase are 25% of total purchases, credit Purchases were Rs. 3,00,000. Opening Inventory Rs. 1,00,000; Closing Inventory was Rs. 50,000 more than opening Inventory. Carriage RS. 15,000. Wages Rs. 35,000.
Solution187:
If Cash Sales from Operations is Rs. 1
Total Sales from operations will be RS. 3
If Credit Sales from Operations is RS. 6,00,000
Total Sales from Operations will be = 3/1 ×RS.6,00,000 = Rs. 18,00,000
If Credit purchase is Rs. 25
Total Purchase will be RS. 100
If Credit Purchases is RS. 3,00,000
Total Purchase will be = 100/25×3,00,000 = Rs. 12,00,000
Cost of Sales from Operations = Purchases + Carriage Inwards + wages – excess of Closing Inventory over Opening Inventory
= RS. 12,00,000 + Rs. 15,000 + Rs. 35,000– Rs. 50,000
= Rs. 12,00,000
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Gross Profit = Sales from Operations – Cost of Sales from Operation Activities
= Rs. 18,00,000 – RS. 12,00,000
=RS. 6,00,000
=(Rs.6,00,000)/(Rs.18,00,000) ×100 = 33.33%
So, the Gross Profit Ratio is 33.33%.
Question 188. A company earns a gross profit of 20% on cost. Its credit Sales from operations are twice its cash Sales from operations. If the credit Sales from operations are Rs. 4,00,000. Calculate the gross profit ratio of the company.
Solution188.
Hence, total Sales from Operations = Rs. 4,00,000
Credit Sales from Operation activity Rs. 2,00,000
Cash Sales from Operations activity Rs. 6,00,000
Gross Profit is 20% of cost of Sales from Operations
Hence, costing of goods Rs. 100 must have been sold for Rs. 120
Hence, If the Sales from Operation activity are Rs. 12, G.P. will be Rs. 20
If Sales from Operation activity are Rs. 6,00,000, G.P. = 20/120×6,00,000
= Rs. 1,00,000
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
=(Rs.1,00,000)/(Rs.6,00,000) ×100 = 16.67%
So, the Gross Profit Ratio is 16.67%.
Question 189. From the following information’s calculate:
Current Ratio,
Quick Ratio,
Operating Ratio, and
Gross Profit Ratio
| Rs. | Rs. | ||
| Current Assets | 70,000 | Operating Expenses | 40,000 |
| Current Liabilities | 35,000 | Sales from Operations | 1,20,000 |
| Inventory | 30,000 | Cost of Sales from Operations | 60,000 |
Solution189
(A) Calculation of the Current Ratio:
Formula of the Current Ratio
Current Ratio =(Current assets )/(Current Liabilities)
Current Assets = (Rs.70,000 )/(Rs.35,000) = 2:1
So, the Current Assets is 2:1.
(B) Calculation of the Gross Profit Ratio:
Formula of the Gross Profit Ratio
Quick ratio = (Liquid assets )/(Current Liabilities)
=(Current assets-Inventory )/(Current Liabilities)
= (Rs.70,000-Rs.30,000 )/(Rs.35,000)
= (Rs.40,000 )/(Rs.35,000) =1.14 : 1
So, the Quick Ratio is 1.14:1
(C) Calculation of the Opening Ratio:
Formula of the Opening Ratio
Opening Ratio =(Cost of Revenue from operations+Operating Expenses )/(Net Revenue from Operations )×100
=(Rs.60,000 + Rs.40,000 )/(Rs.1,20,000)×100
=(Rs.1,00,000 )/(Rs.1,20,000)×100 = 83.33%
So, the Opening Ratio is 83.33%.
(d) Calculation of the Gross Profit Ratio:
Formula of the Gross Profit Ratio
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
= (Revenue from Operations – Cost of Revenue from Operations )/(Net Revenue from operations )×100
= (Rs.1,20,000 – Rs.60,000 )/(Rs.1,20,000)×100
=RS. 60,000
=(Rs.60,000)/(Rs.1,20,000) ×100 = 50%
So, the Gross profit ratio is 50%.
Question 190. Calculate:- (i) Gross Profit ratio; (ii) Operating Ratio; (iii) operating Profit Ratio; and (iv) Net Profit from the following: –
| Rs. | |
| Sales from operations | 2,00,000 |
| Cost of Sales from Operations | 1,20,000 |
| Administration Expenses | 20,000 |
| Selling Expenses | 15,000 |
| Loss by Fire | 10,000 |
| Income from Investment | 5,000 |
Solution190:
(4) Calculation of the Gross Profit Ratio:
Formula of the Gross Profit Ratio
(i)Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Gross Profit = Sales from Operations – Cost of Sales from Operations
=Rs. 2,00,000 – Rs. 1,20,000
= RS. 80,000
=(Rs.80,000)/(Rs.2,00,000) ×100 = 40%
So, the Gross Profit Ratio is 40%.
(2) Calculation of the Operating Ratio:
Formula of the Operating Ratio
Operating Ratio = (Cost of Revenue from operations+Operations expenses)/(Net Revenue from operations )×100
Operations Expenses = Administration Expenses + selling Expenses
= Rs. 20,000 + Rs. 15,000
= RS. 35,000
Operating Ratio = (Rs.1,20,000+Rs.35,000)/(Rs.2,00,000)×100
= (Rs.1,55,000)/(Rs.2,00,000)×100 = 77.5%
So, the Operating Ratio is 77.5%.
(3) Calculation of the Operating Profit Ratio:
Formula of the Operating Profit Ratio
Operating Profit ratio =(Operating Profit )/(Net Revenue from operations )×100
Operating Profit = Gross Profit – Operating Exp. (i.e., Administration Exp. & Selling Exp.)
=Rs. 80,000 – Rs. 20,000- Rs. 15,000
= Rs. 45,000
Operating Profit ratio = (Rs.45,000)/(Rs.2,00,000)×100= 22.5%
So, the Operating Profit ratio is 22.5%.
(4) Calculation of the Net Profit Ratio:
Formula of the Net Profit Ratio
Net Profit ratio = (Net Profit )/(Net Revenue from operations )×100
Net profit = Gross Profit – Administration exp. – Selling Exp. – Loss by Fire + Income from Investments
= Rs. 80,000 = Rs. 20,000 – Rs. 15,000 – Rs. 10,000 + Rs. 5,000
= RS. 40,000
Net Profit Ratio =(Rs.40,000)/(Rs.2,00,000)×100= 20%
So, the Net Profit Ratio is 20 %
Question 191. Mr. Arun Birla owns a business and gives the following figures for two successive years:-
| Rs. 1st Year | Rs. 2nd Year | |
| Sales from Operations | 60,000 | 40,000 |
| Gross Profit | 15,000 | 24,000 |
Mr. Arun Birla speaks very high of his Manager who has increased the profit from RS. 15,000 to Rs. 24,000 and describes him very ‘Efficient’. Do you agree with him? If not, why?
Solution191
Calculation of Gross Profit Ratio for 1st year
Gross Profit Ratio of 1st Year =(Rs.15,000)/(Rs.60,000)×100= 25%
Calculation of Gross Profit Ratio for 2nd year
Gross Profit Ratio of 2nd Year
=(Rs.24,000)/(Rs.1,20,000)×100= 20%
We do not agree with Mr. Arun Birla. The boss is inefficient. Despite the fact that his revenues from operations have doubled this year over last, his gross profit ratio has fallen from 25% to 20%. This may be attributed to disorganisation, lower sale rates, or higher buying prices.
Question 192. From the following information, calculate :- (I) Gross Profit Ratio, and (ii) Inventory Turnover ratio:-
| Rs. | |
| Sales from operations | 2,00,000 |
| purchases | 1,69,000 |
| Opening Inventory | 35,500 |
| Closing Inventory | 44,500 |
Solution192
(1) Calculation of the gross Profit Ratio:
Formula of the gross Profit Ratio
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Cost of Sales from Operations =Purchases + Opening Inventory – Closing Inventory
=Rs. 1,69,000 + Rs. 35,500 – RS. 44,500
= RS. 1,60,000
Gross Profit = Sales from Operations – Cost of Sales from Operations
= RS. 2,00,000 – RS. 1,60,000
= RS. 40,000
Gross Profit Ratio =(Rs.40,000)/(Rs.2,00,000) ×100 = 20%
So, The Gross Profit Ratio is 20%.
(1) Calculation of the Inventory Turnover Ratio:
Formula of the Inventory Turnover Ratio
Inventory Turnover Ratio = (Cost of Revenue from operations)/(Average Inventory )
Average Inventory = (Opening Inventory+Closing Inventory)/2
= (Rs.35,500 +Rs.44,500)/2
=(Rs.80,000)/2 = RS. 40,000
Inventory Turnover Ratio = (Rs.1,60,000)/(Rs.40,000)=4 times
So, The Inventory turnover Ratio is 4 times.
Question 193. From the following information, calculate :- Inventory Turnover ratio and Gross Profit Ratio :-
| Rs. | |
| Opening Inventory | 18,000 |
| Closing Inventory | 22,000 |
| Purchases | 46,000 |
| Wages | 14,000 |
| Sales from Operations | 80,000 |
| Carriage Inwards | 4,000 |
Solution193
(1) Calculation of the Inventory Turnover Ratio:
Formula of the Inventory Turnover Ratio
Inventory Turnover Ratio = (Cost of Revenue from operations)/(Average Inventory )
Cost of Sales from operations = Opening Inventory + Purchases + Wages + Carriage Inwards – closing Inventory
= RS. 18,000 + Rs. 46,000 + RS. 14,000 + RS. 4,000 – RS. 22,00
= RS. 60,000
Average Inventory = (Opening Inventory+Closing Inventory)/2
= (Rs.18,000 +Rs.22,000)/2
=(Rs.40,000)/2 = RS. 20,000
Inventory Turnover Ratio = (Rs.60,000)/(Rs.20,000)=3 times
So, the inventory Turnover Ratio is 3 times.
(2) Calculation of the gross Profit Ratio:
Formula of the Gross Profit Ratio
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Gross Profit = Sales from Operations – Cost of Sales from Operations
= RS.80,000 – RS.60,000
= RS. 20,000
Gross Profit Ratio =(Rs.20,000)/(Rs.50,000) ×100 = 20%
So, the Gross Profit Ratio = 20%
Question 194. Average Inventory Rs. 80,000; Inventory Turnover Ratio 6 Times; Sales from Operations 25% above cost. Calculate Gross Profit Ratio.
Solution194:
Calculation of the gross Profit Ratio:
Given:
Inventory turnover Ratio is 6 Times
Average inventory of RS. 80,000
Formula of the Gross profit Ratio:
Inventory Turnover Ratio = (Cost of Revenue from operations)/(Average Inventory )
6 Times =(Cost of Revenue from operations)/(Rs.80,000 )
Cost of Sales from Operations = Rs. 80,000 × 6 =RS. 4,80,000
If Cost of Sales from Operations is Rs. 100, Gross Profit = RS. 25
If Cost of Sales from Operations is Rs. 4,80,000 Gross Profit = RS. 4,80,000 ×25/(100 )
=RS. 1,20,000
Sales From Operations
= Cost of Sales from Operations + Gross Profit
= RS. 4,80,000 + Rs. 1,20,000 =RS. 6,00,000
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
=(Rs.1,20,000)/(Rs.6,00,000) ×100 = 20%
So, the answer is 20 %
Question 195. A trader carries an average inventory of RS. 40,000. His inventory turnover Ratio is 8 Times. If he sells goods at a profit of 20% on Sales from Operations, find out his profit.
Solution195:
Calculation of the Inventory Turnover Ratio:
Formula of the Inventory Turnover Ratio:
Given :
Inventory turnover Ratio is 8 Times
Average inventory of RS. 40,000
Inventory Turnover Ratio = (Cost of sales from operations)/(Average Inventory )
8 Times =(Cost of sales from operations)/(Rs.40,000 )
Cost of Sales from Operations =
Goods are sold at a profit of 20% on Sales from Operations Rs. 40,000 × 8 = RS. 3,20,000
If Sales from Operations is Rs. 100, Gross Profit will be RS. 20 and cost of Sales from operations RS, 80.
If Cost of Sales from Operations is Activities Rs. 3,20,000 Gross Profit = RS. 3,20,000 ×20/(80 )
=RS. 80,000
So, the Profit is Rs. 80,000.
Question 196. From the following data calculate: –
i. Gross Profit Ratio; ii. Operating Ratio; iii. Net Profit Ratio; iv. Inventory turnover ratio; and v. Current Ratio.
| Rs. | Rs. | ||
| Sales from Operations | 25,20,000 | Fixed Assets | 14,40,000 |
| Cost of Sales from Operations | 19,20,000 | Net worth | 15,00,000 |
| Operating Expenses | 2,40,000 | Debt (Long Term) | 9,00,000 |
| Average Inventory | 8,00,000 | Current Liabilities | 6,00,000 |
| Other Current Assets | 7,60,000 |
Solution196:
(1) Calculation of the Gross Profit Ratio:
Formula of the Gross Profit Ratio:
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Gross Profit = Sales from Operations – Cost of Sales from Operations
= RS.25,20,000 – RS.19,20,000
= RS. 6,00,000
Gross Profit Ratio =(Rs.6,00,000)/(Rs.25,20,000) ×100 = 23.81%
So, the Gross Profit Ratio is 23.81%
(2) Calculation of the Operating Ratio:
Formula of the Operating Ratio:
Operating Ratio = (Cost of Revenue from operations+Operations expenses)/(Net Revenue from operations )×100
Operating Ratio = (Rs.19,20,000+Rs.2,40,000)/(Rs.25,20,000)×100
= (Rs.21,60,000)/(Rs.25,20,000)×100 = 85.71%
So, the Operating Ratio is 85.1%.
(3) Calculation of the Net Profit Ratio:
Formula of the Net Profit Ratio:
(Net Profit Ratio = (Net Profit)/(Revenue from Operations ) ×100
Net Profit = Gross Profit – Operating Exp.
= Rs. 6,00,000 – Rs. 2,40,000
= Rs. 3,60,000
Net Profit Ratio = 3,60,000/(Rs. 25,20,000) ×100 = 14.29%
So, the Net Profit ratio is 14.29%.
(4) Calculation of the Inventory Turnover Ratio:
Formula of the Inventory Turnover Ratio:
Inventory Turnover Ratio = (Cost of Revenue from operations)/(Average Inventory )
Inventory Turnover Ratio = (Rs.19,20,000)/(Rs.8,00,000)=2.4 times
So, the Inventory Turnover Ratio is 2.4 times.
(5) Calculation of the Current Ratio:
Formula of the Current Ratio:
Current Ratio =(Current assets )/(Current Liabilities)
Current Assets = Net Worth + Long term Debts + Current Liabilities – Fixed Assets
=Rs. 15,00,000 + Rs. 9,00,00 + Rs. 6,00,000 – Rs. 14,40,000
= Rs. 15,60,000
Current Ratio =(Rs.15,60,000 )/(Rs.6,00,000 )=2.6:1
So, the Current Ratio is 2.6:1.
Question 197. The following is the Balance Sheet of Arvind Mills Ltd. as at 31st March, 2018:
Solution197.
(1) Calculation of the Quick Ratio
Formula of the Quick Ratio
(I)Quick Ratio = (Liquid Assets )/(Current Liabilities)
Liquid Assets = Bank + Marketable Securities + Trade Receivables
= Rs. 50,000 + Rs. 1,50,000 + Rs. 2,00,000
= Rs. 4,00,000
Current Liabilities =Trade Payables + Outstanding Expense + Tax Provision
= Rs. 1,60,000 + Rs. 10,000 + Rs. 1,30,000
=Rs. 3,00,000
Quick Ratio = (Rs.4,00,000 )/(Rs.3,00,000) = 1.33:1
So, the Quick Ratio is 1.33:3;
(2) Calculation of the Total Assets to Debt ratio
Formula of the Total assets to debt ratio:
Total Assets to Debt ratio =(total assets )/( Debt (i.e.,Long Term Debts) )
= 20,00,000/( 7,00,000) = 2.86:1
So, the Total Assets to Debt Ratio is 2.86:1
(3) Calculation of the Current Ratio
Formula of the Current Ratio
(iii)Current Ratio =(Current assets )/(Current Liabilities)
Current Assets = Liquid Assets + Inventory
=Rs. 4,00,000 + Rs. 3,00,000
= Rs. 7,00,000
Current Ratio =(Rs.7,00,000 )/(Rs.3,00,000 )=2.33:1
So, the Current Ratio is 2.33:1.
(4) Calculation of the Gross Profit Ratio
Formula of Gross Profit Ratio:
Gross Profit Ratio = (Gross Profit )/(Net Revenue from operations )×100
Gross Profit = Sales from Operations – Cost of Sales from Operations
= RS.30,00,000 – RS.25,80,000
= RS. 4,20,000
Gross Profit Ratio =(Rs.4,20,000)/(Rs.30,00,000) ×100 = 14%
So, the Gross Profit 14 %.
(5) Calculation of the Operating Ratio
Formula of Operating Ratio :
Operating Ratio = (Cost of Revenue from operations+Operations expenses)/(Net Revenue from operations )×100
Operating Ratio = (Rs.25,80,000+Rs.2,20,000)/(Rs.30,00,000)×100
= (Rs.28,00,000)/(Rs.30,00,000)×100 = 93.33%
So, the Operating Ratio is 93.33%.
(6) Calculation of the Net Profit Ratio
Formula of Net Profit Ratio:
Net Profit Ratio = (Net Profit)/(Revenue from Operations ) ×100
Net Profit = Gross Profit – Operating Exp.
= Rs. 4,20,000 – Rs. 2,20,000
= Rs. 2,00,000
Net Profit Ratio = (Rs.2,00,000)/(Rs. 30,00,000) ×100 = 6.67%
So, the Net Profit Ratio is 6.67%.
Question 198. Calculate Operating Profit Ratio and Operating Ratio from the following :-
Cash Sales from Operations RS. 2,00,000; credit Sales from Operations RS. 1,30,000; Sales from Operations Return (sales Return) Rs. 10,000; Cost of Sales from operations RS. 1,80,000; office and Administration Expenses Rs. 40,000; Selling expenses Rs. 36,000; Interest on Debentures Rs. 23,000.
Solution198:
Calculation of Operating Profit Ratio:
Operating Profit Ratio = (Operating Profit)/(Revenue from Operations ) ×100
Operating Profit = Gross Profit – Operating Expenses
Calculation of the Gross Profit = Net sales from operations – Cost of sales from operations
=(Cash sales from Operations – Credit sales from Operations – sales from Operations Return ) -Cost of sales from Operations
=(Rs. 2,00,000 + Rs. 1,30,000 – Rs. 10,000) – Rs. 1,80,000
= Rs. 3,20,000 – Rs. 1,80,000
= Rs. 1,40,000
Operating Expenses = Selling Expenses +Office Administrative Expenses
= Rs. 36,000 + Rs. 40,000
= Rs. 76,000
Operating Profit = Gross Profit – Operating Expenses
=Rs. 1,40,000 – Rs. 76,000 = Rs. 64,000
Operating Profit Ratio =(Rs.64,000)/(Rs.3,20,000) = 20%
So, the Operating Profit Ratio = 20%
Calculation of Operating Profit Ratio:
The Formula of calculation of Operating Profit Ratio
Operating Ratio = (Cost of Revenue from opertaions+ Operating Expenses)/( Net Revenue from Operations ) ×100
=(Rs.1,80,000 + Rs.76,000)/( Rs.3,20,000 ) ×100
(Rs.2,56,000 )/( Rs.3,20,000 ) ×100 = 80%
So, the Operating Ratio = 80%.
Question 199. Calculate Operating Profit Ratio and Operating Ratio from the following:-
Net Revenue from Operations RS. 4,00,000; Cost of revenue from Operations RS. 2,50,000; Operating Expenses RS. 90,000.
Solution199:
Calculation of Operating Profit Ratio:
The Formula of calculation of Operating Profit Ratio
Operating Profit Ratio = (Operating Profit)/(Sales from Operations ) ×100
Operating Profit = Gross Profit – Operating Expenses
Calculation of the Gross Profit = Net Sales from operations – Cost of Sales from operations
=Rs. 4,00,000 + Rs. 2,50,000
= Rs. 1,50,000
Calculation of the Operating Profit = Gross Profit – Operating Expenses
=Rs. 1,50,000 – Rs. 90,000
= Rs. 60,000
Operating Profit Ratio =(Rs.60,000)/(Rs.4,00,000) ×100 = 15 %
The Formula of calculation of Operating Ratio
Operating Ratio = (Cost of sales from opertaions+ Operating Expenses)/( Net sales from Operations ) ×100
=(Rs.2,50,000 + Rs.90,000)/( Rs.4,00,000 ) ×100
(Rs.3,40,000 )/( Rs.4,00,000 ) ×100 = 85%
So, the Operating Profit Ratio = 15% and Operating Ratio = 85%.
Question 200. Calculate Operating Profit Ratio and Operating Ratio from the following:-
Net Sales from Operations RS. 3,00,000; Gross Profit Rs. 1,20,000; Operating Expenses Rs. 45,000.
Solution200:
Calculation of Operating Profit Ratio:
The Formula of calculation of Operating Profit Ratio
Operating Profit Ratio = (Operating Profit)/(Revenue from Operations ) ×100
Operating Profit = Gross Profit – Operating Expenses
= Rs. 1,20,000 – Rs. 45,000
= Rs. 75,000
Operating Profit Ratio =(Rs.75,000)/(Rs.3,00,000) ×100 = 25 %
The Formula of calculation of Operating Ratio
Operating Ratio = (Cost of Revenue from opertaions+ Operating Expenses)/( Net Revenue from Operations ) ×100
Cost of sales from Operation activity = Net Sales from Operations – Gross Profit
= Rs. 3,00,000 – Rs. 1,20,000
= RS. 1,80,000
Operating Ratio =(Rs.1,80,000 + Rs.45,000)/( Rs.3,00,000 ) ×100
(Rs.2,25,000 )/( Rs.3,00,000 ) ×100 = 75%
So, the Operating Profit Ratio = 25 % and Operating Ratio = 75 %.
Question 201. Calculate Operating Profit Ratio if Operating Ratio is 78%.
Solution 201:
Calculations of Operating profit ratio:
Given
Operating Ratio Is 78%:
The Formula of calculation of Operating Profit Ratio
Operating Profit Ratio = 100 – Operating Ratio
Operating Profit Ratio = 100 – 78%
Operating Profit Ratio = 22%
Question 202. From the following information, calculate Inventory Turnover Ratio, Operating ratio and Working Capital Turnover Ratio: –
| Opening Inventory | Rs. 56,000 |
| Closing Inventory | Rs. 44,000 |
| Purchases | Rs. 92,000 |
| Sales from Operations | Rs. 1,80,000 |
| Sales from Operations Returns | Rs. 20,000 |
| Carriage Inwards | Rs. 8,000 |
| Office Expenses | Rs. 8,000 |
| Selling and Distribution Expenses | Rs. 4,000 |
| Fixed Assets | Rs. 70,000 |
| Current Assets | Rs. 60,000 |
| Current Liabilities | Rs. 20,000 |
Solution 202
(1) Calculation of inventory turnover ratio:
Inventory Turnover Ratio = (Cost of Revenue from Operations)/(Average Inventory)
Inventory Turnover Ratio = 1,12,000/50,000
Inventory Turnover Ratio = 2.24 Times
So, the Inventory Turnover Ratio is 2.24 times
Below is the calculation of Cost of sales from Operations activity:
Cost of sales from Operations activity = Opening Inventory + Purchases + Carriage Inwards – Closing Inventory
Cost of sales from Operations activity = Rs. 56,000 + Rs. 92,000 + Rs. 8,000 – Rs. 44,000
Cost of sales from Operations activity = Rs. 1,12,000
Below is the calculation of Average Inventory:
Average Inventory = (Opening Inventory+Closing Inventory)/2
Average Inventory = (56,000 + 44,000)/2
Average Inventory = 1,00,000/2
Average Inventory = Rs. 50,000
(2) Calculation of Operating ratio:
Operating Ratio = (Cost of Revenue from Operations+Operating Expenses)/(Net Revenue from Operations)
Operating Ratio = (1,12,000 + 12,000)/1,60,000
Operating Ratio = 1,24,000/1,60,000×100=77.5%
Below is the calculation of Operating Expenses:
Operating Expenses = Office Expenses + Selling and Distribution Expenses
Op2rating Expenses = Rs. 8,000 + Rs. 4,000
Operating Expenses = Rs. 12,000
So, the Operating Expenses is Rs. 12,000
Net sales from Operations activity = Sales from Operations – Sales from Operations Return
Net sales from Operations activity = Rs. 1,80,000 – Rs. 20,000
Net sales from Operations activity= Rs. 1,60,000
(3) Calculation of Working Capital Turnover Ratio:
Working Capital Turnover Ratio = (Net Revenue from Operations)/(Working Capital)
Working Capital Turnover Ratio = (Rs.1,60,000)/40,000
Working Capital Turnover Ratio = 4 times
So, the Working Capital Turnover Ratio is 4 times
Working Note:-
Calculation of Working Capital:-
Working Capital = Current Assets – Current Liabilities
Working Capital = Rs. 60,000 – Rs. 20,000
Working Capital = 40,000
In simple terms, the accounting ratio is the comparison between multiple financial data of a company, generally used for analyzing the financial statements. It is one of the most prominent tools for companies to monitor the financial strengths and weaknesses.
The key objectives for ratio analysis in accounting are as follows –
● Helps to supervise the company’s operating efficiency.
● Track the weaknesses of the company and formulate ways to cope with them.
● Help the companies in framing better financial decisions.
Here are the different types of accounting ratios –
Liquid Ratio – This defines the firm’s capabilities to repay its liabilities. The liquid ratio is categorized into two subparts: Current Ratio and Acid Test Ratio.
Solvency Ratio – This ratio depicts the abilities of the firms to pay their shareholders in the long term.
Profitability Ratio – As the name suggests, it gives the accounts of profits for a firm.
Turnover Ratio – This ratio depicts the frequency of a firm’s performance by utilizing its assets efficiently.
Accounting ratios are the most useful tools for both business owners and investors as it highlights the financial standings of the company and formulates a bag full of strategies to elevate the financial status of the companies, benefiting both the investors and the business owners.
The debt-equity ratio is a type of solvency ratio that determines the solvency of a firm to pay its shareholders. It is one of the most useful ratios as it clearly highlights the relation between a company’s long-term debts and equity shares. This ratio is calculated by the following expression –
Debt-equity ratio = Long term debts / stakeholder’s funds
The acid test ratio is one of the popular accounting ratios used to determine the liquidity of a firm. It helps to determine how well the current assets of a firm can cover its liabilities to allow it financial stability. The acid test ratio is expressed by –
Acid Test ratio = Quick Assets / Current Liabilities.
Also refer to TS Grewal Solutions for Class 12