1. Akhila Enterprises Ltd.

furnished the following information for the current financial year:

Sales Rs.8,10,000
Net working capital Rs.90,000
Current ratio 1.5
Quick ratio 0.9
Gross profit margin 20%
The inventory turnover ratio for the company is
(a) 2 times
(b) 3 times
(c) 5 times
(d) 6 times
(e) 8 times.

Sol.
Current assets – Current liabilities = 90,000

Current assets = 1.5 Current liabilities

1.5 Current liabilities - Current liabilities = 90,000
Current liabilities = Rs.1,80,000
Current assets = 1.5 x Current liabilities = 1.5 x 1,80,000 = Rs.2,70,000

Now, Quick ratio =

Quick assets = 0.9 x Current liabilities = 0.9 x 1,80,000 = Rs.1,62,000
Inventory = Current assets – Quick assets = 2,70,000 – 1,62,000 = RS.1,08,000.
Gross profit margin = 20% = 0.2
Gross profit = 0.2 x Sales
COGS = Sales – Gross profit = 0.8 Sales
= 0.8 x 8,10,000 = Rs.6,48,000

Inventory turnover =
Hence (d) is the answer.

2. Ashish Traders Ltd. has furnished the following details for the year ended 2006-07:
Owners’ equity Rs.10,00,000
Current debt to total debt 0.40
Total debt to owners’ equity 0.60
Fixed assets to total debt 0.8
Total assets turnover 2 times
Inventory turnover 8 times
The inventory to current assets ratio is
(a) 0.254
(b) 0.357
(c) 0.465
(d) 0.543
(e) 0.654.

Sol. Given Total debt to owners’ equity = 0.6

Therefore, Total debt = 0.6 x Owners’ equity = 0.6 x 10,00,000 = Rs.6,00,000
Current debt to Total debt = 0.40
Þ Current debt = 0.4 x Total debt = 0.4 x 6,00,000 = Rs.2,40,000.
Fixed assets to Total debt = 0.8
Þ Fixed assets = 0.8 x Total debt = 0.8 x 6,00,000 = Rs.4,80,000.
Total assets = Total liabilities = Owners’ equity + Total debt = Rs.10,00,000 +
6,00,000
= Rs.16,00,000
Current assets = Total assets – Fixed assets = 16,00,000 – 4,80,000 =
Rs.11,20,000.

Assets turnover =
Sales = 2 x Assets = 2 x 16,00,000 = Rs.32,00,000

Inventory turnover =
Inventory = Sales/8 = 32,00,000/8 = Rs.4,00,000
Inventory to current assets ratio = 4,00,000/11,20,000 = 0.357

3. Consider the following information relating to Nidhi Trading Concerns Ltd.

(Rs.)
Average inventory 10,00,000
Sales 1,65,00,000
Cost of goods sold 60,00,000
Management expenses 5,00,000
Average receivables 13,20,000
Credit sales are 40% of total sales. Assuming there are 360 days in a year, the inventory turnover ratio and
the average collection period respectively are
(a) 5 times; 46 days
(b) 6 times; 57 days
(c) 6 times; 72 days
(d) 7 times; 72 days
(e) 7 times; 80 days.

Sol. Inventory turnover ratio =

Credit sales = 0.4 x 1,65,00,000 = Rs.66,00,000

Average collection period =

Hence (c) is the answer.
4. Consider the following information relating to Nidhi Trading Concerns Ltd.
(Rs.)
Total liabilities Rs.5,50,000
Current liabilities Rs.1,50,000
Fixed assets Rs.2,50,000
Average collection period 36 days
Inventory turnover 10 times
Assets turnover 2 times
Credit sales 50%

If the firm has inventory, sundry debtors and liquid cash as current assets, the amount of liquid cash with
the company and the acid-test ratio for the firm respectively are (Assume 360 days in a year)
(a) Rs.1,27,000; 0.98
(b) Rs.1,27,000; 1.15
(c) Rs.1,35,000; 1.15
(d) Rs.1,35,000; 1.27
(e) Rs.1,42,000; 1.27.

Sol. Total liabilities = Total assets = Rs.5,50,000

Assets turnover =
Sales = 2 x Assets = 2 x 5,50,000 = Rs.11,00,000

Inventory turnover =
Inventory = Sales/10 = 11,00,000/10 = Rs.1,10,000
Average collection period = 36 days
Credit sales = Rs.5,50,000

Average collection period =

Average receivables =
Total assets = Fixed assets + Current assets
Current assets = Total assets – Fixed assets
= 5,50,000 – 2,50,000
= Rs.3,00,000.
Current assets = Liquid cash + Inventory + debtors
Liquid cash = Current assets – (Inventory + debtors)
= 3,00,000 – (1,10,000 + 55,000)
= Rs.1,35,000.
Acid-test ratio =

Hence (d) is the answer.

5. Construct the balance sheet and P & L account for Sundaram Ltd. with the data given hereunder.

Quick ratio = 1.5 Cash = Bank balance

Current ratio =2 Current liabilities to = 1/3
total Net worth
Inventory turnover = 10 Bank OD to Bank = 0.5
balance
Average collection period = 20 days Selling and Admn. = Rs.39,640
Expenses
No. of shares = 12000 Reserves & surplus = 2 ´ current
year’s retained
earnings
EPS = Rs.20 Interest on long-term = 15%
debt
Dividend pay-out ratio = 0.125 Tax rate = 45%
(D/P)
Cash to credit sales = 0.8
Assumptions ® 360 days a year
® Face value of a share = Rs.10
® Total liabilities = Current liabilities + Long-term debt.

SOLUTION
No.of shares =
12,000
Equity =
12,000 ´ Rs.10 =
Rs.1,20,000
Earnings (PAT) = EPS ´ No.of shares
= Rs.20 ´ 12,000 =
Rs.2,40,000
DPS = EPS ´ D/P
= Rs.20 ´ 0.125 = Rs.2.50
Dividend paid = Rs.2.50 ´ 12,000 =
Rs.30,000
Current year’s retained earnings = Rs.2,40,000 – Rs.30,000
= Rs.2,10,000
Given that current year retained earnings are half of the reserves and surplus,
Reserves and Surplus = 2 ´ Rs.2,10,000 =
Rs.4,20,000
Net worth = Rs.1,20,000 + Rs.4,20,000
Hence, Total Net worth = Rs.5,40,000
Current liabilities = Rs.5,40,000/3 =
 Rs.1,80,000
Quick assets = Quick Ratio ´ Current
Liabilities
1.5 ´ Rs.1,80,000 =
Rs.2,70,000
Inventory = Current Assets – Quick
Assets
= Rs.3,60,000 – Rs.2,70,000
= Rs.90,000
Inventory turnover ratio = 10
Total Sales = Rs.9,00,000
Given cash sales to credit sales = 0.8
Cash sales = Rs.4,00,000
Credit sales = Rs.5,00,000
Given average collection period (ACP = 20 days
Accounts receivable = Credit sales ACP
360
= 20
Rs.5,00,000 ´ 360 =
Rs.27,780
Since Current liabilities + Long-term debt = Total liabilities
We get Long-term debt = Rs.5,40,000 – Rs.1,80,000
= Rs.3,60,000
Interest = 15% of Rs.3,60,000
= Rs.54,000
Since PAT = Rs.2,40,000
PBT (@45% tax) = Rs.2, 40, 000
(1  0.45)
= Rs.4,36,360
PBIT = Rs.4,36,360 + Rs.54,000
= Rs.4,90,360
Given Selling and Admn. Expenses = Rs.39,640
Gross profit = (Rs.39,640 + Rs.4,90,360)
Gross profit = Rs.5,30,000
Since Total sales = Rs.9,00,000
Cost of goods sold = Rs.3,70,000 (9,00,000 –
5,30,000)
We have Net worth + Other liabilities = (Rs.5,40,000 + Rs.5,40,000)
= Rs.10,80,000
Total assets = Rs.10,80,000
Since Current assets = Rs.3,60,000
Fixed assets = Rs.7,20,000
Quick assets = Rs.2,70,000
 Accounts receivable = Rs.27,780
Hence Cash + Bank balance = Rs.2,42,220
Since Cash = Bank balance
We get,
Cash = Rs.1,21,110
Bank balance = Rs.1,21,110
Since Bank OD is half of cash =
We get, Bank OD = Rs.60,555
Since Current liabilities = Rs.1,80,000
Accounts payable = (Rs.1,80,000 – Rs.60,555)
= Rs.1,19,445
P & L Account of Sundaram Ltd.
(Rs.)
Total sales
(Cash sales = Rs.4,00,000; 9,00,000
Credit sales = Rs.5,00,000)
Cost of goods sold 3,70,000
Gross profit 5,30,000
Selling and Admn. Expenses 39,640
PBIT 4,90,360
Interest 54,000
PBT 4,36,360
Tax @ 45% 1,96,360
PAT 2,40,000
Dividend 30,000
Retained earnings 2,10,000
Balance Sheet of Sundaram Ltd.
Liabilities Rs. Assets Rs.
Equity 1,20,000 Fixed assets 7,20,000
Reserves & 4,20,000 Current assets:
Surplus
Long-term debt 3,60,000 Cash 1,21,110
Current Bank balance 1,21,110
liabilities:
Bank Overdraft 60,555 Accounts 27,780
receivable
Accounts 1,19,445 Inventory 90,000
payable
1,80,000 3,60,000
Total 10,80,000 Total 10,80,000
6. The income statement and balance sheet of Variety Foods Ltd. for the year ended March 31, 2005 are
given below. However, they are incomplete.
Income statement for the year ended March 31, 2005
(Rs. in lakhs)
Net sales ?
Cost of goods sold ?
Gross profit ?
Other expenses 34
Depreciation 8
Interest on term loan 8
Profit before tax ?
Provision for tax ?
Profit after tax ?
Balance sheet as on March 31, 2005
(Rs. in (Rs. in
Liabilities and networth Assets
lakhs) lakhs)
Paid up equity share capital ? Fixed assets (net) 72
Reserves and surplus ? Inventory ?
Term loan ? Sundry debtors ?
Sundry creditors 37 Cash and bank ?
Provisions 13

Moreover, the following information are available:

Interest rate on term loan = 12.5%
Gross profit margin = 30%
Net profit margin = 10%
Reserves and surplus as on April 1, 2004 = Rs.16 lakhs
Dividend payout ratio = 25%
Percentage of credit sales to net sales = 80%
Average collection period = 72 days
Inventory turnover ratio = 5.00
Current ratio = 1.80
Tax rate = 36%
Assume 1 year = 360 days.
You are required to complete the income statement and balance sheet of the company on the basis of
the given information.
SOLUTION

It is assumed that the net profit margin is the pre-tax net profit margin.
Net profit before tax
Net sales
Net profit margin=
Gross profit  (Other expenses  Depreciation  Interest)
Net sales
=
Gross profit (Other expenses  Depreciation  Interest)

Net sales Net sales
=
 (Other expenses  Depreciation  Interest)
Net sales
or = Gross profit margin – Net profit
margin
34  8  8
Net sales
= 0.30 – 0.10
50
or Net sales = 0.20 = Rs.250 lakhs.
Net sales  Cost of goods sold Cost of goods sold
Net sales Net sales
Gross profit margin = = 1–
Cost of goods sold
Net sales
or = 1 – Gross profit margin
= 1 – 0.30 = 0.70
or Cost of goods sold = (0.70) Net sales
= 0.70 ´ 250 = Rs.175 lakhs.
The completed income statement is shown below:
Income statement for the year ended March 31, 2005
(Rs. in
Particulars
lakhs)
Net sales 250
Cost of goods sold 175
Gross profit 75
Other expenses 34
Depreciation 8
Interest 8
Profit before tax 25
Provision for tax (25 ´ 0.36) 9
Profit after tax 16
Current assets
Current liabilities
Current ratio =
or Current assets = Current ratio ´ Current liabilities
= 1.80 (37 + 13) = Rs.90 lakhs
Cost of goods sold
Inventory
Inventory turnover ratio =
Cost of goods sold
Inventory turnover ratio
or Inventory =
175
= 5 = Rs.35 lakhs
 Accounts receivable
Average credit sales per day
Average collection period =
Annual credit sales
Average credit sales per day = 360
250 (0.80) 200
= 360= 360

Accounts receivable (i.e, Sundry debtors)

= Average credit sales per day ´ Average collection
period
200
= 360´ 72 = Rs.40 lakhs.
\ Cash and bank = Current assets – (Inventories + Sundry debtors)
= 90 – (35 + 40) = Rs.15 lakhs.
8
Term loan = 0.125 =
Rs.64 lakhs.
Reserves and surplus = Opening balance + (Profit after tax – Dividends)
= Opening balance + (16 – 16 ´ 0.25)
= 16 + 12 = Rs.28 lakhs.
Net worth + Liabilities = Total assets = Net fixed asset + Current assets
or Net worth + (Term loan + Sundry creditors + Provisions) = 72 + 90
or Net worth + (64 + 37 + 13) = 162
or Net worth = 162 – 114 = Rs.48 lakhs.
\ Paid up equity share capital = Net worth – Reserves and surplus
= 48 – 28 = Rs.20 lakhs.
The completed balance sheet is shown below:

Balance sheet as on March 31, 2005

Liabilities & Networth (Rs. in Assets (Rs. in
lakhs) lakhs)
Paid up equity share Fixed assets
20 72
capital (net)
Reserves and surplus 28 Inventory 35
Term loan 64 Sundry debtors 40
Sundry creditors 37 Cash and bank 15
Provisions 13
162 162