3 Ratio Analysis

CHAPTER

THEORY
Meaning of ‰ It is a mathematical expression or relationship between two or more things.
Ratio ‰ Financial Ratio means mathematical expression or relationship between
two or more financial values.
Meaning of It is the process of identifying the financial strengths and weaknesses of the
Ratio Analysis enterprise by logically establishing relationship between the items of Balance
Sheet or Income Statement or both and interpreting the results thereof in order
to derive meaningful conclusions.
In other words, it is the comparison of different numbers from balance sheet,
income statement, cash flow statement against the figures of previous year,
other companies, the industry, or even the economy in general for the purpose of
financial analysis.
Advantages of ‰ Simplicity: Ratios are simple to calculate and understand.
ratio analysis ‰ Forecasting: Trends can be established from ratios which help in forecasting.
‰ Liquidity position: It helps in drawing conclusions regarding the liquidity
position of a firm.
‰ Clues to further investigation: It acts as a messenger which can indicate
the areas to be invested further.
‰ I : It helps in finding variance by comparing either
with industry average or those of competitors. The firm can seek to identify
probable reasons and take remedial measures.
‰ : It helps in computing the degree of efficiency in the
management and utilization of its assets & capital employed.
Importance of ‰ For Management: It helps management to determine the operating
ratio analysis efficiency and for forecasting. Production manager uses input-output ratio,
raw material consumption ratio etc. Sales manager uses turnover ratios,
expenses ratio etc. Financial manager uses profitability ratios, turnover
ratios etc. CEO, GM uses all ratios.
‰ For Investors: It helps investors to determine the magnitude and direction
of movement in firm’s earnings and thereon deciding whether to hold, sell or
purchase the shares. They uses profitability ratios, capital structure ratios,
solvency ratios and turnover ratios.
‰ For Short Term Creditors: It helps short term creditors like bankers and
suppliers of material to determine the firm’s ability to meet its current
obligations. They uses liquidity ratios and short term solvency ratios.
‰ For Long Term Creditors: It helps long term creditors to determine the
firm’s long term financial strength and survival with help of leverage or
capital structure ratios. They uses coverage ratios, solvency ratios, turnover
ratios and profitability ratios.
‰ For employees: they will be interested to know the overall financial wealth
of the organization. They uses liquidity ratios, profitability ratios, etc.
‰ For Regulator or Government: They will analyse the financial statements
to determine taxations and other dues payable to the government. They
uses profitability ratios.
‰ Facilitates Intra, Inter and Pattern Comparison: It helps in comparing
data and if at variance either with the industry average or with those of the
competitors, the firm can seek to identify the probable reasons and, in the
light take remedial measures.
‰ Serve as barometer for future: It helps to indicate the direction in which
ad ustment should be made in budget or in performance to bring them
closer to one another.
Limitations of ‰ Only quantitative analysis and not qualitative analysis: It ignores the
ratio analysis qualitative factors which in certain cases may overtake the quantitative
factors.
‰ Price-level changes to be considered: Ratios can be accurately interpreted
only if the effect of change in prices which may have take place, is ad usted
in the figures.
‰ Historical analysis: Generally it is computed on the basis of historical
financial statements and thus are historic in nature.
‰ Not free from bias: The financial statements are not free from bias and as
a result, ratio analysis also cannot be said be free from bias.
‰ Only symptoms and not cure: Ratios are only symptoms and it becomes
the duty of the management to unearth underlying causes.
‰ Reality behind the statements to be considered: The relationship between
the two figures can be well interpreted only after studying the reality behind
the statements on the basis of which the ratio has been established.

Ratio Analysis 25
 ‰ Accuracy of the accounts to be considered: The quality of the ratios very
much depends upon the quality of the accounts on the basis of which these
are established.
‰ Difference in accounting policies: Differences in accounting policies and
accounting period make the accounting data of the two firms or two periods
non-comparable.
‰ : In case of firms having diversified product lines,
of different industries, the ratios calculated on the basis of aggregate data
cannot be used for inter-firm comparison.
‰ Effect of season factors: Seasonal factors may also influence financial data.
ear-end figure may not be the average picture of the business.
Ratios in ‰ Telecom Industry
different Ratio related to call
industries Revenue and expenses per customer
‰ Banks
Loan to deposit ratios
Operating expenses and income ratios
‰ Hotel
Room occupancy ratio
Bed occupancy ratio
‰ Transport
Passenger-kilometre
Operating cost per passenger kilometre
Types of ratios ‰ Liquidity ratios: These ratios measures the ability of the enterprise to meet
short-term obligations as and when they become due. Short term creditors
such as bankers and suppliers are particularly interested in assessing
liquidity
‰ Solvency ratios: These ratios measure the ability of the company to survive
over a long period of time. Long-term creditors like debenture-holders are
particularly interested in long term solvency of the enterprise since their
claims are to be met in the long run.
‰ Activity Ratio: These ratios measure the effectiveness with which a firm
uses its available resources. It helps in commenting on the efficiency of the
enterprise in managing its assets.
‰ P R : These ratios measures management’s overall
effectiveness as shown by the returns generated on sales and investment.
The long term survival of a business enterprise depends on satisfactory
income earned by it.

26 Financial Management PW
Liquidity ‰ Current Ratio: This ratio establishes a relationship between current assets
Ratios and current liabilities. The ob ective of computing this ratio is to measure the
ability of the firm to meet its short-term obligations and to reflect the short-
term financial strengths/solvency of a firm. In other words, the ob ective is
to measure the safety margin available for short-term creditors. This ratio is
computed by dividing the current assets by the current liabilities. This ratio
may be expresses as follows:
Current Assets
Current Ratio =
Current Liabilities
‰ Quick Ratio/ Liquid Ratio/ Acid Test Ratio: This ratio establishes a
relationship between quick assets and current liabilities (or quick liabilities).
The ob ective of computing this ratio is to measure the ability of the firm to
meet its short-term obligations as and when due without relying upon the
realization of stock. This ratio is computed by dividing the quick assets by
the current liabilities. This ratio is usually expresses as a pure ratio e.g. 1 1.
The ratio may be expressed as follows:
Quick Assets
Quick Ratio =
Current Liabilities
The term quick assets refer to those current assets which can be converted
in to cash immediately or at a short notice without loss of value.
Quick Assets = Current Assets – Inventory – Prepaid Expenses + Realizable
value of inventory (if any)
‰ Absolute Cash Ratio: This ratio measures a relationship between cash &
marketable securities and current liabilities. The ob ective of computing
this ratio is to measure the ability of the enterprise to meet its short-term
obligations as and when due without relying upon the realization of stock
and debtors. This ratio is computed by dividing the cash and marketable
securities by current liabilities. This ratio is usually expressed as a pure
ratio e.g. 1 1. The ratio may be expressed as follows
Cash & Marketable Securities
Absolute Cash Ratio =
Current Liabilities
‰ Basic Defense internal / Interval Measure Ratio: This ratio measures a
relationship between quick assets and average daily operating expenses.
The ob ective of computing this ratio is to measure the average period for
which quick assets are available to meet average daily operating expenses.
This ratio is computed by dividing the quick assets by average daily operating
Expenses his ratio is usually expressed in terms of days/weeks/months.
This ratio may be expresses as follows:
Quick assets
Basic defense interval =
Daily operating expenses

Ratio Analysis 27
 Current assets Prepaid expenses Inventories
=
Daily operating expenses
Cash & Bank + Net receivables + Marketable securities
=
Operating expenses ÷No.of days

‰ Net working capital – It is more a cash flow than ratio.

Net working capital = Current assets – Current liabilities (excluding short
term bank borrowing)
Solvency Ratios (A) Capital Structure Ratios

‰ Equity Ratio: It indicates the share of owner’s fund to total fund invested in
the business. Higher ratio indicate lower risk for lenders.
Shareholder s Equity
Equity Ratio =
Net Assets

‰ Debt Ratio: It indicates the proportion of total debt or outside liabilities

used to fund total assets. A ratio greater than 1 indicates assets are funded
more by debt and vice versa.
Total debt
Debt Ratio =
Net Assets

‰ Debt – Equity Ratio: This ratio establishes a relationship between long-term debts
and shareholder’s funds. The ob ective of computing this ratio is to measure the
relative proportion of debt and equity in financing the assets of a firm. This ratio is
computed by dividing the long-term debts by the shareholder’s funds. This ratio is
usually expressed as a pure ratio e.g. 2 1. This ratio may be expressed as follows
Total outside liabilities
Debt to Equity Ratio =
Shareholders equity

Total Debt Long term debt

Debt to Equity Ratio = =
Shareholders equity Shareholders equity

Long term debt

Debt to Equity Ratio =
Shareholders equity

Where,
Total debt = Current liabilities + Non-current liabilities
long term debts means long term loans (whether secured or unsecured
and Shareholder’s fund = Equity share capital + Preference share capital +
Reserves & surplus – Fictitious assets

28 Financial Management PW
 ‰ Debt to Total Assets Ratio: This ratio establishes a relationship between
total assets and total long term debts. It measures the extent to which assets
are being financed with debt. This ratio is computed by dividing the total
debt by the total assets. This ratio is usually expressed as a pure ratio e.g.
2 1. This ratio may be expressed as follows
Total outside liabilities Total debt
Debt to total assets Ratio = =
Total assets Total assets
‰ Proprietory Ratio: This ratio measures a relationship between equity
and the total assets. The ob ective of computing this ratio is to measure
the proportion of total assets financed by the Equity or Proprietor’s fund.
This ratio is computed by dividing the Proprietor’s fund by total assets. It is
expressed as a percentage. This ratio may be expressed as follows:
Proprietor's Fund
Proprietory Ratio = × 100
Total Assets
‰ Capital Gearing Ratio: This ratio establishes a relationship between funds
bearing fixed financial payments and equity shareholder’s funds. The
ob ective of computing this ratio is to measure the relative proportion of
funds bearing fixed financial payments to equity shareholder’s funds This
ratio is computed by dividing the funds bearing fixed financial payments by
equity shareholder’s funds. This ratio is usually expressed as a pure ratio
e.g. 3 1. This ratio may be expressed as follows
Funds bearing fixed financial payments
Capital Gearing Ratio =
Equity Shareholder s Fund

Preference share capital + Debentures + Other borrowed funds

=
Equity share capital + Reserve & Surplus - Losses
(B) Coverage Ratios
‰ Interest Coverage Ratio: This ratio establishes a relationship between
net profits before interest and taxes and interest on debt. The ob ective of
computing this ratio is to measure the debt servicing capacity of a firm so far
as fixed interest on debt is concerned. This ratio is computed by dividing the
net profits before interest and taxes by interest on debt. This ratio is usually
expressed as x’ number of times. This ratio may be expressed as follows

Earning Before Interest & Tax

Interest Coverage Ratio =
Interest

Ratio Analysis 29
 ‰ Preference Dividend Coverage Ratio: This ratio establishes a relationship
between net profits after interest and taxes and Preference Dividend on
Preference Shares. The ob ective of computing this ratio is to measure the
Preference Shares servicing capacity of a firm so far as fixed dividend on
preference shares is concerned. This ratio is computed by dividing net
profits after interest and taxes by preference dividend on Preference Shares.
This ratio is usually expressed as x’ number of times. This ratio may be
expressed as follows:
Net profit after interest and tax
Preference Dividend Coverage Ratio =
Preference dividend on preference shares

Earnings after tax Preference dividend

Equity Dividend Coverage Ratio =
Equity dividend
‰ Debt Service Coverage Ratio: This ratio measures the relationship between
net profits before interest and tax and interest plus principal portion of
installment . The ob ective of computing this ratio is to determine the firm’s
capacity to pay off both the interest and principal portion of the installment.
This ratio is computed by dividing the net profit before interest and tax by
the aggregate of interest and principal potion of installment. It is usually
expressed in number of times. This ratio may be expressed as follows
Earnings available for debt service
Debt Service Coverage Ratio =
Interest + Installments
Where,
Earnings available for debt service = Net profit after tax + non-cash
expenses + Interest + Other ad ustments like loss of assets etc.
EBIT + Depreciation
Fixed charges coverage ratio =
Interest + Repayment of loan

Activity Ratios ‰ Capital turnover ratio: This ratio establishes a relationship between
net sales and capital employed. The ob ective of computing this ratio is to
determine the efficiency with which the capital employed is utilized. This
ratio is computed by dividing the net sales by the capital employed. This
ratio is usually expressed as x’ number of times. This ratio may be expressed
as follows:
Net Sales
Capital Turnover Ratio =
Capital Employed
‰ Fixed assets turnover ratio: This ratio establishes a relationship between
net sales and fixed assets. The ob ective of computing this ratio is to
determine the efficiency with which the fixed assets are utilized. This ratio
is computed by dividing the net sales by the net fixed (operating) assets.
This ratio is usually expressed as x’ number of times. This ratio may be
expressed as follows:

30 Financial Management PW
 Net Sales
Fixed Assets Turnover Ratio =
Net Fixed (Operating)Assets

‰ Current Assets Turnover Ratio: This ratio establishes a relationship

between net sales and current assets. The ob ective of computing this ratio
is to determine the efficiency with which the current assets are utilized. This
ratio is computed by dividing the net sales by the current assets. This ratio
is usually expressed as x’ number of times. This ratio may be expresses as
follows:
Net Sales
Current Assets Turnover Ratio =
Current Assets
‰ Total Assets Turnover Ratio: This ratio establishes a relationship between
net sales and total assets. The ob ective of computing this ratio is to determine
the efficiency with which the total assets is utilized. This ratio is computed
by dividing the net sales by the total assets. This ratio is usually expressed
as ’x’ number of times. This ratio may be expressed as follows
Net Sales
Total assets turnover ratio =
Total assets
‰ Stock Turnover Ratio: This ratio establishes a relationship between cost
of goods sold and average inventory of finished goods. The ob ective of
computing this ratio is to determine the efficiency with which the inventory
is converted into sales. This ratio is computed by dividing the cost of goods
sold by the average inventory. This ratio is usually expressed as x’ number
of times. This ratio may be expressed as follows:

Cost of Goods Sold

Stock Turnover Ratio =
Average Inventory
‰ Stock Velocity: This velocity indicates the period for which sales can be
generated with the help of an average stock maintained and is expressed in
terms of period. This velocity may be calculated as follows
Average Stock
Stock Velocity =
Average Cost of Goods Sold per day

12 months / 52 weeks / 365 days

=
Stock Turnover Ratio
‰ Debtors Turnover Ratio: This ratio establishes a relationship between
net credit sales and average trade debtors (or receivables). The ob ective
of computing this ratio is to determine the efficiency with which the trade
debtors are converted into cash. This ratio is computed by dividing the net
credit sales by average trade debtors. This ratio is usually expressed as x’
number of times. This ratio may be expressed as follows
Net Credit Sales
Debtors Turnover Ratio =
Average Debtors

Ratio Analysis 31
 ‰ Average Debt Collection Period or Debtor’s Velocity: This period shows
an average period for which the credit sales remain outstanding or the
average credit period actually en oyed by the debtors. It measures the quality
of debtors. It indicates the rapidity of slowness with which the money is
collected from debtors. This period may be calculated as follows
Average Debtors
Debt Collection Period =
Average Net Credit Sales per day

12 months / 52 weeks / 365 days

=
Debtors Turnover Ratio
‰ Creditors Turnover Ratio: This ratio establishes a relationship between
net credit purchases and average creditors (or payables). The ob ective of
computing this ratio is to determine the efficiency with which the creditors
are managed and paid. This ratio is computed by dividing the net credit
purchases by average trade creditors. This ratio is usually expressed as x’
number of times. This ratio may be expressed as follows
Net Credit Purchases
Creditors Turnover Ratio =
Average Creditors

‰ Debt Payment Period or Creditor’s Velocity: This period shows an average

period for which the credit purchases remain outstanding or the average
credit period actually availed of. This period may be calculated as follows
Average Creditors
Debt Payment Period =
Average Net Credit Purchases per day

12 months / 52 weeks / 365 days

=
Creditors Turnover Ratio

P ‰ G P R : This ratio measures the relationship between gross profit

Ratios in and net sales. The main ob ective of computing this ratio is to determine the
relation to efficiency with which production and/or purchase operations and selling
sales operations are carried on. It is used to compare profitability department-
wise or product-wise. This ratio is computed by dividing the gross profit by
the net sales. It is expressed as percentage. This ratio may be expressed as
follows:
Gross Profit
Gross Profit Ratio = ×100
Net Sales
‰ Expenses Ratio: This ratio measure the relationship between various
expenses and net sales. The main ob ective of computing this ratio is to
determine the efficiency with which theses expenses are being incurred.
This ratio is computed by dividing the various expenses by the net sales. It
is expressed as percentage. This ratio may be expressed as follows:

32 Financial Management PW
 Cost of Goods Sold
Cost of Goods sold Ratio = ×100
Sales
Adm. OHs + S & D OHs
Operating Expenses Ratio = ×100
Sales
COGS + Operating expenses
Operating Ratio = ×100
Sales
Financial expenses
Financial Expenses Ratio = ×100
Sales
Administration expenses
Administration expenses Ratio = ×100
Sales
S & D expenses
Selling & Distribution expense Ratio = ×100
Sales
Fixed expenses
Fixed Expense Ratio = ×100
Sales
Variable expenses
Variable Expense Ratio = ×100
Sales
‰ P R : This ratio measures the relationship between
operating profit and net sales. The main ob ective of computing this ratio
is to determine the operational efficiency of the management. This ratio is
computed by dividing the operating profit by the net sales. It is expressed as
a percentage. This ratio may be expressed as:
Operating Profit
Operating Profit Ratio = ×100
Net Sales
‰ N P R : This ratio measures the relationship between net profit
and net sales. The main ob ective of computing this ratio is to determine
the overall profitability due to various factors such as operational efficiency,
trading on equity etc. This ratio is computed by dividing the net profit by
the net sales. The figure of net profit may be taken either before tax or after
tax. It is expressed as a percentage. This ratio may be expressed as follows:
Net Profit after tax
Net profit ratio = ×100
Net Sales
Net Profit before tax
Pre-tax profit ratio = ×100
Net Sales
P ‰ Return on Investment (ROI): This ratio measures a relationship between
ratios in the net profit and investment. The ob ective of computing this ratio is to
relation to find out how efficiently the long term funds supplied by the creditors and
investment shareholders have been used. It is expressed as a percentage. In the form of
formula, this ratio may be expressed as follows
Profit / Earnings
Return on Investment = ×100
Investment
Ratio Analysis 33
 ‰ Return on Total Assets:This ratio measures a relationship between net
profit after interest and tax, and total assets. The ob ective of computing
this ratio is to find out how efficiently the total assets have been used by the
management. This ratio is computed by dividing the net profit after interest
and tax by total assets. This ratio is expressed as a percentage. This ratio
may be expressed as follows:

Net profit after tax

Return on total assets (ROTA) =
Average total / tangible / fixed assets
Sometimes, this ratio is also computed before interest but after tax as assets
are also financed by lenders.
Net profit after tax + Interest
Return on total assets (ROTA) =
Average total / tangible / fixed assets

EBIT 1 t
= Average total / tangible / fixed assets

EBIT 1 t
Return on Net Assets (RONA) =
Average Net assets
‰ Return on Capital Employed (ROCE): This ratio measures a relationship
between the net profit and capital employed. The ob ective of computing
this ratio is to find out how efficiently the long term funds supplied by the
creditors and shareholders have been used. It is expressed as a percentage.
In the form of formula, this ratio may be expressed as follows
Earnings before interest & tax EBIT
Return on Capital Employed = ×100
Capital Employed
EBIT 1 t
Return on Capital Employed = ×100
Capital Employed

PAT + Interest
Return on Capital Employed = ×100
Capital Employed
‰ Return on Equity (ROE): This ratio measures a relationship between net
profit after interest and tax available for equity shareholders’ and equity
shareholder’s fund. The ob ective of computing this ratio is to find out how
efficiently the funds supplied by the equity shareholders have been used.
This ratio is computed by dividing the earnings available for equity by equity
shareholder’s funds. It is expressed as a percentage. In the form of formula,
this ratio may be expressed as follows:
PAT + Interest
Return on Equity = ×100
Capital Employed

34 Financial Management PW
P ‰ Earning Per Share (EPS): This ratio measures the earnings available to an
ratios in equity shareholder on a per share basis. The ob ective of computing this
relation ratio is to measure the profitability of the firm on per equity share basis. This
to equity ratio is computed by dividing the net profit after interest, tax and preference
shareholder’s dividend by the number of equity shares. It is expressed as an absolute
fund figure. In the form of formula, this ratio may be expressed as follows

Net Profit After Interest, Tax and Preference Dividend

Earning Per Share =
No. of Equity Shares
‰ Dividend Per Share: This ratio measures the dividend distributed per
equity share. The ob ective of computing this ratio is to measure the
dividend distributed per equity share. This ratio is computed by dividing
the profit distributed as equity dividend by the number of equity shares. It
is expressed as an absolute figure. In the form of a formula, this ratio may be
expressed as follows:
Profit Distributed as Equity Dividend
Dividend Per Share =
No. of Equity Shares
‰ Price Earning Ratio (P/E Ratio): This ratio measures the relationship
between the market price per share and earning per share. The ob ective
of computing this ratio is to find out expectations of the shareholders about
the earnings of the firm. This ratio is computed by dividing market price per
share by the earning per share. It is usually expressed as a pure number. In
the form of formula, this ratio may be expressed as follows
Market Price Per Share
Price Earning Ratio =
Earning Per Share
‰ Dividend Payout Ratio:This ratio measures the portion of earning per
share distributed as dividend. The ob ective of computing this ratio is to
measure the portion of EPS distributed as dividend. This ratio is computed
by dividing the DPS by EPS. It is usually expressed as a percentage. In the
form of formula, this ratio may be expressed as follows
Dividend Per Share (DPS)
Dividend Payout Ratio =
Earning Per Share (EPS)
‰ Earning Yield: This ratio measures the relationship between Earning Per
Share (EPS) and Market Price Per Share (MPS). The ob ective of computing
this ratio is to measure the performance of earnings in relation to market
price per share. This ratio is computed by dividing the EPS by market price
per share. It is usually expressed as a percentage. In the form of a formula,
this ratio may be expressed as follows:

Earning Per Share (EPS)

Earning Yield = ×100
Market Price Per Share (MPS)

Ratio Analysis 35
 ‰ Dividend Yield: This ratio measures the relationship between Dividend Per
Share (DPS) and Market Price Per Share (MPS). The ob ective of computing
this ratio is to measure the performance of dividend in relation to market
price per share. This ratio is computed by dividing the DPS by market price
per share. It is usually expressed as a percentage. In the form of a formula,
this ratio may be expressed as follows:
Dividend Per Share (DPS)
Dividend Yield = ×100
Market Price Per Share (MPS)
‰ Market value/ book value per share: This ratio measures a relationship
between Market Value per share and Book Value per share. The ob ective of
computing this ratio is to measure market response to the book value of a
share. This ratio is computed by dividing the Market Price per share by Book
Value per share. This ratio may be expressed as follows
Market value/Book Value per share (MV/BV) = (Average share price)/
(Net worth No.of equity shares)
Average share price Average share price
= =
Net worth ÷ No. of equity shares Book value per shares
Closing share price
=
Book value per shares
‰ Q Ratio : This ratio measures a relationship between Market Valuation and
intrinsic value. If Q ratio =1 then it is equilibrium. It is less than 1, it means
stock is undervalued and if it is more than 1, it means stock is overvalued.
This ratio may be expressed as follows:
Market value of equity and liabilities
Q Ratio =
Estimated replacement cost of assets
Market value of company
=
assts replacement cost
Du Pont Model The DU Pont Company of USA pioneered a system of financial analysis which has
received widespread recognition and acceptance. The analysis takes into account
important inter-relationships on the basis of information available in the financial
statements. The usefulness of DU Pont chart lies in the fact that it presents the
overall picture of the performance of a firm and enables the management to
identify the factors which have a bearing on its profitability.

Return on Return on Investment (ROI) represents the earning power of the company. ROI
Investment depends on two ratios (a) Net Profit Ratio and (b) Capital Turnover Ratio. A
(ROI) using change in any of these ratios will change the firm’s earning power. These two
the DU Pont ratios are affected by many factors. A change in any of these factors will change
Analysis these ratios also. The analysis has been presented by Du-Pont company of USA
through a chart popularly known as Du-Pont Chart.

36 Financial Management PW
Return on Total The purpose of Du-Pont Chart is to provide management with a measure of
Assets (ROTA) performance in the form of return on Total Assets. It brings together the activity
using the DU ratios and net profit margins on sales and shows how these ratios interact to
Pont Analysis determine the profitability of assets. The Du-Pont chart can be used to find out
ways and means of improving the return on total assets.
Return on There are three components in the calculation of return on equity using the
Equity (ROE) traditional Du-Pont model (a) the net profit margin (b) assets turnover ratio
using the DU and (c) the equity multiplier. By examining each input individually, the sources of
Pont Analysis a company’s return on equity can be discovered and compared to its competitors.

PRACTICAL QUESTIONS
1. Following information are available for SK ltd. along with various ratio relevant to the particulars
industry it belongs to. Appraise your comments on strength and weakness of SK ltd. comparing
its ratios with the given industry norms. [SM]
SK Ltd. Balance Sheet as at 31.3.2022
Liabilities Amount (`) Assets Amount (`)
Equity Share Capital 48,00,000 Fixed Assets 24,20,000
10% Debentures 9,20,000 Cash 8,80,000
Sundry Creditors 6,60,000 Sundry Debtors 11,00,000
Bills Payable 8,80,000 Stock 33,00,000
Other Current Liabilities 4,40,000
77,00,000 77,00,000

S P

Particulars Amount (`) Amount (`)

Sales 1,10,00,000
Less: cost of goods sold – –
Material 41,80,000 –
Wages 26,40,000 0
Factory Overhead 12,98,000 81,18,000
Gross profit – 28,82,000
Less Selling & Distribution Cost 11,00,000 –
Administrative cost 12,28,000 23,28,000
Earnings before interest and taxes – 5,54,000
Less: Interest charges – 92,000
Earnings before tax – 4,62,000
Less Taxes 50% – 2,31,000
Net Profit (PAT) – 2,31,000

Ratio Analysis 37
 Industry Norms
Ratios Norm
Current Ratio 2.5
Receivables turnover ratio 8.0
Inventory turnover Ratio (based on sales) 9.0
Total Assets Turnover ratio 2.0
Net Profit Ratio 3.5%
Return on Total Assets 7.0%
Return on Net Worth (Based on net profit) 10.5%
Total Debt/Total Assets 60.0%
[Sol. Actual ratios = 2.67 10 3.33 1.43 2.10% 3.60% 4.81% 37.66%]
2. SK Ltd. has made plans for the next year. It is estimated that the company will employ total assets
of `8,00,000, 50% of the assets being financed by borrowed capital at an interest rate of 16% per
year. The direct costs for the year are estimated at `4,80,000 and all other operating expenses are
estimated at `80,000. The goods will be sold to customers at 150% of the direct costs. Income
tax rate is assumed to be 50%. ou are required to calculate [Similar Nov 2020]
(a) Net profit margin
(b) Return on capital employed
(c) Assets turnover
(d) Return on owner’s equity
[Sol. (a) 6.67% (b) 20% (c) 0.90 times (d) 12%]
3. The total sales (all credit) of a firm are `6,40,000. It has a gross profit margin of 15% and a current
ratio of 2.5. The firm’s current liabilities are `96,000 inventories `48,000 and cash `16,000. [SM]
(a) Determine the average inventory to be carried by the firm, if an inventory turnover of 5
times is expected (Assume a 360 day year)
(b) Determine the average collection period if the opening balance of debtors is intended to be
`80,000 (Assume a 360 day year)
[Sol. (a) `1,08,800 (b) 72 days]
4. The following figures are related to the trading activities of M Ltd. [Nov 2022] [Nov 2022]
Total assets - `10,00,000
Debt to total assets - 50%
Interest cost - 10% per year
Direct cost - 10 times of the interest cost
Operating expenses - `1,00,000
The goods are sold to customers at a margin of 50% on the direct cost. Tax rate is 30%. ou are
required to calculate
(a) Net profit margin (b) Net operating profit margin
(c) Return on assets (d) Return on owner’s equity
[Sol. (a) 10% (b) 20% (c) 15% (d) 14%]

38 Financial Management PW
 5. The capital structure of SK ltd. is as follows [SM]
Equity share capital of `10 each 8,00,000
9% Preference share capital of `10 each 3,00,000
11,00,000
Additional information Profit (after tax at 35 percent), `2,70,000 Depreciation `60,000 Equity
dividend paid 20 percent Market price of equity shares `40. ou are required to compute the
following, showing the necessary workings
(a) Dividend yield on the equity shares (b) Cover for the preference and equity dividend
(c) Earnings per share (d) Price-earning ratio
[Sol. (a) 5% (b) 10 times 1.52 times (c) `3.0375 (d) 13.17 times]
6. SK Private. Ltd. gives you the following information relating to the year ending 31st March, 2022
[SM]
(1) Current Ratio 2.5 1
(2) Debt-Equity Ratio 1 1.5
(3) Return on Total Assets (After Tax) 15%
(4) Total Assets Turnover Ratio 2
(5) Gross Profit Ratio 20%
(6) Stock Turnover Ratio 7
(7) Net Working Capital `13,50,000
(8) Fixed Assets `30,00,000
(9) 1,80,000 Equity shares of `10 each
(10) 60,000 9% Preference Shares of `10 each
(11) Opening stock `11,40,000
ou are required to calculate
(a) Quick ratio
(b) Fixed assets turnover ratio
(c) Proprietary ratio
(d) Earnings per share
[Sol. (a) 1.10 times (b) 3.5 times (c) 49.71% (d) `4.075]
7. Following figures and ratios are related to a company of Q Ltd. [May 2019]
Sales for the year (all credit) `30,00,000
Gross profit ratio 25%
Fixed assets turnover ratio (based on cost of goods sold) 1.5
Stock turnover ratio (based on cost of goods sold) 6
Liquid ratio 11
Current Ratio 1.5
Receivables (Debtors) collection period 2 months
Reserves & surplus to share capital 0.60 1
Capital gearing ratio 0.5
Fixed assets to net worth 1.20 1
ou are required to calculate
Closing stock, Fixed Assets, Current Assets, Debtors and Net Worth.
[Sol. `3,75,000 `15,00,000 `11,25,000 `5,00,000 `12,50,000]
Ratio Analysis 39
 8. Following information has been provided from the books of SK Ltd. for the year ending on 31st
March, 2022 [SM, MTP Nov 2018]
Net Working Capital `4,80,000
Bank Overdraft `80,000
Fixed Assets to Proprietary Ratio 0.75
Reserve and Surplus `3,20,000
Current Ratio 2.5
Liquid Ratio (Quick Ratio) 1.5
ou are required to prepare a summarised balance sheet as at 31st March, 2022 assuming that
there is no long term debt.
[Sol. BS total = `22,40,000]
9. Following is the abridged Balance Sheet of SK Ltd [SM]
Liabilities Amount (`) Assets Amount (`)
Share Capital 1,00,000 Land & Buildings 80,000
Profit & Loss Account 17,000 Plant & Machinery 50,000
Current Liabilities 40,000 Less: Depreciation 15,000 35,000
1,15,000
Stock 21,000
Receivables 20,000
Bank 1,000 42,000
1,57,000 1,57,000
With the help of the additional information furnished below, you are required to prepare trading
and profit & loss account and a balance sheet as at 31st March, 2022.
(a) The company went in for re-organisation of capital structure, with share capital remaining
the same as follows:
Share Capital 50%
Other Shareholder’s fund 15%
5% Debentures 10%
Creditors 25%
Debentures were issued on 1 April. Interest is to be paid annually on 31st March.
st

(b) Land and buildings remained unchanged. Additional plant and machinery has been bought
and a further `5,000 depreciation was written off.
(The total fixed assets then constituted 60% of total fixed and current assets)
(c) Working capital ratio was 8 5.
(d) Quick ratio was 1 1.
(e) The receivables (four-fifth of the quick assets) to sales ratio revealed a credit period of 2
months. There were no cash sales.
(f) Return on net worth was 10%
(g) Gross profit was at the rate of 15% of selling price.
(h) Stock turnover was eight times for the year.
Ignore taxation.
[Sol. GP = `36,000 NP = `13,000 BS Total = `2,00,000]
40 Financial Management PW
 10. The following accounting information and financial ratios of SK Ltd. relate to the year ended 31st
December, 2022 [SM, RTP Nov 2022]
(I) Accounting Information
Gross Profit 15% of sales
Net Profit 8% of sales
Raw material consumed 20% of works cost
Direct wages 10% of works cost
Stock of raw materials 3 month’s usage
Stock of finished goods 6% of works cost
Debt collection period 60 days
(II) Financial Ratios
Fixed assets to sales 13
Fixed assets to current assets 13 11
Current ratio 21
Long-term loans to current liabilities 21
Capital to Reserves and Surplus 14
st
If value of fixed assets as on 31 December, 2021 amounted to `26 lakhs, prepare a summarized
Profit and Loss Account of the company for the year 31st December, 2022 and also the Balance
Sheet as on 31st December, 2022.
[Sol. GP = `11,70,000 NP = `6,24,000 BS Total = `48,00,000]
11. Based on the following particulars show various assets and liabilities of SK Ltd. [RTP May 2018]
Fixed assets turnover ratio 8 times
Capital turnover ratio 2 times
Inventory Turnover 8 times
Receivable turnover 4 times
Payable turnover 6 times
GP Ratio 25%
Gross profit during the year amounts to `8,00,000. There is no long-term loan or overdraft.
Reserve and surplus amount to `2,00,000. Ending inventory of the year is `20,000 above the
beginning inventory.
[Sol. BS Total = `20,03,333]
12. From the following ratios and information given below, prepare Trading Account, Profit & Loss
Account and Balance sheet of SK Ltd. [SM]
Fixed Assets `40,00,000
Closing stock `4,00,000
Stock turnover ratio 10
Gross profit ratio 25%
Net profit ratio 20%

Ratio Analysis 41
 Net profit to capital 1/5
Capital to total liabilities ½
Fixed assets to capital 5/4
Fixed assets to Total current assets 5/7
[Sol. GP = `8,00,000 NP = `6,40,000 BS Total = `96,00,000]
13. Using the following information, complete the Balance Sheet given below [MTP May 2019]
(a) Total debt to net worth 12
(b) Total assets turnover 2
(c) Gross Profit on sales 30%
(d) Average collection period (assume 360 days in a year) 40 days
(e) Inventory turnover ratio based on cost of goods sold
and year-end inventory 3
(f) Acid test ratio 0.75
Balance Sheet as on March 31, 2022
Liabilities ` Assets `
Equity share capital 4,00,000 Plant & Machinery & other fixed assets ……
Reserve & Surplus 6,00,000 Current Assets
Total Debt: Inventory ……
Current liabilities …….. Debtors ……
Cash ……

[Sol. BS Total = `15,00,000]

14. SK Ltd. has furnished the following ratios and information relating to the year ended 31st March,
2022. [SM, Similar July 2021]
Sales `60 lacs
Return on net worth 25%
Rate of income tax 50%
Share capital to reserves 7:3
Current ratio 2
Net-profit to Sales (after tax) 6.25%
Inventory turnover (based on cost of goods sold and closing stock) 12
Cost of goods sold `18 lacs
Interest on Debentures ( 15%) `60,000
Sundry Debtors `2 lacs
Sundry Creditors `2 lacs
ou are required to
(a) Calculate the operating expenses for the year ended 31st March, 2022.
(b) Prepare a Balance Sheet as on 31st March, 2022.
42 Financial Management PW
 Balance Sheet as on March 31, 2022
Liabilities ` Assets `
Equity share capital ...... Fixed Assets ......
Reserve & Surplus ...... Current Assets ......
15% Debentures ...... Stock ......
Payables ...... Receivables ......
...... Cash ......

[Sol. (a) `33,90,000 (b) BS Total = `21,00,000]

15. Using the information given below, complete the Balance Sheet of SK Private Limited
(i) Current ratio 1.6 1
(ii) Cash and Bank balance 15% of total current assets
(iii) Debtors turnover ratio 12 times
(iv) Stock turnover (cost of goods sold) ratio 16 times
(v) Creditors turnover (cost of goods sold) ratio 10 times
(vi) Gross profit ratio 20%
(vii) Capital gearing ratio 0.6
(viii) Depreciation rate 15% on WDV
(ix) Net Fixed Assets 20% of total assets
(Assume all purchase and sales are on credit)
Balance Sheet of SK Private Limited as at 31.03.2022
Liabilities ` Assets `
Share Capital 25,00,000 Fixed Assets
Reserve & Surplus ? Opening WDV ?
12% Long term debt ? Less: Depreciation ?
Current Liabilities Current Assets
Creditors ? Stock ?
Provision & outstanding expenses 68,50,000 Debtors ?

Cash & Bank balance ?

Total ? Total ?
[Sol. BS total = `1,37,00,000]
16. Assuming the current ratio of a company is 2, STATE in each of the following cases whether the
ratio will improve or decline or will have no change [RTP Nov 2018]
(a) Payment of current liability (b) Purchase of fixed assets by cash
(c) Cash collected from customers (d) Bill receivable dishonoured
(e) Issue of new shares
[Sol. (a) Improve (b) Decline (c) No change (d) No change (e) Improve]

Ratio Analysis 43
 PRACTICE QUESTIONS
17. In a meeting held at Delhi towards the end of 2020, the Directors of M/s SK Ltd. have taken a
decision to diversify. At present SK Ltd. sells all finished goods from its own warehouse. The
company issued debentures on 01.01.2021 and purchased fixed assets on the same day. The
purchase prices have remained stable during the concerned period. Following information is
provided to you [SM]
Income Statement
2020 2021
` ` ` `
Sales: Cash 30,000 32,000
Credit 2,70,000 3,00,000 3,42,000 3,74,000
Cost of sales (2,36,000) (2,98,000)
Gross margin 64,000 76,000
Expenses:
Warehousing 13,000 14,000
Transport 6,000 10,000
Administration 19,000 19,000
Selling 11,000 14,000
Debenture Interest ..... 2,000
(49,000) (59,000)
Net Profit 15,000 17,000
Balance Sheet
On 31st December On 31st December 2021
2020
` ` ` `
Fixed assets (Less Depreciation) 30,000 40,000
Current assets
Stock 60,000 94,000
Debtors 50,000 82,000
Cash 10,000 7,000
1,20,000 1,83,000
Less Current liabilities - Trade creditors (50,000) (76,000)
Net current assets 70,000 1,07,000
1,00,000 1,47,000
Share capital 75,000 75,000
Reserves and undistributed profit 25,000 42,000
Debentures 30,000
1,00,000 1,47,000

44 Financial Management PW
 ou are required to calculate the following ratios for the year 2020 and 2021.
(a) Gross Profit Ratio
(b) Other Operating Expenses to Sales Ratio
(c) Operating Profit Ratio
(d) Capital Turnover Ratio
(e) Stock Turnover Ratio
(f) Net Profit to Net worth ratio
(g) Debtors collection period
Ratio relating to capital employed should be based on the capital at the end of the year. Give the
reasons for change in the ratios for 2 years. Assume opening stock of `40,000 for the year 2020.
Ignore Taxation.
[Sol. (a) 21.3% 20.3% (b) 16.3% 15.2% (c) 5% 5.08% (d) 3 2.54 (e) 4.72 3.87 (f) 15% 16.24%
(g) 67.6 days 87.5 days]
18. ABC Company sells plumbing fixtures on terms of 2/10 net 30. Its financial statements over the
3 years are as follows: [SM]
Particulars 2020-21 2021-22 2022-23
` ` `
Cash 30,000 20,000 5,000
Accounts receivables 2,00,000 2,60,000 2,90,000
Inventory 4,00,000 4,80,000 6,00,0000
6,30,000 7,60,000 8,95,000
Net fixed assets 8,00,000 8,00,000 8,00,000
14,30,000 15,60,000 16,95,000
Accounts payable 2,30,000 3,00,000 3,80,000
Accruals 2,00,000 2,10,000 2,25,000
Bank loan (short term) 1,00,000 1,00,000 1,40,000
5,30,000 6,10,000 7,45,000
Long-term debt 3,00,000 3,00,000 3,00,000
Common stock 1,00,000 1,00,000 1,00,000
Retained earnings 5,00,000 5,50,000 5,50,000
14,30,000 15,60,000 16,95,000
Sales 40,00,000 43,00,000 38,00,000
Cost of goods sold 32,00,000 36,00,000 33,00,000
Net profit 3,00,000 2,00,000 1,00,000
Considering opening balance of accounts receivables and inventory as 2,00,000 and 4,00,000
respectively as on 1,04,202, analyse the company’s financial condition and performance over the
last 3 years. Are there any problems?
[Sol. ]
Ratio Analysis 45
 19. MT Limited has the following Balance Sheet as on March 31, 2019 and March 31, 2020
[RTP May 2020]
`in lakhs
March 31, 2019 March 31, 2020
Sources of Funds
Shareholder’s Funds 2,500 2,500
Loan Funds 3,500 3,000
6,000 5,500
Application of Funds
Fixed Assets 3,500 3,000
Cash and Bank 450 400
Receivables 1,400 1,100
Inventories 2,500 2,000
Other Current Assets 1,500 1,000
Less Current Liabilities (1,850) (2,000)
6,000 5,500
The Income Statement of The MT Ltd. for the year ended is as follows:
`in lakhs
March 31, 2019 March 31, 2020
Sales 22,500 23,800
Less: Cost of goods sold (20,860) (21,100)
Gross Profit 1,640 2,700
Less Selling, General & Administrative expenses (1,100) (1,750)
Earnings before Interest and Tax (EBIT) 540 950
Less: Interest Expenses (350) (300)
Earning before Tax (EBT) 190 650
Less: Tax (57) (195)
Profits after Tax (PAT) 133 455
Required CALCULATE for the year 2019-20
(a) Inventory turnover ratio
(b) Financial Leverage
(c) Return on Capital Employed (ROCE)
(d) Return on Equity (ROE)
(e) Average collection period
[Take 1 year = 365 days]
[Sol. (a) 9.4 (b) 1.46 (c) 11.56% (d) 18.20% (e) 19.17 days]

46 Financial Management PW
 20. The following is the Profit and loss account and Balance Sheet of KLM LLP. [RTP Nov 2019]
T P A

Particulars Amount (`) Particulars Amount (`)

To Opening stock 12,46,000 By Sales 1,96,56,000
To Purchases 1,56,20,000 By Closing stock 14,28,000
To Gross Profit c/d 42,18,000
2,10,84,000 2,10,84,000
To Administrative expenses 18,40,000 By Gross profit b/d 42,18,000
To Selling & Dist. exp. 7,56,000 By Interest on investment 24,600
To Interest on loan 2,60,000 By Dividend received 22,000
To Net Profit 14,08,600
42,64,600 42,64,600

Balance Sheet as on……..

C L Amount (`) Assets Amount (`)

Capital 20,00,000 Plant & Machinery 24,00,000
Retained earnings 42,00,000 Building 42,00,000
General reserve 12,00,000 Furniture 12,00,000
Term loan from bank 26,00,000 Sundry receivables 13,50,000
Sundry payables 7,20,000 Inventory 14,28,000
Other liabilities 2,80,000 Cash & Bank balance 4,22,000
1,10,00,000 1,10,00,000

ou are required to COMPUTE

(a) Gross profit ratio
(b) Net Profit ratio
(c) Operating cost ratio
(d) Operating profit ratio
(e) Inventory turnover ratio
(f) Current ratio
(g) Quick ratio
(h) Interest coverage ratio
(i) Return on capital employed
( ) Debt to assets ratio
[Sol. (a) 21.46% (b) 7.17% (c) 91.75% (d) 8.25% (e) 11.55 times (f ) 3.2 times (g) 1.77 times
(h) 6.42 times (i) `1,00,00,000 ( ) 23.64%]

Ratio Analysis 47
 21. Following information relates to SK ltd [SM, RTP May 2022]
Debtors velocity 3 months
Creditors velocity 2 months
Stock turnover ratio 1.5
Gross profit ratio 25%
Bills receivables `25,000
Bills payable `10,000
Gross profit `4,00,000
Fixed assets turnover ratio 4
Closing stock of the period is `10,000 above the opening stock. Calculate
(i) Sales and cost of goods sold (ii) Sundry debtors
(iii) Sundry creditors (iv) Closing stock
(v) Fixed assets
[Sol. [ (i) `16,00,000 `12,00,000 (ii) `3,75,000 (iii) `1,91,667 (iv) `8,05,000 (v) `4,00,000]
22. Following information has been gathered from the books of Tram Ltd. the equity share of which
is trading in the stock market at `14. [Nov 2019, Similar RTP Dec 2021]
Particulars Amount (`)
Equity Share Capital (face value `10) 10,00,000
10% Preference Shares 2,00,000
Reserves 8,00,000
10% Debentures 6,00,000
Profit before Interest and Tax for the year 4,00,000
Interest 60,000
Profit after tax for the year 2,40,000
Calculate the following
(a) Return on Capital Employed (b) Earnings per share (c) PE Ratio
[Sol. (a) 15.38% 9.23% (b) `2.20 (c) 6.364]
23. X Co. has made plans for the next year. It is estimated that the company will employ total assets
of `8,00,000 50 per cent of the assets being financed by borrowed capital at an interest cost of 8
percent per year. The direct costs for the year are estimated at `4,80,000 and all other operating
expenses are estimated at `80,000. The goods will be sold to customers at 150 per cent of the
direct costs. Tax rate is assumed to be 50 per cent. [SM, Similar MTP Nov 2019]
ou are required to calculate
(i) Operating profit margin (before tax)
(ii) Net profit margin (after tax)
(iii) Return on assets (on operating profit after tax)
(iv) Assets turnover
(v) Return on owner’s equity
[Sol. (i) 22.22% (ii) 8.9% (iii) 10% (iv) 0.9 times (v) 16%]

48 Financial Management PW
 24. The following is the information of ML Ltd. relate to the year ended 31-03-2018 [Nov 2018]
Gross Profit 20% of Sales
Net Profit 10% of sales
Inventory Holding Period 3 months
Receivable collection period 3 months
Non-current assets to sales 14
Non-current assets to current assets 12
Current Ratio 21
Non-current liabilities to current liabilities 11
Share capital to Reserve and Surplus 41
Non-current assets as on 31st March, 2017 `50,00,000
Assume that
(a) No change in Non-current assets during the year 2017-18
(b) No depreciation changed on Non-Current Assets during the year
(c) Ignoring tax
ou are required to calculate cost of goods sold, net profit, inventory, receivables and cash for the
year ended on 31st March, 2018.
[Sol. `1,60,00,000 `20,00,000 `40,00,000 `50,00,000 `10,00,000]
25. Following information and ratios are given for W Limited for the year ended 31st March, 2022
[May 2022]
Equity share capital of `10 each `10 lakhs
Reserve & Surplus to shareholder’s fund 0.50
Sales / Shareholder’s fund 1.50
Current ratio 2.50
Debtors Turnover Ratio 6.00
Stock Velocity 2 Months
Gross Profit Ratio 20%
Net Working Capital Turnover Ratio 2.50
ou are required to calculate
(i) Shareholder’s fund (ii) Stock
(iii) Debtors (iv) Current liabilities (v) Cash Balance
[Sol. (i) `20,00,000 (ii) `4,00,000 (iii) `5,00,000 (iv) `8,00,000 (v) `11,00,000]
26. The following accounting information and financial ratios of A&R Limited relate to the year ended
31st March, 2020 [MTP July 2020]
Inventory Turnover Ratio 6 Times
Creditors Turnover Ratio 10 Times
Debtors Turnover Ratio 8 Times
Current Ratio 2.4
Gross Profit Ratio 25%

Ratio Analysis 49
 Total sales `6,00,00,000 cash sales 25% of credit sales cash purchases `46,00,000 working
capital `56,00,000 closing inventory is `16,00,000 more than opening inventory.
ou are required to calculate
(a) Average Inventory
(b) Purchases
(c) Average Debtors
(d) Average Creditors
(e) Average Payment Period
(f) Average Collection Period
(g) Current Assets
(h) Current Liabilities
[Sol. (a) `75,00,000 (b) `4,66,00,000 (c) `60,00,000 (d) `42,00,000 (e) 36.5 days (f) 45.625 days
(g) `96,00,000 (h) `40,00,000]
27. Using the following information, prepare the balance sheet: [SM]
Long-term debt to net worth 0.5
Total assets turnover 2.5
Average collection period* 18 days
Inventory turnover 9
Gross profit margin 10%
Acid-test ratio 1
*Assume a 360 day year and all sales on credit.
` `
Cash ? Notes and payables 1,00,000
Accounts receivable ? Long term debt ?
Inventory ? Common stock 1,00,000
Plant & Equipment ? Retained earnings 1,00,000
Total Assets ? Total liabilities and equity ?

[Sol. BS Total = `4,00,000]

28. From the following information, complete the Balance sheet given below [Jan 2021]
(i) Equity `2,00,000
(ii) Total debt to owner’s equity 0.75
(iii) Total assets turnover 2 times
(iv) Inventory turnover 8 times
(v) Fixed assets to owner’s equity 0.60
(vi) Current debt to total debt 0.40
[Sol. BS total = `3,50,000]

50 Financial Management PW
 29. Following information and ratios are given in respect of AQUA Ltd. for the year ended 31st March,
2023 [May 2023]
Current ratio 4.0
Acid test ratio 2.5
Inventory turnover ratio (based on sales) 6
Average collection period (days) 70
Earnings per share 3.5
Current liabilities 3,10,000
Total assets turnover ratio (based on sales) 0.96
Cash ratio 0.43
Proprietary ratio 0.48
Total equity dividend 1,75,000
Equity dividend coverage ratio 1.60
Assume 360 days in a year.
ou are required to complete Balance Sheet as on 31st March, 2023.
Balance Sheet as on 31st March, 2023
Liabilities ` Assets `
Equity share capital (`10 per share) XXX Fixed assets XXX
Reserve & surplus XXX Inventory XXX
Long-term debt XXX Debtors XXX
Current liabilities 3,10,000 Loans & advances XXX
Cash & bank XXX
Total XXX Total XXX

[Sol. BS Total = `29,06,250]

30. From the following information and ratios, prepare the balance sheet as at 31st march, 2023 and
Income statement for the year ended on that date for M/s SK Ltd. [SM]
Average stock `10 lakhs
Current ratio 31
Acid test ratio 11
PBIT to PBT 2.2 1
Average collection period (assume 360 days in a year) 30 days
Stock turnover ratio (use sales as turnover) 5 times
Fixed assets turnover ratio 0.8 times
Working capital `10 lakhs
Net profit ratio 10%
Gross profit ratio 40%
Operating expenses (excluding interest) `9 lakhs
Long term loan interest 12%
Tax Nil
[Sol. Answer – GP = `20,00,000 NP = `5,00,000 BS Total = `77,50,000]
Ratio Analysis 51
 31. Following are the data in respect of ABC Industries for the year ended 31st March, 2021 [Dec 2021]
Debt to Total assets ratio 0.40
Long-term debts to equity ratio 30%
Gross profit margin on sales 20%
Accounts receivables period 36 days
Quick ratio 0.9
Inventory holding period 55 days
Cost of goods sold `64,00,000

Liabilities ` Assets `
Equity Share Capital 20,00,000 Fixed assets
Reserve & surplus Inventories
Long-term debts Accounts receivable
Accounts payable Cash
Total 50,00,000 Total
Required
Complete the balance sheet of ABC Industries as on 31st March, 2021. All calculations should be
in nearest rupee. Assume 360 days in a year.
[Sol. BS Total = `50,00,000]
32. The accountant of Moon Ltd. has reported the following data [May 2018]
Gross Profit `60,000
Gross profit Margin 20 per cent
Total Assets Turnover 0.30 1
Net Worth to Total Assets 0.90 1
Current Ratio 1.5 1
Liquid Assets to Current Liability 11
Credit sales to total sales 0.80 1
Average collection period 60 days
Assume 360 days in a year.
ou are required to complete the following
Balance Sheet of Moon Ltd.
Liabilities ` Assets `
Net Worth Fixed Assets ?
Current Liabilities Stock ?
Debtors ?
Cash ?
Total Liabilities Total Assets ?
[Sol. BS total = `10,00,000]
52 Financial Management PW
 33. SK ltd. has furnished the following information relating to the year ended 31st March, 2021 and
31st March, 2022 [SM]
31st March, 2021 31st March, 2022
Share Capital 40,00,000 40,00,000
Reserve & Surplus 20,00,000 25,00,000
Long term loan 30,00,000 30,00,000

Net profit ratio 8%

Gross profit ratio 20%
Long-term loan has been used to finance 40% of the fixed assets
Stock turnover with respect to cost of goods sold is 4
Debtors represent 90 days sales
The company holds cash equivalent to 1 months cost of goods sold.
Ignore taxation and assume 360 days in a year.
ou are required to prepare balance sheet as on 31st March, 2022 in the following format
Liabilities ` Assets `
Share capital – Fixed Assets –
Reserve & Surplus – Sundry Debtors –
Long term loan – Closing Stock –
Sundry Creditors – Cash in hand –
[Sol. BS total = `1,09,37,500]
34. From the following information, find out missing figures and rewrite the balance sheet of Mukesh
Enterprise. [RTP May 2023]
Current ratio – 2 1
Acid test ratio = 3 2
Reserve and surplus – 20% of equity share capital
Long term debt = 45% of net worth
Stock turnover velocity = 1.5 months
Receivables turnover velocity = 2 months
ou may assume closing receivables as average receivables.
Gross profit ratio = 20%
Sales is `21,00,000 (25% sales are on cash basis and balance on credit basis)
Closing stock is `40,000 more than opening stock
Accumulated depreciation is 1/6 of original cost of fixed assets.
Balance sheet of the company is as follows:

Ratio Analysis 53
 Liabilities (`) Assets (`)
Equity share capital ? Fixed assets (cost) ?
Reserve & Surplus ? Less Accumulated depreciation ?
Long term loans 6,75,000 Fixed assets (WDV) ?
Bank overdraft 60,000 Stock ?
Creditors ? Debtors ?
Cash ?
Total ? Total ?
[Sol. BS total = 26,35,000]
35. From the following information, you are required to prepare a summarized balance sheet for
Rudra Ltd. for the year 31st March, 2023 [SM]
Debt Equity Ratio 11
Current ratio 31
Acid test ratio 8:3
Fixed assets turnover (on the basis of sales) 4
Stock turnover (on the basis of sales) 6
Cash in hand `5,00,000
Stock to debtors 11
Sales to net worth 4
Capital to reserves 12
Gross profit 20% of cost
COGS to creditor 10 1
Interest for entire year is yet to be paid on long term loan 10%.
[Sol. BS Total = `75,00,000]

SOLUTIONS
17. Computation of Ratios
Ratio 2021-22 (`) 2022-23 (`)
1. Gross profit ratio (Gross profit/sales) 64, 000 ! 100 76, 000 ! 100
" 21.3% " 20.3%
3, 00, 000 3,74, 000
2. Operating expense to sales ratio (Operat- 49, 000 ! 100 57, 000 ! 100
ing exp/ Total sales) " 16.3% " 15.2%
3, 00, 000 3, 74, 000
3. Operating profit ratio (Operating profit/ 15, 000 ! 100 19, 000 ! 100
Total sales) " 5% " 5.08%
3, 00, 000 3,74, 000

54 Financial Management PW
 Ratio 2021-22 (`) 2022-23 (`)
4. Capital turnover ratio (Sales/capital 3, 00, 000 3,74, 000
employed) =3 = 2.54
1, 00, 000 1, 47, 000
5. Stock turnover ratio (COGS/ Average 2, 36, 000 2, 98, 000
stock) (Refer to W.N. 1) = 4.72 = 3.87
50, 000 77, 000
6. Net Profit to Net worth ratio (Net profit / 15, 000 ! 100 19, 000 ! 100
Net worth) " 15% " 16.24%
1, 00, 000 1,17, 000
7. Receivables collection period (Average 50, 000 82, 000
receivables/ Average daily credit sales) = 67.6 days = 87.5 days
739.73 936.99
(Refer to W.N. 2)
Working Notes:
1. Average Stock = (opening stock + closing (40,000+60,000)/2 (60,000+94,000)/2
stock) /2 =50,000 = 77,000
2. Average daily sales = Credit sales /365 2, 70, 000 3, 42, 000
= 739.73 = 936.99
365 365

Analysis: The decline in the Gross profit ratio could be either due to a reduction in the selling
price or increase in the direct expenses (since the purchase price has remained the same). In
this case, cost of goods sold have increased more than proportion of increment in sales, hence
impacting gross profit ratio.
Similarly, there is a decline in the ratio of operating expenses to sales. Further analysis reveals
that in comparison to increase in sales, there has a lesser proportionate increase in operating
expenses. As a result, even the operating profit ratio has remained the same approximately in
spite of a decline in the Gross profit ratio.
The company has not been able to deploy its capital efficiently. This is indicated by a decline in
the Capital turnover ratio from 3 to 2.54 times.
The decline in stock turnover ratio implies that the company has increased its investment in
stock. Net Profit to Net worth ratio has increased indicating that the company’s Net worth or
Shareholders’ capital is efficient in generating profits.
The increase in the Receivables collection period indicates that the company has become liberal
in extending credit on sales. There is a corresponding increase in the receivables also due to such
credit policy.

Ratio Analysis 55
18.
Ratios 2020-21 2021-22 2022-23

Current ratio (Current Assets / 1.19 1.25 1.20

Current Liabilities) `6,30,000 `7,60,000 `8,95,000
`5,30,000 `6,10,000 `7,45,000
Acid-test ratio (Quick Assets / 0.43 0.46 0.40
Current Liabilities) `2,30,000 `2,80,000 `2,95,000
`5,30,000 `6,10,000 `7,45,000
Receivables turnover ratio 20 18.70 13.82
(Sales/ Average Receivables) `40,00,000 `43,00,000 `38,00,000
(Refer Working Notes) `2,00,000 `2,30,000 `2,75,000

Average collection period 18.25 19.52 26.41

(365 / Receivables turnover (365/20) (365/18.70) (365/13.82)
ratio)
Inventory turnover ratio 8 8.18 6.11
(COGS / Average Inventory) `32,00,000 `36,00,000 `33,00,000
(Refer Working Notes) `4,00,000 `4,40,000 `5,40,000
Total debt to net worth 1.38 1.40 1.61
(Short term + Long term `8,30,000 `9,10,000 `10,45,000
Debt) / (Common stock + `6,00,000 `6,50,000 `6,50,000
Retained earnings)
Long-term debt to total 0.33 0.32 0.32
capitalization `3,00,000 `3,00,000 `3,00,000
`9,00,000 `9,50,000 `9,50,000
Gross profit margin (Gross 0.20 0.16 0.13
Profit / Sales) `8,00,000 `7,00,000 `5,00,000
{ Gross profit = Sales - Cost of `40,00,000 `43,00,000 `38,00,000
Goods sold }
Net profit margin (Net Profit / 0.075 0.047 0.026
Sales) `3,00,000 `2,00,000 `1,00,000
`40,00,000 `43,00,000 `38,00,000
Total Asset turnover (Sales / 2.80 2.76 2.24
Total Assets) `40,00,000 `43,00,000 `38,00,000
`14,30,000 `15,60,000 `16,95,000

56 Financial Management PW
 Ratios 2020-21 2021-22 2022-23

Return on assets (Net profit/ 0.21 0.13 0.06

Total Assets) `3,00,000 `2,00,000 `1,00,000
`14,30,000 `15,60,000 `16,95,000
Working Notes
Average receivables {( Opening (`2,00,000+ (`2,00,000+ (`2,60,000+
+ closing )/2} `2,00,000)/2 `2,60,000)/2 `2,90,000)/2
=`2,00,000 =`2,30,000 =`2,75,000
Average Inventory {( Opening + (`4,00,000+ (`4,00,000+ (`4,80,000+
closing )/2} `4,00,000)/2 `4,80,000)/2 `6,00,000)/2
=`4,00,000 =`4,40,000 =`5,40,000
Analysis: The current ratio and quick ratio are less than the ideal ratio (2 1 and 1 1 respectively)
indicating that the company is not having enough resources to meet its current obligations.
Receivables are growing slower, although the average collection period is still very reasonable
relative to the terms given. Inventory turnover is slowing as well, indicating a relative build-up in
inventories. The increase in receivables and inventories, coupled with the fact that net worth has
increased very little, has resulted in the total debt-to-net worth ratio increasing to what would
have to be regarded on an absolute basis as a high level.
Long-term debt to total capitalization has not changed relatively coupled with the fact that
retained earnings of only 50,000 is made in year 2019-20, and there is no issuance of new
long-term debt in year 2019-20 and 2020-21.
Both the gross profit and net profit margins have declined substantially. The relationship
between the two suggests that the company has incurred more relative expenses. The build-up
in inventories and receivables has resulted in a decline in the asset turnover ratio, and this,
coupled with the decline in profitability, has resulted in a sharp decrease in the return on assets
ratio.
COGS 21,100
19. (a) Inventory turnover ratio = = = 9.4
Average Inventory 2,500 + 2,000 2

EBIT 950
(b) Financial Leverage = = = 1.46
EBT 650
EBIT 1 t 950 1 0.30 665
(c) ROCE = × 100 = × 100 = × 100 = 11.56%
Average capital Employed 6,000 + 5,500 2 5,750
Profits after tax 455
(d) ROE = × 100 = × 100 = 18.20%
Average Shareholders Funds 2,500

Average Receivables×365 1,400 + 1,100 2

(e) Average collection = × 365 = 19.17 days
Sales 23,800
Gross Profit 42,18,000
20. (a) Gross profit ratio = × 100 = × 100 = 21.46%
Sales 1,96,56,000
Ratio Analysis 57
 Net Profit 14,08,600
(b) Net Profit ratio = × 100 = × 100 = 7.17%
Sales 1,96,56,000
Operating cost 1,54,38,000 + 25,96,000
(c) Operating ratio = × 100 = × 100 = 91.75%
Sales 1,96,56,000

Cost of goods sold = Sales – Gross profit = 1,96,56,000 – 42,18,000 = `1,54,38,000

Operating expenses = Administrative exp. + Selling & dist. Exp.

= 18,40,000 + 7,56,000= `25,96,000
(d) Operating profit ratio = 100 – operating cost ratio = 100 – 91.75% = 8.25%
Cost of goods sold 1,54,38,000
(e) Inventory turnover ratio = = = 11.55 times
Average stock 14,28,000 + 12,46,000 2
(f) Current ratio

Current assets 13,50,000 + 14,28,000 + 4,22,000 32,00,000

= = = = 3.2 times
Current liabilities 7,20,000 + 2,80,000 10,00,000
Quick assets 32,00,000 14,28,000
(g) Quick ratio = = = 1.77 times
Current liabilities 10,00,000
EBDIT Net Profit+Interest 14,08,600 + 2,60,000
(h) Interest coverage ratio = = = = 6.42 times
Interest Interest 2,60,000

(i) Return on capital employed

EBIT 14,08,600 + 2,60,000

= × 100 = × 100 = 16.69%
Capital employed 1,00,00,000

Capital employed = Capital + Retained earnings + General reserve + Term loan

= 20,00,000 + 42,00,000 + 12,00,000 + 26,00,000 = `1,00,00,000

( ) Debt to assets ratio = Debt/(Total assets)×100 = 26,00,000/1,10,00,000×100 = 23.64%

21. (i) Determination of Sales and Cost of goods sold:

Gross Profit
Gross Profit Ratio = × 100
Sales
25 `4,00,000
Or, =
100 Sales
4,00,00,000
Or, Sales = =`16,00,000
25
Cost of Goods Sold = Sales – Gross Profit = 16,00,000 – 4,00,000 = 12,00,000
(ii) Determination of Sundry Debtors:
Debtors’ velocity is 3 months or Debtors’ collection period is 3 months,

58 Financial Management PW
 12 months
So, Debtors’ turnover ratio = =4
3 months
Credit Sales
Debtors’ turnover ratio = Debtors' turnover ratio =
Average Accounts Receivable
`16,00,000
= =4
Bills Receivable + Sundry Debtors

Or, Sundry Debtors + Bills receivable = 4,00,000

Sundry Debtors = 4,00,000 – 25,000 = 3,75,000
(iii) Determination of Sundry Creditors:
Creditors’ velocity of 2 months or credit payment period is 2 months.
12 months
So, Creditors’ turnover ratio = =6
2 months

Credit Purchases *
Creditors turnover ratio =
Average Accounts Payables
`12,10,000
= =6
Sundry Creditors + Bills Payables

So, Sundry Creditors + Bills Payable = 2,01,667

Or, Sundry Creditors + 10,000 = 2,01,667
Or, Sundry Creditors = 2,01,667 – 10,000 = 1,91,667
(iv) Determination of Closing Stock

Stock Turnover Ratio = Cost of Goods Sold = `12,00,000 = 1.5

Average Stock Average Stock

So, Average Stock = 8,00,000

Opening Stock + Closing Stock
Now Average Stock =
2
Opening Stock + Opening Stock + `10,000
Or = `8,00,000
2
Or, Opening Stock = 7,95,000
So, Closing Stock = 7,95,000 + 10,000 = 8,05,000
(v) Determination of Fixed Assets
Sales
Fixed Assets Turnover Ratio = =4
Fixed Assets
`16,00,000
Or, = =4
Fixed Assets

Or, Fixed Asset = 4,00,000

Ratio Analysis 59
 Workings:
* Calculation of Credit purchases
Cost of goods sold = Opening stock + Purchases - Closing stock
12,00,000= 7,95,000+ Purchases - 8,05,000
12,00,000+ 10,000= Purchases
12,10,000= Purchases (credit)
Assumption:
(i) All sales are credit sales
(ii) All purchases are credit purchase
(iii) Stock Turnover Ratio and Fixed Asset Turnover Ratio may be calculated either on Sales or
on Cost of Goods Sold.
22. (a) Capital employed = Equity shareholder’s fund + Debenture + Pref. shares
= 10,00,000 + 8,00,000 + 6,00,000 + 2,00,000 = `26,00,000

EBIT 4,00,000
Return on capital employed (pre tax) = × 100 = × 100 = 15.38%
Capital Employed 26,00,000

EAT 2,40,000
Return on capital employed (post tax) = × 100 = × 100 = 9.23%
Capital Employed 26,00,000

Earning available for equity holders 2,40,000 20,000

(b) Earning per share = = = `2.20
No. of equity shares 1,00,000
MPS 14
(c) PE Ratio = = = 6.364
EPS 2.20

23. T :

Particulars
Sales (150% of 4,80,000) 7,20,000
Direct costs (4,80,000)
Gross profit 2,40,000
Operating expenses (80,000)
Profit before Interest and Tax (EBIT) 1,60,000
Interest changes (8% of 4,00,000) (32,000)
Profit before taxes 1,28,000
Taxes ( 50%) (64,000)
Net profit after taxes 64,000

EBIT `1,60,000
(i) Operating profit margin = = = 0.2222 or22.22%
Sales `7,20,000

60 Financial Management PW
 Net Profit after taxes `64,000
(ii) Net profit margin = = = 0.89 or 8.9%
Sales `7,20,000
EBIT 1–T `1,60,000 1 0.5
(iii) Return on assets = = = 0.10 or10%
Assets 8,00,000
Sales `7,20,000
(iv) Asset turnover = = = 0.9 times
Assets `8,00,000

Net Profit after taxes `64,000 `64,000

(v) Return on equity = = = = 16%
Owners' equity 50% of `8,00,000 `4,00,000

24. Non-current assets to sale =14

Sales = Non-current assets × 4
= 50,00,000 × 4 = `2,00,00,000
Net Profit = 10% × Sales = 10% × 2,00,00,000 = `20,00,000
Cost of Goods Sold = Sales – Gross Profit
= 2,00,00,000 – (20% × 2,00,00,000)
= `1,60,00,000
Inventory = COGS × (3/12)
= 1,60,00,000 × (3/12) = `40,00,000
Receivables = Sales × (3/12)
= 2,00,00,000 × (3/12) = `50,00,000
Non-Current Assets to current assets = 1 2
Current Assets = Non-current assets × 2
= 50,00,000 × 2 = `1,00,00,000
Cash = Current Assets – Inventory – Receivables
= 1,00,00,000 – 40,00,000 – 50,00,000
= `10,00,000
Reserve & Surplus
25. (i) = 0.5
Shareholder s fund
Reserve & Surplus
= 0.5
Equity Share Capital+Reserve & surplus
Reserve & Surplus = 0.5(10,00,000 + Reserve & Surplus)
Reserve & Surplus = 5,00,000 + (0.5)Reserve & Surplus
(0.5)Reserve & Surplus = 5,00,000
Reserve & Surplus = 10,00,000
Shareholder’s fund = 10,00,000 + 10,00,000 = `20,00,000
(ii) Sales = 1.5 × Shareholder’s fund = 1.5 × 20,00,000 = `30,00,000
Gross profit = Sales × GP Ratio = 30,00,000 × 20% = `6,00,000
Cost of goods sold (COGS) = Sales – Gross Profit = 30,00,000 – 6,00,000 = `24,00,000
Ratio Analysis 61
 Stock velocity = 2 month
Average stock
× 12
COGS
2 × 24,00,000
Average stock = = `4,00,000
12
(iii) Debtors Turnover Ratio = 6

Sales
=6
Average Debtors

30,00,000
=6
Average Debtors
Average Debtors = `5,00,000
(iv) Net working capital turnover ratio = 2.5
Average creditors
Average Daily Credit Purchases
30,00,000
= 2.5
Net working capital
Net working capital = 12,00,000
Current Assets – Current Liabilities = 12,00,000
Current Assets = 12,00,000 + Current Liabilities ...(1)
Current ratio = 2.5

Current Assets
= 2.5
Current Liabilities
Current Assets = (2.5)Current liabilities ...(2)
Put value of current assets from equation (1) in equation (2)
12,00,000 + Current liabilities = (2.5)Current liabilities
(1.5)Current liabilities = 12,00,000
Current liabilities = 8,00,000
Thus, from equation (1), Current Assets = 12,00,000 + 8,00,000 = `20,00,000
(v) Total current assets = Debtors + Stock + Cash balance
20,00,000 = 5,00,000 + 4,00,000 + cash balance
Cash balance = `11,00,000
26. (a) Computation of Average Inventory
Gross Profit = 25% of 6,00,00,000 = `1,50,00,000
Cost of goods sold (COGS) = 6,00,00,000 - 1,50,00,000 = `4,50,00,000
Cost of Goods sold
Inventory Turnover Ratio =
Average Stock

62 Financial Management PW
 4,50,00,000
6=
Average Stock
Average stock = `75,00,000
(b) Computation of Purchases
Purchases = COGS + Increase in Stock = 4,50,00,000 + 16,00,000 = `4,66,00,000
(c) Computation of Average Debtors
Let Credit Sales be `100
Cash sales = 25% of 100 = `25
Total Sales = 100 + 25 = `125
6,00,00,000
If total sales is `6,00,00,000, then credit sales = ×100 = `4,80,00,000
125
Thus, Cash Sales = `6,00,00,000 - `4,80,00,000 = `1,20,00,000
Net Credit Sales
Debtors Turnover Ratio =
Average Debtors
4,80,00,000
8=
Average Debtors
Average Debtors = `60,00,000

(d) Computation of Average Creditors

Credit Purchases = Purchases Cash Purchases
= 4,66,00,000 46,00,000 = `4,20,00,000
Net Credit Sales
Creditors Turnover Ratio =
Average Debtors
4,20,00,000
10 =
Average Creditors
Average Creditors = `42,00,000
(e) Computation of Average Payment Period
Average creditors 42,00,000
Average Payment Period = = = 36.5 days
Average Daily Credit Purchases 4,20,00,000 365
OR
Average Payment Period = 365/Creditors Turnover Ratio = 365/10 = 36.5 days
(f) Computation of Average Collection Period
Average Debtors 60,00,000
Average Collection Period = = = 45.625 days
Average Daily Credit Sales 4,80,00,000 365
OR
Average collection period = 365/Debtors Turnover Ratio = 365/8 = 45.625 days
(g) Computation of Current Assets
Current Assets (CA)
Current Ratio =
Current Liabilities (CL)

Ratio Analysis 63
 CA
2.4 =
CL
CL = CA/2.4
Working capital = Current Assets Current liabilities
56,00,000 = CA – (CA/2.4)
CA = 96,00,000
(h) Computation of Current Liabilities
Current liabilities = 96,00,000 2.4 = `40,00,000
27. Working Notes
(i) Long term Debt
Long-term debt Long-term debt
0.5 = =
Net worth `1, 00, 000 + `1, 00, 000

Long term debt = 1,00,000

(ii) Total assets

Total liabilities and Equity = Notes and payables + Long-term debt + Common stock +
Retained earnings
= 1,00,000 + 1,00,000 + 1,00,000 + 1,00,000 = 4,00,000
Total assets = Total liabilities and Equity = 4,00,000
(iii) Sales and Cost of Goods sold
Sales Sales
Total asset turnover = 2.5 = =
Total assets `4,00,000
Sales = 10,00,000
Cost of goods sold = (100% – Gross Profit margin) × Sales
= (100%-10%) × 10,00,000= 9,00,000.
(iv) Current Assets
Cost of goods sold `9,00,000
Inventory turnover = 9 = =
Inventory Inventory
Inventory = 1,00,000
Receivables × 360 Receivables × 360
Average collection period = 18 = =
Sales `10,00,000
Accounts receivables = 50,000
Cash + Accounts Receivable Cash + `50,000
Acid-test ratio = 1 = =
Notes and Payables `1,00,000
Cash = 50,000
(v) Plant and equipment
= Total Assets - Current Assets
= 4,00,000 – ( 1,00,000 + 50,000 + 50,000) = 2,00,000

64 Financial Management PW
 Balance Sheet

Cash 50,000 Notes and payables 1,00,000

Accounts receivable 50,000 Long-term debt 1,00,000
Inventory 1,00,000 Common stock 1,00,000
Plant and equipment 2,00,000 Retained earnings 1,00,000
Total assets 4,00,000 Total liabilities and equity 4,00,000
28. (a) Current ratio = 4
Current assets
=4
Current liabilities
Current assets = 4 × 3,10,000 = `12,40,000
(b) Acid test ratio = 2.5
Current assets-Inventory
= 2.5
Current liabilities
12,40,000 Inventory
= 2.5
3,10,000
12,40,000 – Inventory = 7,73,000
Inventory = `4,65,000
(c) Inventory turnover ratio (on sales) = 6
Sales
=6
Inventory
Sales = 6 × 4,65,000 = `27,90,000
(d) Debtors Collection period = 70 days
Debtors
× 360 = 70
Sales
70
Debtors = × 27,90,000 = `5,42,500
360
(e) Total assets turnover ratio (on sales) = 0.96
Sales
= 0.96
Total assets
27,90,000
= 0.96
Total assets
Total assets = `29,06,250
(f) Fixed assets = Total assets – current assets = 29,06,250 – 12,40,000 = `16,66,250
Cash
(g) Cashratio = 0.43
Current liabilities
Cash = 0.43 × 29,06,250 = `1,33,300
Ratio Analysis 65
 Proprietary fund
(h) Proprietary ratio = = 0.48
Total assets
Proprietary fund
= 0.48
29,06,250
Proprietary fund = `13,95,000
(i) Equity dividend coverage ratio = 1.6
Earning for Equity
= 1.6
Equity Dividend
Earning for Equity = 1.6 (Equity Dividend)
Divide both side by number of shares
Earning for Equity Equity Dividend
= 1.6 ×
No. of equity shares No. of equity shares

EPS = 1.6 (DPS)

3.5
DPS =
1.6
DPS = `2.1875
Total Dividend
( ) DPS =
No. of equity shares
1,75,000
2.1875 =
No. of equity shares
No. of equity shares = 80,000
Equity share capital = 80,000 × 10 = `8,00,000
Reserve & Surplus = 13,95,000 – 8,00,000 = `5,95,000
(k) Loans and advances = Current assets – Inventory – Receivables – Cash & Bank
= 12,40,000 – 4,65,000 – 5.42.500 – 1,33,000 = `99,200
Balance Sheet as on 31st March, 2023
Liabilities ` Assets `
Equity share capital (`10 per share) 8,00,000 Fixed assets 16,66,250
Reserve & surplus 5,95,000 Inventory 4,65,000
Long-term debt (Bal. fig.) 12,01,250 Debtors 5,42,500
Current liabilities 3,10,000 Loans & advances 99,200
Cash & bank 1,33,300
Total 29,06,250 Total 29,06,250
29. Equity = 2,00,000
Total Debt = Equity × 0.75 = 2,00,000 × 0.75 = `1,50,000
Current Debt = total Debt × 0.40 = 1,50,000 × 0.40 = `60,000
66 Financial Management PW
 Long term debt = 1,50,000 – 60,000 = `90,000
Fixed Assets = Equity × 0.60 = 2,00,000 × 0.60 = `1,20,000
Total Assets = Total Liabilities = Equity + Total Debt = 2,00,000 + 1,50,000 = `3,50,000
Current Assets = Total Assets – Fixed Assets = 3,50,000 – 1,20,000 = `2,30,000
Sales = 2 × Total Assets = 2 × 3,50,000 = `7,00,000
Sales 7,00,000
Inventory = = = `87,500
ITR 8
Other CA = Current Assets – Inventory = 2,30,000 – 87,500 = `1,42,500
Equity 2,00,000 Fixed Assets 1,20,000
Long Term Debt 90,000 Inventory 87,500
Current Debts 60,000 Other CA 1,42,500
3,50,000 3,50,000
30. 1. Current Ratio = 3 1
Current Assets (CA)/Current Liability (CL) = 3 1
CA = 3CL
WC = 10,00,000
CA – CL = 10,00,000
3CL – CL = 10,00,000
2CL = 10,00,000
10,00,000
CL =
2
CL = 5,00,000
CA = 3 × 5,00,000
CA = 15,00,000
2. Acid Test Ratio = CA- Stock /CL = 1 1
15,00,000 - Stock
= =1
5,00,000
15,00,000 – stock = 5,00,000
Stock = 10,00,000
3. Stock Turnover ratio (on sales) = 5
Sales
=5
Avg stock
Sales
=5
10,00,000
Sales = 50,00,000
4. Gross Profit =50,00,000×40%= 20,00,000
Net profit (PBT)=50,00,000×10%= 5,00,000

Ratio Analysis 67
 5. PBIT/PBT=2.2
PBIT =2.2×5,00,000
PBIT =11,00,000
Interest =11,00,000-5,00,000= 6,00,000
6, 00, 000
Long term loan = =`50, 00, 000
0.12
6. Average collection period =30 days
30
Receivables = × 50.00.000 = 4,16,667
360
7. Fixed Assets Turnover Ratio =0.8
50,00,000/ Fixed Assets =0.8
Fixed Assets = 62,50,000
Income Statement

Sales 50,00,000
Less: Cost of Goods Sold 30,00,000
Gross Profit 20,00,000
Less: Operating Expenses 9,00,000
Less: Interest. 6,00,000
Net Profit 5,00,000

Balance sheet
Liabilities Assets
Equity share capital 22,50,000 Fixed asset 62,50,000
Long term debt 50,00,000 Current assets
Current liability 5,00,000 Stock 10,00,000
Receivables 4,16,667
Other 83,333 15,00,000
77,50,000 77,50,000

31. Balance Sheet of ABC Industries as on 31st March, 2021

Liabilities ` Assets `
Equity Share Capital 20,00,000 Fixed assets 30,32,222
Reserve & surplus 10,00,000 Inventories 9,77,7778
Long-term debts 9,00,000 Accounts receivable 8,00,000
Accounts payable 11,00,000 Cash 1,90,000
Total 50,00,000 Total 50,00,000

68 Financial Management PW
 Note:
Working Notes:
(1) Total liabilities = Total assets = `50,00,000
Debt Debt
= 0.40 = = 0.40
Total Assets 50,00,000
Debt = `20,00,000
(2) Reserve & Surplus = Total liabilities – Equity capital – Debt
= 50,00,000 – 20,00,000 – 20,00,000 = `10,00,000
Long term debt Long term debt
(3) = 30% = = 30%
Equity shareholder fund 20,00,000 + 10,00,000

Long term debt = `9,00,000

(4) Accounts payable = total debt – long term debt = 20,00,000 – 9,00,000 = `11,00,000
(5) COGS ratio = 100 – GP Ratio = 100 – 20% = 80% of sales
Cost of goods sold 64,00,000
(6) Sales = = = `80,00,000
COGS Ratio 80%
Cost of goods sold 64,00,000
(7) Closing inventory = × 360 = × 360 = ` 9,77,778
Inventory days 55
Credit sales 80,00,000
(8) Account receivables = × 360 = × 360 = `8,00,000
Account receivable period 36
Quick assets
(9) Quick ratio =
Current liabilities
Cash + Debtors
0.90 =
11,00,000
Cash + 8,00,000 = 9,90,000
Cash = `1,90,000
(10) Fixed assets = Total assets – current assets = 50,00,000 – (9,77,778 + 8,00,000 + 1,90,000)
= `30,32,222
32. Balance Sheet of Moon Ltd.
Liabilities ` Assets `
Net Worth 9,00,000 Fixed Assets 8,50,000
Current Liabilities 1,00,000 Stock 50,000
Debtors 40,000
Cash 60,000
Total Liabilities 10,00,000 Total Assets 10,00,000

Ratio Analysis 69
 Working Notes:
Sales = Gross profit Gross Profit Margin
= 60,000 20% = `3,00,000
Total Assets = Sales Total Assets Turnover
= 3,00,000 0.30 = `10,00,000
Net Worth = 0.90 × Total Assets
= 0.90 × 10,00,000 = `9,00,000
Current Liability = Total Assets – Net Worth
= 10,00,000 – 9,00,000 = `1,00,000
Current Assets = 1.5 × Current Liabilities
= 1.5 × 1,00,000 = `1,50,000
Liquid Assets = Current Liabilities × 1
= 1,00,000 × 1 = `1,00,000
Stock = Current Assets – Liquid Assets
= 1,50,000 – 1,00,000 = `50,000
Debtors = Credit sales × (Average collection period 12)
= 3,00,000 × 0.80 × (60/360) = `40,000
Cash = Current Assets – Stock – Debtors
= 1,50,000 – 50,000 - 40,000 = `60,000
Fixed assets = Total Assets – Current Assets
= 10,00,000 – 1,50,000 = `8,50,000
33. (i) Change in Reserve & Surplus = 25,00,000 – 20,00,000 = 5,00,000
So, Net profit = 5,00,000
Net Profit Ratio = 8%
5,00,000
Sales = =`62,50,000
8%
(ii) Cost of Goods sold
= Sales – Gross profit Margin = 62,50,000-20% of 62,50,000 = 50,00,000

(iii) Fixed Assets = `30,00,000 = `75,00,000

40%
Cost of Goods Sold 50,00,000
(iv) Stock = = =`12,50,000
Stock Turnover ratio 4

62,50,000
(v) Debtors = × 90 =`15,62,500
360
50,00,000
(vi) Cash Equivalent = × 1.5 =`6,25,000
12
70 Financial Management PW
 Balance Sheet as on 31st March 2023
Liabilities Assets
Share Capital 40,00,000 Fixed Assets 75,00,000
Reserve and Surplus 25,00,000 Sundry Debtors 15,62,500
Long-term loan 30,00,000 Closing Stock 12,50,000
Sundry Creditors 14,37,500 Cash in hand 6,25,000
(Balancing Figure)
1,09,37,500 1,09,37,500
34.
Liabilities (`) Assets (`)
Equity share capital 12,50,000 Fixed assets (cost) 20,58,000
Reserve & Surplus 2,50,000 Less Accumulated depreciation (3,43,000)
Long term loans 6,75,000 Fixed assets (WDV) 17,15,000
Bank overdraft 60,000 Stock 2,30,000
Creditors 4,00,000 Debtors 2,62,500
Cash 4,27,500
Total 26,35,000 Total 26,35,000
Working Notes:
(1) COGS = Sales – GP = 21,00,000 – 20% = `16,80,000
Average receivables
(2) Receivable turnover velocity = × 12
Credit sales
Average receivables
2= × 12
21,00,000 × 75%
Average receivables = `2,62,500
Closing receivables = `2,62,500
Average stock
(3) Stock turnover velocity = × 12
COGS
Average stock
1.5 = × 12
16,80,000
Average stock = `2,10,000
Opening stock + closing stock
= 2,10,000
2
Opening stock + closing stock = 4,20,000
Given that, closing stock = opening stock + 40,000
Opening stock + opening stock + 40,000 = 4,20,000
Opening stock = `1,90,000
Closing stock = 1,90,000 + 40,000 = `2,30,000
Ratio Analysis 71
 Current assets Stock + Receivables + cash
(4) Current ratio = =
Current liabilities Bank overdraft + creditors
2,30,000 + 2,62,500 + cash
2=
60,000 + creditors
1,20,000 + 2(Creditors) = 4,92,500 + cash
Cash = 2(Creditors) – 3,72,500 (1)
Current assets–stock Debtors + Cash
Acid test ratio = =
Current liabilities Bank overdraft + creditors
3 2,62,500 + Cash
=
2 60,000 + creditors

1,80,000 + 3(Creditors) = 5,25,000 + 2(Cash)

Putting value of cash from equation (1) in equation (2)
1,80,000 + 3(Creditors) = 5,25,000 + 2[2(creditors) – 3,72,500]
1,80,000 + 3(Creditors) = 5,25,000 + 4(Creditors) – 7,45,000
Creditors = `4,00,000
Cash = 2(4,00,000) – 3,73,500 = `4,27,500
(5) Long term debt = 45% of net worth
Long term debt 6,75,000
Net worth = = = `15,00,000
45% 45%
(6) Equity share capital (ESC) + Reserves = 15,00,000
ESC + (0.2)ESC = 15,00,000
ESC = `12,50,000
Reserves = 0.2 12,50,000 = `2,50,000
(7) Total of liabilities = 12,50,000 + 2,50,000 + 6,75,000 + 60,000 + 4,00,000 = 26,35,000
Total of assets = Fixed assets (WDV) + 2,30,000 + 2,62,500 + 4,27,500
= FA(WDV) + 9,20,000
Total assets = Total liabilities
FA(WDV) + 9,20,000 = 26,35,000
Fixed assets (WDV) = `17,15,000
FA (Cost) – Depreciation = FA (WDV)
FA Cost
FA (Cost) – = 17,15,000
6
5
FA Cost = 17,15,000
6
FA (Cost) = `20,58,000
Depreciation = 20,58,000 1/6 = `3,43,000

72 Financial Management PW
 35. Balance Sheet of Rudra Ltd.

Liabilities Assets
Capital 10,00,000 Fixed Assets 30,00,000
Reserves 20,00,000 Current Assets
Long Term Loan 10% 30,00,000 Stock in Trade 20,00,000
Current Liabilities Debtors 20,00,000
Creditors 10,00,000 Cash 5,00,000
Other Short-term 2,00,000
Current Liability (Other STCL)
Outstanding Interest 3,00,000
75,00,000 75,00,000

Working Notes:
Let sales be x
Balance Sheet of Rudra Ltd.
Liabilities Assets
Capital Fixed Assets x/4
Reserves Current Assets
Net Worth x/4 Stock in Trade x/6
Long Term Loan 10% x/4 Debtors x/6
Cash 5,00,000
Current liabilities
Creditors x/12
Other Short-term Current
Liability
Outstanding Interest
Total Current Liabilities x/9+5,00,000/3
Total Total

x
1. Fixed Asset Turnover = 4 =
Fixed Assets
x
Fixed Assets =
4

x
2. Stock Turnover = 6 =
stock

x
Stock =
6

Ratio Analysis 73
 x
3. Sales to net worth = 4 =
net worth
x
Net worth =
4
Long TermLoan 1
4. Debt Equity = 1 :1 =
Net worth 1
x
Long term loan = Net worth =
4
5. Gross Profit to Cost =20%
GP
= 20%
Sales – GP
GP
= 20%
x GP
GP = 0.2x – 0.2GP
1.2GP = 0.2x
0.2x
GP =
1.2
GP = x/6
Cost of Goods Sold = x–x/6 = 5/6x
6. COGS to creditors =10 1
COGS 10
=
Creditors 1
5
x
6 10
=
Creditors 1
5x x
Creditors = =
60 12
Stock
7. =1
Debtor
x
Debtor = Stock =
6
8. Current Ratio =3 1
Stock + Debtors + Cash 3
=
Current Liabilities 1
x x x
+ +5,00,000 +5,00,000
6 6 =3 = 3 = CL
Current Liabilities 3

x 5,00,000
CL = +
9 3

74 Financial Management PW
 9. CA =3CL
x `5,00,000
=3 +
9 3
x
CA = +5,00,000
3
10. Net worth + Long Term Loan + Current Liability = Fixed Asset + Current Assets
x x x `5,00,000 x x
+ + + = + +`5,00,000
4 4 9 3 4 3
x x x `5,00,000
+ =`5,00,000
4 9 3 3
9x + 4x 12x `15,00,000 `5,00,000
=
36 3
x `10,00,000
=
36 3
x = 1,20,00,000
11. Now, from above calculations, we get,
x `1,20,00,000
Fixed Asset = = = `30,00,000
4 4
x `1,20,00,000
Stock = = = `20,00,000
6 6
x `1,20,00,000
Debtor = = = `20,00,000
6 6
x
Net Worth = =`30,00,000
4
Now, Capital to Reserve is 1 2
Capital = 10,00,000
and, Reserve = 20,00,000
x
Long Term Loan = = 30,00,000
4
Outstanding Interest = 30,00,000 × 10% = 3,00,000
x `1,20,00,000
Creditors = = = `10,00,000
12 12
Current Liabilities = Creditors + Other STCL + Outstanding Interest
x `5,00,000
+ =`10,00,000 + Other STCL + `3,00,000
9 3
`1,20,00,000 `5,00,000
+ = `13,00,000 + Other STCL
9 3
15,00,000 = Other STCL + 13,00,000
Other STCL = 2,00,000

Ratio Analysis 75