You are required to calculate the following ratios: a) Current Ratio b) Quick Ratio c) Gross Profit Ratio d) Operating Ratio e) Stock Turnover Ratio f) Return on shareholder fund g... You are required to calculate the following ratios: a) Current Ratio b) Quick Ratio c) Gross Profit Ratio d) Operating Ratio e) Stock Turnover Ratio f) Return on shareholder fund g) Net profit Ratio.
Understand the Problem
The question is asking the user to calculate various financial ratios based on provided financial statements and additional data related to the firm. This involves using accounting principles to derive the required ratios like Current Ratio, Quick Ratio, and others from the provided figures.
Answer
- Current Ratio: $1.69$ - Quick Ratio: $1.55$ - Gross Profit Ratio: $15.05\%$ - Operating Ratio: $94.8\%$ - Stock Turnover Ratio: $2.88$ - Return on Shareholder Fund: $3.13\%$ - Net Profit Ratio: $5.66\%$
Answer for screen readers
- Current Ratio: $1.69$
- Quick Ratio: $1.55$
- Gross Profit Ratio: $15.05%$
- Operating Ratio: $94.8%$
- Stock Turnover Ratio: $2.88 \text{ times}$
- Return on Shareholder Fund: $3.13%$
- Net Profit Ratio: $5.66%$
Steps to Solve
- Identify Financial Ratios to Calculate
We need to calculate the following financial ratios based on the provided financial statements:
- Current Ratio
- Quick Ratio
- Gross Profit Ratio
- Operating Ratio
- Stock Turnover Ratio
- Return on Shareholder Fund
- Net Profit Ratio
- Calculate Current Ratio
The Current Ratio is calculated by dividing Current Assets by Current Liabilities.
[ \text{Current Assets} = \text{Cash in Hand} + \text{Stock in Trade} + \text{Sundry Debtors} ]
- Cash in Hand: 8,000
- Stock in Trade: 16,000
- Sundry Debtors: 1,78,500
Total Current Assets: [ \text{Current Assets} = 8,000 + 16,000 + 1,78,500 = 2,02,500 ]
Total Current Liabilities include:
- Bank Overdraft: 38,000
- Sundry Creditors: 26,000
- Proposed Dividend: 16,000
- Provision for Tax: 40,000
Total Current Liabilities: [ \text{Current Liabilities} = 38,000 + 26,000 + 16,000 + 40,000 = 1,20,000 ]
Current Ratio: [ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{2,02,500}{1,20,000} \approx 1.69 ]
- Calculate Quick Ratio
Quick Ratio is calculated by excluding inventory from current assets.
[ \text{Quick Assets} = \text{Current Assets} - \text{Stock in Trade} ] [ \text{Quick Assets} = 2,02,500 - 16,000 = 1,86,500 ]
Quick Ratio: [ \text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}} = \frac{1,86,500}{1,20,000} \approx 1.55 ]
- Calculate Gross Profit Ratio
Gross Profit Ratio is calculated as follows: [ \text{Gross Profit} = \text{Sales} - \text{Cost of Goods Sold} ]
From the P&L account: [ \text{Gross Profit} = 2,50,000 ]
Gross Profit Ratio: [ \text{Gross Profit Ratio} = \frac{\text{Gross Profit}}{\text{Sales}} = \frac{2,50,000}{16,60,000} \approx 0.1505 \text{ or } 15.05% ]
- Calculate Operating Ratio
Operating Ratio includes cost of goods sold and operating expenses.
[ \text{Operating Ratio} = \frac{\text{Cost of Goods Sold + Operating Expenses}}{\text{Sales}} ]
Where: [ \text{Cost of Goods Sold} = 15,00,000 ] [ \text{Operating Expenses} = \text{Selling & Distribution} + \text{Administration} = 24,000 + 50,000 = 74,000 ]
Operating Ratio: [ \text{Operating Ratio} = \frac{15,00,000 + 74,000}{16,60,000} = \frac{15,74,000}{16,60,000} \approx 0.948 \text{ or } 94.8% ]
- Calculate Stock Turnover Ratio
Stock Turnover Ratio is defined as the ratio of cost of goods sold to average inventory.
[ \text{Stock Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} ]
Given that the end stock is 5,00,000 and the beginning stock was Rs. 40,000 more, we take the average as:
[ \text{Average Inventory} = \frac{\text{Beginning Stock} + \text{Ending Stock}}{2} = \frac{(5,00,000 + 40,000) + 5,00,000}{2} = 5,20,000 ]
Stock Turnover Ratio: [ \text{Stock Turnover Ratio} = \frac{15,00,000}{5,20,000} \approx 2.88 \text{ times} ]
- Calculate Return on Shareholder Fund
Return on Shareholder Fund can be computed as:
[ \text{Return on Shareholder Fund} = \frac{\text{Net Profit}}{\text{Equity Share Capital}} \times 100% ]
Where net profit is the final profit after tax and is given as:
Net Profit after tax: [ \text{Net Profit} = 94,000 ]
Return on Shareholder Fund: [ \text{Return on Shareholder Fund} = \frac{94,000}{30,00,000} \times 100% \approx 3.13% ]
- Calculate Net Profit Ratio
Net Profit Ratio is calculated as follows:
Net Profit Ratio: [ \text{Net Profit Ratio} = \frac{\text{Net Profit}}{\text{Sales}} \times 100% = \frac{94,000}{16,60,000} \times 100% \approx 5.66% ]
- Current Ratio: $1.69$
- Quick Ratio: $1.55$
- Gross Profit Ratio: $15.05%$
- Operating Ratio: $94.8%$
- Stock Turnover Ratio: $2.88 \text{ times}$
- Return on Shareholder Fund: $3.13%$
- Net Profit Ratio: $5.66%$
More Information
These financial ratios provide insights into the firm's solvency, liquidity, profitability, and operational efficiency. A higher Current Ratio indicates better liquidity, while the Gross Profit Ratio shows the efficiency of production.
Tips
- Miscalculating Current Assets or Liabilities: Make sure to include all relevant items, such as cash, inventory, and receivables.
- Confusing Gross Profit with Net Profit: These are distinct figures; always ensure you’re using the correct profit figure for the respective ratios.
- Not using average inventory for Stock Turnover Ratio: Ensure you calculate using the average of opening and closing stock.